Egypt’s Military Undermines Its Economic Revival

(Bloomberg Opinion) -- As Egypt marks the third anniversary of its bailout by the International Monetary Fund, the results are decidedly mixed. While the state has managed to significantly reform its subsidy program, lower its budget deficit, strengthen its reserves, and devalue the pound, ordinary Egyptians have paid a significant cost. Austerity measures introduced to improve efficiencies in the market, coupled with the pound’s devaluation, have devastated their purchasing power and driven many into poverty.

There is little gain to show for all this pain. Exports are down, the purchasing managers index has been negative nearly every month since the bailout began—indicating economic contraction outside of the oil and gas sector—and non-oil foreign direct investment is small and shrinking.

While many contributing variables help explain these disappointing figures, the armed forces’ economic activity through an expanding network of military enterprises is central to Egypt’s long-term structural underperformance and its failure to properly benefit from the difficult and important reforms it has undertaken in the past few years.

The military has played an outsized role in Egypt’s economy since the administration of President Gamal Abdel Nasser. The military competes with the private sector in producing an array of consumer goods, from bottled water to home appliances. Since the 2013 coup the military has grown even more aggressive in expanding its economic empire.

One example is the armed forces’ decision in 2018 to build a billion-dollar cement factory despite the oversaturation in production capacity in Egypt. As a result, private cement manufacturers, already dealing with oversupply and rising input costs, have come under even greater pressure. The German-owned Tourah cement plant halted production entirely this summer due to oversupply in the market.

As military enterprises grow, investors, both foreign and domestic, contend with the daunting prospect of competing with an institution that enjoys an array of comparative advantages—from lower taxes to looser regulatory controls, subsidized labor, and privileged access to credit. Naguib Sawiris, one of Egypt’s most prominent business leaders, complained in a recent interview that these advantages have deterred investment in the private sector.

Aside from undercutting competition in the market, tax exemptions for military companies hurt the state’s fiscal position. As they take market share from taxable private entities, they cut into Egypt’s tax base. The country’s tax to GDP ratio is already stubbornly low at around 14%. To reduce the deficit and end the dependence on debt-driven stimulus, the government needs that figure to rise, but expanding untaxed military-led economic activity hampers that effort.

President Abdel-Fattah El-Sisi has granted military companies a series of no-bid contracts to upgrade Egypt’s long-neglected infrastructure. While this policy may bolster Sisi’s support among his officers, it adds to Egypt’s already substantial infrastructure bill. Given the country’s economic challenges and significant upcoming infrastructure needs, this approach is wasteful, and possibly unaffordable.

The military’s control over the government and its spending priorities also encourages rent-seeking behavior, emphasizing projects that benefit military companies. A military-owned company oversaw the Suez Canal expansion and another now manages the creation of the new administrative capital.

To make matters worse, the authoritarian nature of the state denies investors access to information essential to making investment decisions. Much of the media is owned by the state or its institutions. Government data is dubious. The Central Bank’s claim to have floated the pound was challenged when a report found that the central bank had been using large state banks to stabilize the currency and impose a surreptitious peg to the dollar.

Sisi floated the idea of listing military companies on the Egyptian Stock Exchange, framing this as an opportunity for the public and private sector to invest in, and benefit from, military enterprises. To comply with public-trading regulations, military companies would need to dramatically improve their transparency. But some of their private-sector competitors worry that the state could grant these companies yet another legal exemption, allowing public listing at a lower standard of disclosure. This would not only give them another advantage over the private sector, it would also damage the integrity of the EGX in the process.

Egypt’s rulers have long prioritized control over growth, and patronage over progress. This has spawned a class of interested parties—the military preeminent among them—that sees no benefit in the reforms needed to lift the country out of poverty, such as reducing red tape and making regulations more consistent, coherent and efficiently applied; streamlining customs procedures; expanding judicial independence; and subjecting military enterprises to the same tax and regulatory burdens applied to the private sector.

Such reforms would necessitate ceding power to the public. Preventing that from happening helps preserve the military’s competitive advantage over the private sector.

Without these reforms, any appearance of improvement is just that: an appearance. The IMF program may have stabilized Egypt’s fiscal position, but it has not set the country on a path to sustainable growth or recovery. This why the market is reluctant to buy into Egypt’s current trajectory, as is indicated by the negative PMI figures and the stubbornly low levels of FDI, most of which are in the oil and gas sector. Between the cost of patronage, lost investments, and market instability, the military’s intervention in Egypt’s economy is a luxury the country can no longer afford.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Timothy Kaldas is an independent risk adviser and nonresident fellow at the Tahrir Institute for Middle East Policy. 

©2019 Bloomberg L.P.

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