Is Egypt heading for bankruptcy?

Egyptians have been busy recently with concerns that their country may be heading for bankruptcy, especially in light of a report by the US Foreign Relations Council about to be submitted to Donald Trump. Some citizens fear that the economic conditions may lead the government to seize their deposits in local banks to save itself.

Companies, individuals or countries go bankrupt when they become unable to pay their debts, premiums and interest. In Egypt’s case, and despite the mountain of foreign debt — which reached more than $60 billion last September — followed by loans from a number of sources, and more than $5 billion in foreign debt premiums and interest in the past two fiscal years, the government regularly pays the interests and premiums it owes.

When some said that Egypt requested a renewal of Saudi bonds worth half a billion dollars, by deferring repayment, the Central Bank denied it, confirming the repayment of the semi-annual instalment of the Paris Club countries worth about $700 million in January.

As interest and premiums increase, the government resorts to borrowing more money, whether locally or abroad, through a variety of means, including direct borrowing, treasury bills and bonds in Egyptian pounds, dollars and Euros. The government will also resort to selling some shares from Banque du Caire (Cairo Bank), which is government-owned, in May, followed by the sale of shares in oil companies, and perhaps governmental hospitals as well.

In light of the financial gap, estimated by the International Monetary Fund to be about $12 billion annually for the next three years, the regime in Cairo is keen on repaying all interest and premiums, in order to maintain the confidence of the lenders. It also wants to continue with the game of borrowing from one source to pay another, which it’s been playing since the coup in 2013. There has been more borrowing to pay previous loans or for spending purposes, rather than directing such loans towards developments that bring revenue to help cover the cost of servicing the loans.

What has happened in recent years has shown that Western and Eastern countries are keen to provide financial support to the coup regime through the Gulf States. Countries such as Saudi Arabia, the UAE and Kuwait could not have provided generous subsidies if the West was not happy for them to do so.

When Gulf aid stopped due to the decline in the price of oil, Western countries started helping Egypt through international financial institutions, in which they have majority shares, such as the World Bank, International Monetary Fund, and even the African Development Bank, in which they own half of the voting quotas. Furthermore, Western countries such as Germany, Britain and France have provided the Egyptian regime with direct loans. The US, meanwhile, has kept up its annual support of $250 million, in addition to its military aid of more than $1 billion a year.

The West knows that there are only two main powers in Egypt: the army and the Islamic movement. Although Western governments are not happy with the army’s suppression of civil freedoms, they believe that this is less harmful to their interests in the region and the interests of Israel than the Islamic movement. Hence, they condone the practices of the current regime in its repression of all political opposition, including liberals.

That’s why we see valuations issued by Western rating agencies which give Egypt a stable B grade, despite a surging budget deficit, huge foreign debts and rising debt to the GDP, as well as a high inflation rate. There were also bonds issued by Egypt last month which were covered three times despite the lack of political and security stability and fears about the overthrow of the Cairo regime as a result of popular unrest because of sharp price rises for basic necessities.

It’s also why we see a report from the US Council on Foreign Relations — issued in the context of American interests in the region, such as facilitating the transit of its troops through the Suez Canal and the opening of airspace to US aircraft — which recommends that Washington should provide additional support to the Egyptian regime. This would include support for the Egyptian armed forces and political and diplomatic support to its leaders. The council also requested the resumption of US food aid to Egypt, which stopped in 1992.

The formation of a group to include the US, EU and Asian and Gulf countries, to mobilise more resources to revive the Egyptian economy in the face of bankruptcy has been suggested as well. This means the possibility of Gulf support resuming for the Egyptian regime, albeit at lower levels, especially with the increase in the price of oil. There are huge balances in the Gulf sovereign funds and the move will exploit the Saudi-led coalition’s need for Egyptian forces in countering the Houthi rebels in Yemen.

Translated from Arabi21, 5 February 2017

The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.