OpinionMiddle East

The Egyptian financial crisis: Implications for Israel and the region

The continued stability of the political order in Egypt is among Israel’s most important national interests.

Flags of Egypt and Israel. Credit: Leonid Altman/Shutterstock.
Flags of Egypt and Israel. Credit: Leonid Altman/Shutterstock.
Eran Lerman
Col. (ret.) Dr. Eran Lerman, former deputy director of the National Security Council, is the vice president of the Jerusalem Institute for Strategic Studies.

Egypt’s economic woes were made manifest early in 2023 when the Egyptian pound rapidly collapsed, for the first time crossing the threshold of 30 to the dollar (25 in December 2022, less than 20 in October). The key reason was the foreign currency shortage due to the steep rise in the cost of wheat and other essential imports, as the war in Ukraine disrupted supply lines. Record users’ fees from the Suez Canal—the enlargement of which had been one of Egyptian President Abdel Fattah el-Sisi’s proudest grand projects—could only marginally cover these shortfalls. All of it was compounded by the lingering effects of a decline in state incomes in recent years, including a decrease in tourism, the impact of COVID, terror attacks and broader patterns in the global markets all at play.

The pound’s collapse is also due to deliberate regime policy derived from the commitments made in the framework of the agreement with the IMF, approved in December 2022. It would entitle Egypt to $3 billion in loans over the next three years under an EEF—Extended Fund Facility—to be disbursed in batches of a few hundred million every few months, subject to a twice-yearly review of Egypt’s compliance with the IMF’s conditions. The latter include, among others, the floating of the Egyptian pound, a restrictive monetary policy aimed at curbing inflation, budget cuts aimed at reducing the debt-GDP ratio (now at 88%) and generating growth centers led by the private sector.

Among the immediate and demonstrative steps of the regime came the declaration by Prime Minister Mostafa Madbouly (Jan. 9, 2023) that until the end of the Egyptian fiscal year (in June), there would be severe restrictions on all government foreign currency expenditures, including travel abroad, and on acquisitions by most government ministries, excluding those of defense, foreign affairs, interior and health (a list indicating what the core capacities of the state are now). Exceptions would need authorization at the highest level. None of this would pull Egypt out of its difficulties, but they were meant as a message—proof of the regime’s recognition of the seriousness of its predicament—aimed at both the IMF and the Egyptian public.

At this stage, there are no signs that the steps taken by the government—having been modified by gestures toward the poorer classes, such as the distribution of pita bread and other essentials—gave rise to any significant political disturbances. However, if the economic decline continues, it is difficult to predict when the turning point might come. For Israel, there are strategic reasons for trying to prevent developments that could lead to instability in the most important country on our border.

Positive trends on the horizon

Given the IMF’s consistent commitment to promoting free markets, one set of actions derived from the IMF demands is reflected in the Egyptian government’s decision to privatize state assets, specifically those owned by the military. For the first time, it may become possible to open to investment, and competition, sectors that for decades have been under the control of the military establishment and constituted about a third of the national economy. Beyond the income from privatization, this can also help correct structural impediments that have long burdened Egypt’s growth. The IMF has suggested a 14 billion pound benchmark for private investment to be drawn by these measures in the three years under review.

Another potential ray of light—alongside the prospects of a pick-up in tourism in the post-pandemic era and as terrorism subsides (although regime claims of victory seem premature)—comes from the energy field, specifically the series of discoveries in Egyptian EEZ waters. The announcement (Jan. 15, 2023) that gas had been discovered by a partnership of ENI and Chevron at the Narjes offshore field can be added to previous breakthroughs offering a prospect of economic relief—if indeed arrangements are made in the Eastern Mediterranean basin enabling cooperation in exports. Still, gas exports will only impact the economy and the balance of payments a few years down the road.

How can Israel be of help?

As noted above, the continued stability of the political order in Egypt is among Israel’s most important national interests, if only because the alternative—the collapse of governance in a nation of 105 million on our border, and possibly a full or partial takeover by radical totalitarian Islamists in Sinai and/or Egypt—would itself constitute a grave danger to Israel’s national security.

Moreover, el-Sisi’s regime—despite points of friction from time to time—has positioned itself as a constructive actor toward Arab-Israeli normalization, joining the Negev Forum (alongside the United States, Israel, the United Arab Emirates, Bahrain and Morocco) and serving through its intelligence service as an effective go-between with Hamas on a range of issues, including the fate of Israelis and bodies held in Gaza. Egypt played a role in the Aqaba emergency meeting on Feb. 26, and will host the next round. While it is true that Cairo’s position on the Palestinian question remains unchanged, and its posture toward Israel in U.N. institutions remains quite hostile, cooperation in other aspects of the relationship, including the war on terror in Sinai, is closer than ever. The regime now claims to have achieved a decisive outcome in the struggle against the “Sinai Province” of ISIL – and to some extent, as it is willing to admit in private, with Israel’s help.

On the economy, however, Israel’s direct leverage is pretty limited:

1. Supply of gas from Israeli fields, which enables Egypt to export LNG from its existing facilities (which have been idle for a long while) on the Mediterranean coast.

2. The QIZ arrangements, which enable Egyptian produce to be sold to the United States under the terms of the American-Israeli FTA as long as a certain percentage of Israeli input is involved.

More significantly, the Israeli government can and should use the range of diplomatic avenues available—including the EMGF (East Mediterranean Gas Forum) and the Negev Forum, as well as bilateral strategic consultations with the US and European powers—to support policies that can help Egypt extricate itself from its present predicament:

1. Seek an agreed resolution—in close coordination with Greece—of the EEZ delineation in the Eastern Mediterranean, currently challenged by Turkey. There is room for compromise, drawing on the Israeli-Lebanese model, particularly if there indeed seems to be a willingness in Libya to renegotiate the November 2019 MoU with Ankara.

2. Encourage the Gulf states, led by the UAE (and Saudi Arabia), to realize the potential for investment mapped out by the IMF—and invest in significant productive sectors of the Egyptian economy, including military-owned enterprises that may now be on sale.

3. Turn the attention of national security establishments in friendly countries—above all, the United States and Europe—to the need to give the necessary backing for el-Sisi’s reforms and treat the role played by the PRC in Egyptian projects leniently. Too much is at stake for this to become another point of contention regarding Chinese influence.

There are and will be ways for the Egyptian regime to be made aware of such discreet Israeli actions, which reflect Jerusalem’s national security interests rather than an act of altruism. Nevertheless, Israel can contribute to consolidating bilateral relations and bolstering Egypt’s commitment to the 1979 Peace Treaty.

Col. (ret.) Dr. Eran Lerman, the former deputy director of Israel’s National Security Council, is the vice president of the Jerusalem Institute for Strategy and Security.

This article was originally published by the Jerusalem Strategic Tribune.

The opinions and facts presented in this article are those of the author, and neither JNS nor its partners assume any responsibility for them.
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