Will Sisi Squander His Chance to Fix Egypt's Economy?

David Schenker

Economics, Middle East

The latest bailout from Saudi Arabia may be the last.

Ever since Saudi King Salman’s early April visit to Cairo, Egypt’s President Abdel Fattah el-Sisi has been in damage control mode, trying to contain a crisis sparked by two nearly simultaneous announcements: that Egypt would be transferring sovereignty of two Red Sea islands to Saudi Arabia, and that Riyadh would be providing an enormous economic aid package to Cairo. This news—coupled with reports that King Salman had showered senior Egyptian officials and parliamentarians with Rolexes—led many to conclude that Sisi had “sold” the islands.

The optics were awful, and catalyzed Cairo’s largest demonstrations in years, with thousands once again calling to topple the regime. Amidst the intense focus on the islands, however, the significance of the Saudi grant has largely been overlooked. Absent the $22 billion in Saudi aid, Egypt was seemingly on a glide path to economic collapse.

Egypt has long faced economic challenges, but over the past two years—since Sisi took power in a military coup—the situation has markedly deteriorated, precipitated by declining tourism and Suez Canal revenues, as well as a persistent Islamist insurgency led by ISIS. With foreign reserves dwindling to dangerous levels, a staggering 9 percent annual inflation rate, over 13 percent unemployment and an annual budget deficit of about 12 percent, Cairo’s finances, the Sisi administration’s durability and Egypt’s stability were all increasingly at risk.

While he has made concerted efforts to encourage foreign direct investment, Sisi has not tackled Egypt’s core structural economic problems, chief among them the military’s oversized role in the financial system—the army controls an estimated 30 percent of the economy—and food and energy subsidies, which account for nearly 20 percent of the annual budget. These subsidies, along with salaries for the seven million employees in the state’s bloated bureaucracy, and debt servicing, equate to 80 percent of annual government spending.

Complicating matters, a new baby is born about every nineteen seconds, constituting an annual growth rate of 2.6 percent, which means that Egypt’s population is poised to double to 180 million by 2050. Already, nearly half of Egyptians subsist on less than $2 per day.