The Arab Gulf States Institute in Washington's eighth annual Petro Diplomacy conference examined the upheaval in the oil and gas markets following Russia’s invasion of Ukraine and the role of Gulf Arab oil producing states in meeting the sudden demand surge.
In early April, three Gulf Cooperation Council countries pledged around $22 billion to Egypt. The Saudis deposited $5 billion into Egypt’s central bank, while the Emiratis and Qataris made investment deals. The GCC support arrived at a critical moment for Egypt’s economy. Mounting pressures on the Egyptian pound have been building since the beginning of 2022. On one hand, higher interest rates on the dollar have raised the cost of rolling over Egypt’s foreign debt. They have also encouraged capital outflows exacerbating the country’s exposure to the volatility of short-term flows. On the other, being a net food and energy importer, higher international energy and food prices have deepened the country’s current account deficit.
The Russian invasion of Ukraine was the cherry on the pie. In late March, the Egyptian pound depreciated, losing around 15% of its value versus the dollar. This was the biggest decline in almost three years of relative exchange-rate stability. In the wake of large capital flight, the Egyptian government announced the start of a new round of negotiations with the International Monetary Fund, with the possibility of getting yet another loan. Then the GCC countries came to the rescue sending a firm message to Egypt’s foreign creditors that the country has rich friends that are willing to pitch in in the hour of need. This is especially the case with the GCC oil exporters lush with money in the wake of higher international energy prices.
Egypt’s resorting to the GCC countries for urgent financial support is a reminder of the few years that preceded Egypt’s deal with the IMF in November 2016. Following the 2011 revolution and the political turmoil that ensued, Egypt relied on financial support from different GCC countries at different stages to offset the depletion of its foreign reserves. In 2012, Qatar extended around $10 billion to the Muslim Brotherhood-backed president, Mohamed Morsi. After the ousting of Morsi, the United Arab Emirates, Saudi Arabia, and Kuwait supported Egypt with a massive $23 billion between 2013 and 2015. Egypt’s reliance on the GCC states was significantly reduced as the IMF deal included a $12 billion loan and subsequently gave Egypt better access to global financial markets. Indeed, the Egyptian government expanded its foreign borrowing, and the country’s foreign debt jumped from $40 billion in 2015 to $137 billion in January.
Reverting to the GCC states now is not just a sign of financial vulnerability six years after the adoption of the IMF package, it also indicates deteriorating conditions for borrowing on international markets for highly exposed countries like Egypt. The one thing that Egypt could fall back on is the more familiar political-economic dynamics of oil rent redistribution in the Middle East through inter-governmental aid, investment, and remittances that had proved quite crucial many times since the mid-1970s. However, this time the GCC support entails an actual underwriting of Egypt’s foreign debt in a way that sends a message of assurance to private investors to bring their money back or at least stop them from withdrawing it from the country. Either way, it is a moment of primacy for geopolitical and political considerations over financial and economic ones.
The GCC support came the same week Egypt joined the UAE, Bahrain, and Morocco in an unprecedented meeting in Negev, Israel. This was the most striking presence of Egypt since the beginning of the normalization process between some Arab states and Israel in August 2020. Egypt had not shown much enthusiasm for this endeavor, possibly for fear of the erosion of its regional role as the historic mediator between the Arab world and Israel, as the first Arab country to sign a peace agreement with Israel. Whether the Negev meeting marks a sustainable shift in Egypt’s position is not a foregone conclusion. But with this renewed financial dependency on the GCC states, Egypt may have to align itself more clearly with the new security arrangement emerging between some GCC states and Israel, designed primarily to counter the actual and perceived Iranian threat. In this context, Egypt’s earlier autonomous stances on the Yemen and Syria conflicts could be interpreted in terms of the diversification of its foreign financial needs away from the GCC states after the 2016 IMF deal. Since the 2015 Saudi-led intervention, Egypt has refrained from any direct military involvement in the Yemen conflict despite continuously affirming its commitment to Gulf security. Similarly, Egypt has been open to the restoration of “Syria’s position in the Arab world” under President Bashar al-Assad. In turn, the reversal of this trend may translate into less autonomy in the future.
Another geopolitical implication of the recent money injection is the Qatari contribution. Unlike the support from 2012-16 that came exclusively from Qatar or the UAE and Saudi Arabia, this time it is coming from all three together. This is a manifestation of the reconciliation process set off by the January 2020 Al Ula GCC summit between Qatar and its Gulf neighbors as well as Egypt. However, it also indicates that Egypt might be diversifying its interests among GCC states employing the differences among Saudi Arabia, the UAE, and Qatar in pursuit of its interest in sustaining an autonomous foreign policy. This would not be the first time. During the 2021 Gaza war, the Egyptian government agreed with the Qataris over a financial package for the reconstruction of the Gaza Strip. This was seen as a countermeasure to the UAE’s rapprochement with Israel and a reassertion of Egypt’s unique position regarding Gaza and subsequently Israel.
Beyond the geopolitical implications of the recent financial support from GCC states, the form such help has assumed might mark a qualitative shift in Egypt’s dependency. It is notable that the UAE’s and Qatar’s economic injection is planned to take the form of the acquisition of financial assets in various sectors, including energy, fertilizers and petrochemicals, port management, and financial services. These massive acquisition deals come immediately in the wake of the recent depreciation of the Egyptian pound making them cheaper for foreign investors. This might constitute a new trend in which reliance on future GCC financial support would translate into a more extensive presence in the Egyptian domestic economy via the property transfer of assets.
Egypt’s renewed dependency on direct financial support from GCC states shows that the roots of the country’s economic malaise have not been adequately addressed in the past few years. The resort to the GCC states for a bailout reconfirms Egypt’s insertion into the Middle East political economy as a secondary recipient of oil- and gas-based rent. Moreover, it seems now that Egypt’s access to this kind of rent is a prerequisite for further borrowing on international financial markets. The perpetuation of these financial vulnerabilities may impact the scale and scope of Egypt’s involvement in any future GCC-led security arrangement to counter Iran. It also raises questions about whether the GCC states will always be willing and able to step in and prioritize Egypt’s financing needs in the future.
is assistant professor in the department of political science at The American University in Cairo.
While the strategic value of Iran’s drones seems limited thus far, Moscow seems to view them as an inexpensive – and punitive – way to maintain leverage in the conflict.
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