The reasons cited for the downgrade include pressure on the banking system from the sovereign debt crisis (since Egyptian banks are some of the largest holders of Egyptian sovereign debt), constraints on the availability of hard currency, expected negative impact on capitalization due to expected depreciation of the pound, and the perceived inability of the Egyptian government to shore up the banking system in case of a crisis. This downgrade in the credit rating comes as the net foreign asset deficit of the Egyptian banking sector hit a new high of $24.5 billion as of March, compared to $23 billion in February, showing the increased vulnerability of the sector.

The vulnerability is compounded by the weakness of the national foreign currency reserves, which stood at a meager $32.4 billion as of March. These reserves are the main resource that the government can call upon, not only to meet its debt obligations, but to rescue Egyptian banks if they fail to meet their obligations in foreign currency.

Egypt’s IMF Loan Now Shows Sure Fire Signs of Failure

The situation is further compounded by another vulnerability, which was stated to be a factor in the downgrade, although Fitch alluded to in the report. This would be the $11 billion (340 billion Egyptian pounds) worth of treasury bills held by non-residents, what is commonly known as “hot money.” If a mass exodus of these investments took place, similar to the $20 billion (610 billion Egyptian pounds) exodus that took place in March 2022 due to the war in Ukraine, precipitating the current debt crisis, the consequences would be catastrophic. Indeed, an outflow of such a magnitude would push the banking sector to the edge of the abyss, a crisis which the regime would be almost powerless to stop.

The downgrade also comes at a moment when the debt crisis seems to be deepening, with pressure from President Abdel Fattah el-Sisi’s allies mounting and no financial aid appearing in sight. For example, the regime’s Gulf allies seem to have agreed on a unified position: before they will provide aid, Sisi is expected to comply with three main conditions. First is the devaluation of the Egyptian pound, which is a logical ask considering that the Gulf is expected to be the primary buyer of regime-held assets and a devaluation would make these assets cheaper. Second is a change in personnel for those responsible for managing the Egyptian economy. Considering that the management of the economy is highly centralized and militarized, this is a direct attack on the regime’s economic policy and even on the presidency.

Third, and most important, is the demilitarization of the economy, a prospect that seems to be far-fetched at the moment, with no concrete steps taking place since the crisis began. The consequences of the sluggish rate of reform have been all too real. Since the government announced the sale of 32 state-owned companies, the first in the fire sale privatization program, not one significant sale has been concluded, with the Gulf demanding a demilitarization of the economy before buying into state-owned assets. The slow pace of the privatization program is a result of the lack of reforms.

The regime, however, seems to be playing a high-stakes game of chicken, hoping that the “too big to fail” logic would prevail in the event of a crisis and that the international community would intervene to stave off a complete collapse. This logic was clearly reflected in the regime budget for next year, which assumes that the main source of public revenues will come from loans, at an estimated share of 49.2% of the budget. In comparison, taxes constitute 35.2% of the state budget. This logic presumes the continued availability of external sources of financing, despite the regime’s current difficulties in soliciting international capital inflows. It comes at a time when Egypt has been ranked the country with the third highest risk of default after Ghana and Ukraine, according to Bloomberg. Continued access to international capital inflows is wishful thinking under these conditions.

Who Will Buy America’s Debt Now?

For this reason, the regime is not only facing a sovereign debt crisis, but a banking crisis as well. The exposure is stemming from obligations in foreign currencies, placing the regime in a uniquely vulnerable position. Indeed, if the major banks are unable to meet their obligations, the state will not be able to step in to shore up the banks. Simply put, the regime does not have enough hard currency reserves in its coffers to do that, and its access to quick liquidity is limited. This could potentially be catastrophic for Egyptian banks, leading to possible collapse of the sector or to its being cut off from international financial markets—which for a peripheral economy like Egypt would be catastrophic and would require immediate international intervention.

Indeed, as long as the sovereign debt crisis remains unresolved, this scenario continues to become more likely, threatening catastrophic consequences for the Egyptian economy and the mass of the citizenry. Barring the very unlikely setup of a currency swap line with the US Federal Reserve, there is no other avenue other than another rescue package from the International Monetary Fund, with a much larger value, and even more stringent conditions that the regime will most likely attempt to circumvent.

[Arab Digest first published this article and is a partner of Fair Observer.]

[Anton Schauble edited this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post Egypt’s Banking System Is Getting Closer to the Edge appeared first on Fair Observer.

As of now, Egypt does not seem to have followed the IMF’s policy recommendations. In making the recommendations, the IMF demonstrated a systemic misunderstanding of the fundamental dynamics of Egypt’s political economy. This misunderstanding is bound to exacerbate Egypt’s economic problems and exacerbate the current crisis.

The Military Likes Moolah

For decades, the military has had first claim on Egypt’s resources. The IMF recommends that the military give up its privileged economic position. It also calls for leveling the playing field between the public and private sector. Yet signs abound already that the regime is circumventing these recommendations. In fact, it is deepening the economic footprint of the military.

In January, Sisi issued a presidential decree assigning prized land to the military. The military now has land two kilometers wide on both sides of 31 roads. The military uses this tactic to gain control over commercially viable pieces of land, which it then uses for profit-generating activities. 

Sisi’s government has also instituted an amendment of the 1975 Law 30, which regulates the operation of the Suez Canal Authority. This came only a few days after the IMF deal. Prima facie, this amendment carries out the IMF’s recommendations. It creates the “Suez Canal Fund,” which will invest surplus revenue from the canal’s operations. This fund will also be able “to lease, sell, and purchase assets, establish companies, and invest in financial instruments.”

However, the devil lies in the details. A statement from the president reveals that the new fund will be under the control of a “sovereign entity,” a euphemism for the security services. Furthermore, the amendment provides for no parliamentary supervision for the fund. This means that the military will be able to siphon off hard currency from this fund, which could prove critical for meeting both Egypt’s debt obligations and the import needs of the population. 

Finally, the government has no real plan to sell off state-owned assets as part of the effort to meet its debt obligations. Of the 32 companies it is selling off, only two of them are military-owned. Watanya, the petrol station chain, seems to have been subjected to asset stripping. Most of Watanya’s assets have been moved to ChillOut, another military-owned chain. Deals that have been done are also in trouble. In February, ADNOC acquired half of Total’s fuel stations . There are reports that this Emirati state-owned company is backing out of the deal.

It is clear that, as many predicted, the IMF’s recommendations are meeting stiff resistance. Hence, their implementation is extremely unlikely.

Increasing Inflation and Rising Debt Spell Trouble Ahead

Inflation rose from 21.9% in December to 26.5% in January. Food prices are up. Bread, meat and poultry cost a lot more. The IMF recommended “a shift to a flexible exchange rate while taking measures to help shield the Egyptian population from a mounting cost-of-living crisis.” Inherent in this recommendation is an admission. This shift will exacerbate inflation and worsen the cost-of-living crisis.

In January, Al Jazeera reported that the Egyptian pound had lost half of its value since March. Bloomberg has observed that devaluation has already hurt the Egyptian economy. As of February, the private sector had declined for 26 consecutive months. Scarcities persist and the private sector is struggling. Business sentiment has sagged to its third lowest level since April 2012. Remember, this was a time when the Muslim Brotherhood was in power. 

Finally, Egyptian debt is showing worrisome trends. Even though external debt has declined by 0.5% on a quarterly basis, short-term debt has increased from 11.48% in September 2021 to 27.4% in September 2022. This rapid increase is alarming. Sisi’s regime faces pressure to repay its debt even as investor confidence remains low. So, the regime is relying on short-term borrowing to solve the problem. This debt comes at a higher price. It is issued with higher interest rates, driving up Egypt’s cost of servicing this debt. Unsurprisingly, Moody has downgraded Egypt’s credit rating from B2 to B3, piling up even more pressure on the Sisi regime.

In essence, the prospects for IMF’s policy recommendations are poor. Indeed some of its recommendations will only deepen the crisis and increase poverty. The only possible and durable solution to the crisis is a radical transformation of Egypt’s model of crony capitalism. The IMF economic policy recommendations cannot succeed under the country’s current political system, which the institution implicitly supports.Without a comprehensive understanding of Egypt’s political economy, the IMF will continue to throw good money after bad and its loans will only enrich elites in Sisi’s military regime while inflicting pain on Egypt’s long-suffering people.

[Arab Digest first published this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post Egypt’s IMF Loan Now Shows Sure Fire Signs of Failure appeared first on Fair Observer.

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The revoking of the emergency law does have some positive consequences, namely the suspension of the infamous “state security court,” which offered no avenue for appeal and was notorious for its harsh sentences. However, these positive impacts are mitigated by a myriad of repressive laws, heavy use of pre-trial detention, extrajudicial killings and the heavy politicization of the judiciary, which make the state of emergency mostly redundant.

Two Laws

The most notable example of the repressive laws issued by the regime is the 2015 Anti-Terrorism Law. This law has a few notable features.

First, it provides a very vague definition of what constitutes terrorism to include acts that affect “social harmony and national security,” an expansion of which allows the Egyptian regime to crack down on dissent and charge activists with terrorism at will. Second, the law provides immunity to the security forces stating that “members of the security forces cannot be prosecuted in case force was used in the line of duty.” Finally, the law gives the president the power to take “necessary measures” in specific geographic areas in response to a terrorist threat, including isolating specific regions, depopulating them and the imposition of curfews for a period of six months, which can be extended.

In addition, on November 1, after the state of emergency was revoked, parliament approved an amendment to the law that expanded the power of the president, giving him the right to designate the security agency responsible for imposing his directives, a thinly veiled reference to assigning the military as a domestic security force to repress dissent.

The consequences of this law are significant. Besides the use of terror charges against peaceful activists, there has been a sharp rise in extrajudicial executions, reaching 755 alleged killings in 143 shootouts between 2015 and 2020. In some cases, the families of those killed have attested that their relatives were detained at the time of the alleged shootout. The immunity provided to the security forces by this law has emboldened them to commit killings, with no real investigation or consequence.

Another law that is seldom discussed is the Law for Protection of Public and Vital Entities. This law, issued in 2014, stipulates that the military is responsible for providing security to public institutions in cooperation with local police forces. The law says these buildings and institutions belong to the military, hence any acts of protest affecting their functioning fall under the jurisdiction of military courts, notorious for harsh sentencing and lack of due process. The definition of vital entities includes roads, bridges, railways, power lines and public institutions, essentially almost all of the public space.

This law was supposed to be temporary. However, in the same session where the amendments to the terror law were approved, it was made permanent. In effect, this permanently militarizes the public space by extending the jurisdiction of military courts to cover most public spaces and transforming the military into a domestic security agency, responsible for the repression of dissent and protest.

Pre-Trial Detention and the Judiciary

The lawful quashing of dissent is also coupled with the heavy use of quasi-legal methods of repression, the most prominent of which is the application of pre-trial detention. Egyptian criminal procedure law states that pre-trial detention should be limited to six months for misdemeanors, 18 months for felonies and two years for offenses punishable by death or life imprisonment. In reality, there are a number of cases where detainees remained in custody even after they surpassed their pre-trial detention limit. This practice has allowed the regime to arbitrarily detain its opponents for prolonged periods of time on vague charges, with little evidence and in complete disregard of due process.

In addition to this, the regime institutionalized the practice of “rotation,” where once the pre-trial detention period on one charge lapses, the detainee is charged in a new case, with very similar charges. The most notable example is Abdel Moneim Aboul-Fotouh, the head of the Strong Egypt Party, who was arrested in February 2018. He has remained in pre-trial detention after new charges were brought against him in February 2020.

The noose of repression is complete with the heavy politicization of the judiciary, which has been a feature of the regime since the coup of 2013. This is reflected in a number of mass trials, which have shown little regard for due process. The most notable is the trial of 735 defendants in the case of Cairo’s Rabaa al-Adawiya Square sit-in, during which hundreds of protesters were killed by security forces. The final verdict, issued in June 2021, saw the confirmation of the death sentence of 12 prominent Muslim Brotherhood leaders; out of 75 death sentences issued by the lower terrorism court, 31 death sentences were commuted to life in prison.

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The cooption of the judiciary was formalized with the constitutional amendment of 2019, which gave the president the power to appoint the heads of judicial institutions, as well as stipulating the creation of a higher judicial council — headed by the president — which oversees appointments, promotions and secondments within the judiciary.

The Permanent State of Repression

Hence, the suspension of the state of emergency in Egypt does not signal a real easing of repression, rather, under another guise, its permanence is extended. The amendments to the Anti-Terrorism Law and the Law for Protection of Public and Vital Entities made the state of emergency redundant. This, combined with the actual practices of the security forces and judiciary of using pre-trial detention, extrajudicial killings and torture, means that repression has been deeply institutionalized within the state apparatus, in essence turning it into a modus operandi.

One can speculate that the suspension of the state of emergency was a feeble attempt to claim progress aimed at the Biden administration, which withheld $130 million in aid over human rights concerns. However, the regime’s strategies point to the opposite, namely that brutal repression in Egypt will be a feature of daily life for years to come.

*[This article was originally published by Arab Digest, a partner organization of Fair Observer.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post The Permanent State of Emergency in Egypt appeared first on Fair Observer.