Thursday, November 10, 2016

Warning Update: Economic and Political Instability in Egypt

By Wesam Hassanein

Key Takeaway: The Muslim Brotherhood called for mass protests on Friday, November 11 in response to harsh economic reforms by the Egyptian government. Egypt is at risk of major economic and political instability following President Sisi's decision to implement severe economic policies in pursuit of a loan from the IMF, which he hopes will stabilize Egypt's turbulent economy. Egypt's dire economic situation is compounded by geopolitical tension. Most notably, Saudi Arabia's decision to halt oil shipments put the Egyptian government in a very precarious financial and political position. Islamist and militant groups will likely take advantage of this instability, and use it as an opportunity to gain power in Egypt.
Egypt's dismal economic situation prompted the Egyptian government to implement unpopular economic reforms. Egypt's economic woes began in 2011, when political uprisings prompted the collapse Egyptian tourism, the country's most crucial industry. The tourism industry further deteriorated following ISIS's bombing of a Russian plane in October 2015. Egypt also struggled to attract foreign direct investment after mass protests and a coup in 2013. Furthermore, the Egyptian government began to invest heavily in large public works projects, such as the extension of the Suez Canal, following President Sisi's inauguration in June 2014. These events diminished the state's coffers and put pressure on Egyptian currency. Moreover, the Gulf countries, particularly the United Arab Emirates, reportedly halted their aid to Egypt as of October 2016, in order to further pressure the Egyptian government into reforming its own economy. President Sisi has asked the IMF for a loan, which comes with stringent conditions. The Egyptian government has taken several actions in order to comply with the IMF requirements:
  • The Egyptian government floated its currency and raised fuel subsidies by 30-48% on November 3, 2016.
  • Additionally, it secured six billion dollars from outside sources, including two billion dollars from Saudi Arabia in September and a $2.7 billion currency swap deal with China in October.
  • Furthermore, the Egyptian Cabinet approved 15-20% cut in government spending
  • The Egyptian Parliament passed the Civil Service Law in October in order to reform Egypt's bloated bureaucracy.
  • The Egyptian Parliament also passed a Value Added Tax Law in August.
Egypt's ability to cope with the IMF's mandated reforms is very limited. President Sisi's popularity declined by fourteen percent between September and November 2016. Inflation rates in Egypt are at their highest in seven years. Egyptian non-oil business activity has not grown in thirteen months, and Egypt is also experiencing severe shortages of sugar and of medical supplies. 
Egypt has a history of political instability following drastic economic reforms. Egypt previously experienced mass demonstrations after the lifting of subsidies and price hikes in 1977 and in 2008. 
  • In 1977, the Egyptian economy's sluggish performance prompted then-President Anwar Sadat to request a loan from the IMF. The Egyptian government subsequently lifted food and fuel subsidies as conditions for receiving this loan.  Mass protests erupted throughout the country, prompting President Sadat to restore order through military action and to backtrack on economic reforms.
  • Similarly, in 2008, grain shortages and high food prices prompted thousands to protest in several Egyptian cities. The Egyptian government blamed the Muslim Brotherhood for provoking these protests, and increased security presence in major squares throughout the country. 
The Muslim Brotherhood has previously taken advantage of protests in Egypt in order to destabilize the Egyptian regime, as it did during the so-called Arab Spring of 2011. Social and economic grievances were a main driver of the mass protests that led to former Egyptian president Hosni Mubarak's resignation in February 2011. 

The risk of political instability brought about by Egypt's dire economic situation is compounded by geopolitical tension. The Egyptian oil minister announced on November 7, 2016 that Saudi Arabia notified Egypt it would halt oil shipments until further notice This decision sent shockwaves through Egypt, and rattled its already unstable economy. Tensions between Saudi Arabia and Egypt are increasing. The nuclear deal between the United States and Iran prompted a shift in Saudi Arabia's strategic priorities towards integrating and containing Islamist forces in order to present a unified Sunni bloc against Iranian influence in the region.  Conversely, the Egyptian regime views Islamist forces, particularly the Muslim Brotherhood, as an existential threat to its stability. Egypt and Saudi Arabia have since found themselves at odds in several theaters:
  • The Egyptian government has refused to send ground troops to support Saudi efforts against Houthis in Yemen. Additionally, the Egyptian government came out in March 2016 against the idea of sending ground troops to fight Assad and ISIS in Syria. 
  •  Meanwhile, Egypt attempted to placate Saudi King Salman during his visit to Egypt in April 2016 by transferring control of two small islands in the Red Sea.  However, the Egyptian court halted the transfer in June. 
  • Most importantly, the strain on Saudi-Egyptian relations surfaced publicly following Egypt's decision to vote in favor of a Russian resolution in the U.N. Security Council on October 12, 2016. Two resolutions regarding international involvement in the ongoing civil war in Syria came before the U.N. Security Council in early October. The first resolution, presented by the French, demanded an end to airstrikes and the implementation of a no-fly zone. The Russian resolution called for a ceasefire, and did not acknowledge the French resolution. Egypt voted in favor of both, and in doing so explicitly voted against the position of Saudi Arabia in its support for the Russian resolution. The Saudi envoy to the United Nations called Egypt's position "painful," and well known Saudi Arabians went to social media to criticize President Sisi for being disloyal, and even "anti-Arab."
In light of the decreasing geopolitical cooperation between the two countries, and especially in response to Egypt's vote with Russia in the U.N. Security Council, Saudi Arabia suddenly halted oil deliveries to Egypt on October 11, 2016. Subsequently, the Egyptian government has resorted to buying oil from the international market at a much higher cost.  This increased financial strain on Egypt's foreign currency reserves, and Egypt's hard currency reserves declined by $550 million in October.
The Egyptian government's decision to reform its economy presents adversaries with an opportunity to exploit the resulting instability. The Muslim Brotherhood has already taken advantage of this opportunity with its call for protests on Friday, November 11. Whether ordinary Egyptians will heed the call of the Muslim Brotherhood remains to be seen. However, Sisi's regime is on a dangerous path toward turbulent political and economic conditions, compounded by the Muslim Brotherhood's increasing popularity, rising levels of inflation due to drastic, IMF-mandated economic reform measures, ill-timed investments in mega projects by the regime, and the loss of economic support from Gulf countries. These conditions will foster instability and discontent in Egypt, ripe for exploitation.
Powerful states, Islamist political groups, and Salafi-jihadi militant organizations will likely seek to take advantage of Egypt's political and economic instability in the short term. The Muslim Brotherhood will likely take advantage of the eruption of any protests in Cairo in order to come back to power. Gulf states, dissatisfied with Egypt's political and economic behavior, may back these Islamist groups. Similarly, Salafi -Jihadi organizations will exploit tensions in Egyptian society and take advantage of governance gaps in order to threaten the Egyptian state. If the economic and political situation deteriorates further, a security vacuum will emerge which could lead various militant organizations, such as ISIS's Wilayat Sinai, to achieve a greater foothold in the Egyptian mainland. As economic conditions threaten President Sisi's hold on power, Egypt could turn in desperation to new sources of economic and political aid - such as Russia and Iran. Russia would demand concessions from Egypt; likely in the form of naval privileges or possibly even establishment of a base on the Mediterranean.