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Amid Reforms, Egyptian Military Strengthens Grip on Economy

Egypt- egyptian soldiers at the Suez Canal
Soldiers watch a cargo container ship cross the new section of the Suez Canal after the opening ceremony in Ismailia, Egypt, 6 August 2015. Photo AP

The Helwan Company for Metallic Appliances, a military-owned entity, aims to double its production of household equipment in 2017, Chairman Darwish Mustafa el-Gendy told Daily News Egypt in January 2017. He added that the company sources components locally, in order to limit imports and ease pressure on foreign currency in Egypt.

Decreasing import dependency is a key pillar of Egypt’s economic reform programme, which is part of a $12-billion loan agreement made with the International Monetary Fund (IMF) last November 2016.

A major step in the programme was floating the currency the same month. Almost overnight the Egyptian pound (EGP) lost half of its value. It now stands at around 18 EGP to the dollar, compared to the fixed-dollar rate before the float of 8.7 EGP.

Among other objectives, the devaluation aims to encourage businesses to manufacture and source raw materials locally instead of importing them, and make Egypt more attractive for foreign investors.

The most recent indicators show that the reforms have had some positive results. Exports are up, imports down and major manufacturers have turned to the local market for materials. Sometimes the reforms have worked too well: President Abdel Fattah al-Sisi was forced to halt the export of fish in April 2017, because exporting had become so profitable that fishermen had stopped supplying the local market, resulting in a steep price hike for local buyers.

At first glance the picture looks bright, but there is a catch. The Helwan Company for Metallic Appliances is not the only business under the umbrella of the Ministry of Military Production aiming to step up local manufacturing. In May 2017, the ministry announced the signing of a protocol with a Chinese company to produce power transmission equipment. It was the latest in a growing list.

In March 2017, the ministry unveiled plans to establish a solar panel manufacturing unit in cooperation with Samsung. In January 2017, Minister of Military Production Mohamed al-Assar met officials in Belarus to discuss setting up production lines in Egypt of tractors, water pumps and drilling equipment.

The ministry is also involved in implementing a new food subsidy system, which aims to achieve the IMF objective of supporting the most vulnerable. Furthermore, the ministry has announced health-care projects, including establishing an industrial pharmaceutical area; plans to manufacture car components, refrigerators and washing machines, and develop and export chemical products.

For many Egyptians, the army’s increasing economic involvement is no cause for concern. On the contrary, the military has long been involved in the economy and has a reputation for providing cheap, high-quality products. Its petrol stations are known for clean toilets and good sandwiches, and its roads and bridges are perceived as being more solid than the standard in Egypt.

Egyptian business journalist Hossam Mounir told Fanack that the government is turning to the military to execute projects, as the military is “capable of carrying out high-quality projects at high speed, more so than private contractors”. He cites contracting the army’s engineering corps to oversee the $8-billion extension of the Suez Canal, which was finished in one year instead of the projected three.

The military is also participating in other megaprojects, such as the reclamation of 1.5 million feddans (630,000 hectares) of land for agriculture, building one million low-income houses and establishing a new administrative capital 45km east of Cairo. However, these projects have drawn criticism for being too costly and failing to meet actual needs, while mostly serving a nationalist propaganda agenda.

The increased activity of the Ministry of Military Production is related to the devaluation of the Egyptian currency, Mounir said, as it has an “important role in limiting import and filling the gap in the local market”.

The army is skilled at portraying itself as an advocate of the people. In October 2016, mothers protested against the shortage of baby formula. The army promptly stepped in to announce it would start importing the product to combat ‘greedy traders’ out to distort the market.

The question is whether a larger military involvement in the economy is in line with the IMF reform programme, which aims ‘to address deep-seated structural impediments to growth and job creation, and create an enabling environment for private sector development’.

“Military production companies do not crowd the private sector, but rather aim at offering high-quality products and low prices in order to ease the burdens on citizens,” el-Gendy said in the interview with Daily News Egypt.

According to Mounir, the military projects are in line with the IMF reforms. He referred to a speech al-Sisi made in December 2016, during which the president said military businesses constitute only 1.5-2 per cent of GDP. However, independent observers put that number as high as 40 per cent. Some commentators believe the army’s business activities do, in fact, disrupt the private sector.

“For foreign investors, the prospect of competing with companies close to the security apparatus is a deterrent,” Timothy Kaldas, non-resident fellow at the Tahrir Institute for Middle East Policy, told Fanack.

In a lengthy analysis for Foreign Policy magazine, Zeinab Abul-Magd, Associate Professor of Middle Eastern History at Oberlin College, Ohio, wrote: ‘The military establishment, which fully controls the economic reform plan, has selectively implemented the loan’s conditions. While it enthusiastically reduces subsidies to impoverished civilians, it has expanded its domination of many economic sectors and reaped huge profits at the expense of the private sector.’

One of the competitive advantages the army has over the private sector is its large source of cheap labour in the form of conscripts. Conscription in Egypt ranges from one to three years. According to industrial engineering student Mohamed, he and his fellow students all fear being conscripted for the full three years. “We are cheap labour,” he said, explaining that the army needs engineering graduates to run the often-outdated machines in its factories. “You’re not building relevant experience in the army,” he said, “so after the conscription period, it is difficult to find a job [in the private sector].”

The IMF has so far not mentioned the military involvement in the economy in its communications on the reform programme. According to Abul-Magd, ‘the IMF loan agreement failed to fully account for the military’s domination of the economy’.

The IMF declined to respond to questions from Fanack, saying that the IMF mission had been in Cairo earlier this month to review the first part of the programme. ‘We will communicate at the end of the visit,’ spokesperson Randa Elnagar wrote in an e-mail.