What Happened?

The International Monetary Fund (IMF) released a Staff Report on January 10, 2023, detailing the commitments made by the Egyptian government in return for the award of about $3 billion in new lending, Egypt’s fourth loan since 2016. Although the initial agreement was announced on October 27, 2022, it has taken ten months since talks first kicked off to hammer out its full scope.

The outcome is remarkable. According to the IMF, the agreement encompasses “a comprehensive policy package to preserve macroeconomic stability, restore buffers, and pave the way for inclusive and private sector-led growth.” Much of this focuses on producing “a durable shift to a flexible exchange rate regime, monetary policy aimed at gradually reducing inflation, fiscal consolidation to ensure downward public debt trajectory while enhancing social safety nets to protect the vulnerable.” Though important in general, some of this is boilerplate language, while tackling Egypt’s deepening currency crisis is no longer news in and of itself.

More striking is how far the latest agreement goes in placing at center stage “wide-ranging structural reforms,” reducing “the state footprint” in the economy, and strengthening “governance and transparency.” This is significant because it can only mean that the IMF finally went to the mat in order to bring much greater urgency to Egyptian pronouncements—which are frequent, but have yet to lead to concrete results—on reinvigorating the large public and public business sectors, whether by restructuring them or selling shares in them to private investors, and on levelling the playing field in order to facilitate private-sector-led growth.

Reflecting this, the latest agreement draws directly on the State Ownership Policy that was launched in draft form by the government in June 2022, in which Egypt promised that the state would entirely exit from up to 79 sectors of the economy, reduce its footprint in 45 others, and increase its investment in dozens of others. The government may have been merely going through the motions to secure the new IMF loan, and there are serious doubts about how feasible the policy actually is. Former deputy prime minister Ziad Bahaeddine has noted that most of the modalities it proposes have been officially adopted several times over the years with no discernible impact. Nonetheless, references to it are woven in throughout the latest agreement, making it harder for Egypt to drag its feet too visibly. The fact that Egyptian President Abdel-Fattah al-Sisi formally approved the policy on December 29, 2022, just ahead of the IMF’s official publication of the agreement, was no coincidence. Indeed, the agreement refers explicitly to his endorsement, and pointedly regards the policy as the “structural benchmark” for progress.


Why Is It Important?

Despite the importance of the general framework described above, what is exceptional about it is that it also encompasses Egypt’s military companies. This contradicts the initial impression given by the loan agreement announcement in October 2022, that the IMF had not used its leverage to place the military companies on the agenda.

The Egyptian government’s official Memorandum of Economic and Financial Policies to the IMF, which forms an attachment to the agreement, commits the government to clarifying the “definition of the state” in its new State Ownership Policy and to “explicitly outline that it covers all enterprises owned fully or partially by a state-associated entity irrespective of the institutional framework under which the enterprise is established.” To avoid any ambiguity, the memorandum then lists military-owned companies specifically as among the public-sector companies, public business sector companies, economic authorities, and joint ventures and partnerships covered by the definition.

The memorandum additionally spells out some of the implications. One, which has particularly vexed the private sector and international financial institutions such as the IMF, is to limit the numerous exemptions that provide market advantages to state-owned enterprises (SOEs) over private competitors and prevent a level playing field. Military companies have benefited from more extensive exemptions even than other state companies and agencies—from paying any income, property, and other taxes, value-added tax, customs duties, various administrative fees, currency exchange rate caps, transport tolls, and the like—but the memorandum promises to “remove all SOE tax exemptions” from them as well.

No less important is that military-owned companies are again included explicitly in the list of state companies and agencies that must publish “a comprehensive annual tax expenditure report, including details and estimates of tax exemptions and tax breaks broken down by classification.” This is one of numerous promised measures relating to financial management and governance of state entities. Military companies are therefore among all of these in being required to submit biannual financial accounts to the Finance Ministry, which “will ensure open access to these data along with information quantifying the subsidies provided to the commercial and non-commercial activities of the SOEs.” Military companies will, similarly, be expected to introduce performance contracts and operational and financial targets to help assess performance and come under more centralized oversight, which should moreover prevent oversight of market regulators and the companies they regulate being undertaken by the same institution.

The government additionally promises to improve customs procedures and information sharing with the private sector, which necessarily impacts military companies that enjoy both formal and informal facilities for clearing their imports, and for blocking those of their competitors. Even more revolutionary, if implemented, is the plan to streamline allocation of state land to civilian entities, both public and private, which is controlled by the Defense Ministry. The memorandum moreover promises to require “top officials in all SOEs” to submit asset declaration forms, and to report publicly on their compliance. Managers will be subject to performance contracts, and board members to transparent selection processes according to clear guidelines for qualifications and remuneration. Last, and far from least, between 25 and 100 percent of the proceeds of the sale of shares in SOEs, depending on the legal basis of their establishment, must be submitted to the Finance Ministry or the general state budget.


What Are the Implications for the Future?

That the Egyptian government acquiesced at all, not only in bringing military companies formally within the scope of its agreement with the IMF, but also in subjecting them to the same rules for taxation and financial reporting as their civilian counterparts, is breathtaking. It may also be pure make-believe. A review of military business expansion since June 2022 alone, for example, reveals that it is already contradicting the government’s promise that the “establishment of new SOEs would need to be transparently based on the state ownership policy.”

Another issue that will definitely generate military pushback is the IMF emphasis on proper reporting of debt and arrears. The IMF report notes its inability to assess the liabilities of the thousands of extra budgetary funds held by numerous state agencies, which will have to be included in its coverage sooner or later, but the military holds on to its extra budgetary funds extremely jealously.

Furthermore, military resistance almost certainly explains the continuing delay in floating military companies on the Egyptian Stock Exchange or selling shares through Egypt’s sovereign wealth fund. This is despite the president’s repeated public advocacy of this since 2018 (if not 2016), the announcement three years ago that ten military companies were being prepared for offer, and official government announcements that the military-owned Wataniyyah chain of petrol stations and Safi mineral water bottling company would be first in line. Much has been made of supposed Gulf interest in buying up Wataniyyah, but it appears to have been subject to asset stripping as its stations are replaced by the ubiquitous ChillOut combined petrol and service stops, also military-owned, which can only reduce Gulf interest in purchasing it. Besides the loss of control over assets, the military opposes the levels of financial disclosure that would have to accompany even partial sell-offs of its companies.

Indeed, the military is known to be hostile to the sale of any state assets, let alone its own. This helps explain the extent of vocal opposition among parliamentarians, many of whom are handpicked by Military and General Intelligence, to the government’s plans to privatize companies and other assets belonging to the Suez Canal Authority, which the military regards as its exclusive economic enclave. Military distrust over this issue threatens to get in the way of both the president’s and the government’s efforts to attract greater Emirati investments, in particular, since the Suez Canal represents the one true commercial and strategic interest that the United Arab Emirates has in Egypt.

Military opposition is significant, but past experience suggests that the government will exploit every loophole to delay implementation of provisions of the IMF agreement, and prevaricate across the board. Neither the presidency nor the government have done the kind of intensive political preparation needed to push through something as wide-ranging and far-reaching as the State Ownership Policy. The agreement with the IMF will certainly suffer significant delays and watering down, potentially making it more aspirational than operational.

A crucial area where this may become all too evident is ensuring that public procurement is “competitive, nondiscriminatory, and transparent,” as the IMF seeks. In granting itself leeway to “clarify conditions under which direct contracting between public entities would be warranted under Law No. 182 on Regulating Public Procurement,” the government’s memorandum leaves the door ajar for the military to continue to enjoy the immensely lucrative power to receive, and award, non-competitive contracts on a no-bid basis. Tackling this may be a bridge too far for the IMF at present. As detailed in my “Throwing Down the Gauntlet: What the IMF Can Do About Egypt’s Military Companies,” the enabling legal and regulatory frameworks must be revised if military companies (and economically active military agencies) are to be genuinely brought in line with the commitments made in the Egyptian government’s memorandum.