What is the future of the army economy and the public sector in Egypt after the IMF stipulates that they be reduced?

Over the past three years, there has been talk about the possibility of privatizing some Egyptian army companies (Getty)

The Egyptian government’s crisis with the International Monetary Fund was resolved after the Fund’s Executive Council approved the first and second reviews related to the December 2022 loan, and the value of the loan was increased by about 5 billion dollars, bringing the total to 8 billion dollars, but this approval did not come on a white paper. Rather, there was Conditions, some of which were implemented by the Egyptian government several weeks ago, related to having a flexible exchange rate and raising the interest rate.

However, the important condition, which was indicated in the press release published on the IMF website, relates to limiting public investment and leveling the playing field in a way that allows the private sector to become an engine of growth.

More than once over the past three years, there has been talk about the possibility of privatizing some army companies, and indeed the “National Petroleum Company” and the “Safi” Mineral Water Company were named, but the matter did not enter into force, and the Egyptian government’s agreement with the International Monetary Fund at the end of 2022 included The state of equality between the public and private sectors, including military companies.

The Egyptian government's slowness in privatizing companies in general, and privatizing army companies in particular, and not accepting the devaluation of the currency were the reasons for not adopting the IMF reviews with Egypt.

International Monetary Fund Director Kristalina Georgieva and Egyptian Prime Minister Mostafa Madbouly (social media sites)

Army economics

The file that always lacks transparency and leaves those concerned with the Egyptian economy to estimates is the economic value of the army’s civilian projects in Egypt. While Egyptian President Abdel Fattah al-Sisi previously estimated it at between 2% and 3%, some economic experts estimate it at about 40%.

However, it is noted that the contribution of companies affiliated with the army has witnessed a significant expansion in the civilian economy after the 2013 coup, and Yazid Sayigh - through his study published at the Carnegie Center under the title “The Egyptian Military Establishment as the Spearhead of State Capitalism” - concludes that the net value of military companies and the military production of goods and services Much smaller than many estimate, but much greater than it was a decade ago.

Sayegh explains the areas in which the army’s economy has expanded over the past decade through real estate development, the establishment of industrial and transportation complexes, the extraction of natural materials, relations with the private sector, and increasing public sector capital through private investments.

According to the state’s general budget figures, Chapter Five - which includes single-line budgets, most notably the army budget, rose from 41 billion pounds ($5.79 billion according to the exchange rate of 7.07 pounds to the dollar at the time) in the fiscal year 2013-2014 to 145 billion pounds ($4.70 billion). According to the exchange rate of 30.8 pounds to the dollar) in the 2023-2024 budget.

By virtue of the Constitution, the army’s budget appears in the state’s general budget in light of what is known as the one-line budget, which is discussed in a special committee.

It is noted that the expansion of the army’s activity in the economic field also came at the expense of the public business sector in terms of liquidating some companies and carrying out similar activities, as happened in the iron and cement sector, as well as competing with the private sector in consumer goods activities, especially those that are imported from abroad.

The contribution of military-affiliated companies has witnessed a significant expansion in the civilian economy (Reuters)

Private sector contribution

Data from the state general plan follow-up report, issued by the Ministry of Planning and Economic Development in Egypt, for the fiscal year 2020-2021, show that the private sector’s contribution to the gross domestic product reached approximately 68%-69% in the years 2019-2020 and 2020-2021, respectively.

But this percentage needs a careful reading to know the nature of the private sector’s contribution. This high percentage is due to the fact that consumption represents the largest percentage of the components of the GDP, which consists of: consumption + investment + net exports of goods and services.

Referring to Egypt’s GDP figures in the year 2020-2021, according to the follow-up report, we find that it is 6.3 trillion pounds ($401 billion according to an exchange rate of 15.7 pounds to the dollar), while private consumption reached 5.5 trillion pounds ($350 billion according to an exchange rate of 15.7 pounds to the dollar). Representing 88% of the value of the gross domestic product, the problem here lies in the fact that the private sector’s contribution comes within the framework of consumption, not production.

Perhaps knowing the share of the private sector in the total investments implemented in Egypt during the years 2019-2020 and 2020-2021, explains the private sector’s contribution to economic activity more clearly, as investments made by the private sector amounted to 38.3% and 24.5%, respectively.

If we consider that the year 2020-2021 was in which economic activities were affected by the negative repercussions of the Corona crisis, then the year 2019-2020 can be measured against it, and therefore the private sector investments implemented at their best do not reach 40%.

The problem of classifying the army economy

It is assumed that the army is an institution affiliated with the state, and specifically affiliated with the executive authority, but given that army institutions control a significant portion of civilian economic activities, especially those related to the implementation of public projects, the implementation of these projects takes place through private sector companies within a certain framework. It is known as a “subcontractor”, and thus these works are classified as being carried out through the private sector, while a large portion of the net profits go to army companies, and the best example of this is what is done in the New Administrative Capital.

A car selling products belonging to a company owned by the Egyptian army (social networking sites)

Will the army withdraw from economic activity?

The International Monetary Fund program includes embarking on the privatization of many public projects in Egypt, and thus we are faced with two scenarios regarding the army’s economic activities in the civilian framework during the coming period, in a way that achieves the IMF’s demand to achieve equality and parity between the public and private sectors, including army companies.

The first scenario is that the army withdraws from civilian economic activities by not expanding its activities further than it already is, and also stops the military taking over the management of public projects or using Parliament to enact legislation that paves the way for army companies to take over projects.

The second scenario is the army gradually offering its companies for privatization, whether the privatization takes place in a local or foreign context. The privatization of army companies requires quite short periods of time to evaluate the assets and find out the truth about the financing position of these companies.

If the army exits civilian economic activities, there will be a great opportunity for the private sector, but this requires the private sector to significantly rehabilitate its material and technical capabilities, especially after a period of reducing its activity for more than a decade.

The challenge for the private sector, in the event of the army’s withdrawal from economic activity, will be to work to form large entities through joint-stock companies, especially since informal savings in Egypt are widely available, and every period is exposed to waste through what is known as “rest-placed” activities or investment of funds. Through illegal channels.

Waste operations mean what is lost by citizens who give their money to individuals personally to use it with the aim of obtaining a higher return than bank returns. In this case, savers’ money may be directed to unsecured or undocumented activities and it may be completely lost to its owners, or a portion of it may be recovered.

As for the public sector economies, they will no longer exist. In the clear strategy, whether through the conditions of the IMF, or through the practices of the Egyptian government, these companies will be significantly reduced during the coming period, and the state’s ownership in them will be small shares, which will not affect The management decision of these companies.

The door will also be wide open for foreign investments, whether for governments or the private sector, and the Gulf countries may have a large share in this field, as the Ras Al-Hikma deal was attractive in terms of the nature of its financing arrangement, which used 31% of its value from the balance. UAE deposits in the Central Bank of Egypt.

Other Gulf countries may find that in the UAE’s path, disposing of their deposits in the Central Bank of Egypt is a practical step to recover these deposits in the form of obtaining capital assets for companies or lands for new projects. Saudi Arabia is considered a candidate for such behavior, as it has the largest balance of foreign deposits in the Central Bank of Egypt. About 10.5 billion dollars.

Source: Al Jazeera