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Will the Egyptian Economy Benefit from Floating the Military-Owned Companies?

Despite heated criticism from some of the socialist members of the parliament, the Egyptian government is determined to proceed with its ambitious plan to liberalize the economy, while bending in the wind of the Russia-Ukraine war. The plan is to shrink the government’s involvement in the market, as a competitor, to avail a space as large as 65% for the local private sector and the foreign investors to compete over the many lucrative opportunities that the huge and prolific Egyptian market has to offer. The government hopes that these new macroeconomic reforms will attract foreign investments of 40 billion dollars over the coming four years.

The initial reaction of the foreign investors and international lenders to these brave steps by the Egyptian government is quite promising. In less than one month, since the Egyptian Prime Minister, Mostafa Madbouly, announced the roadmap to opening the market, the government has been able to make deals of future investments with foreign investors and international lenders, that total more than 30 billion dollars. Moreover, the ‘hot money’ investors, who fled the country in the past two years, started to crawl their way back to benefit from the new opportunities.

In addition to the long-term benefits of this plan on the economic system, in general, it is also contributing to easing the pressure of the war in Eastern Europe on the domestic economy. Thanks to this new decentralized market approach, the Egyptian government has managed to make trade deals of basic food commodities with other countries, to maneuver the disruption of the supply chains, until the war in eastern Europe comes to an end.

The decentralization of the macroeconomic system is the dominant feature of the process of modernizing the Egyptian economy. By any means, that is not an easy mission in a country like Egypt with a long history of favoring the public sector even when it was failing or underqualified to run the precious national assets under its control. What makes the process even more complicated and challenging is that the national companies targeted with floating are not limited to those falling under the administration of the civilian government. Some of the military-owned commercial enterprises are also on the list.

Presidential Vision

In his milestone speech, following the presidential iftar that was hosted in April, the Egyptian President, Abdel Fattah El-Sisi, gave orders to the government to start working on “listing the companies owned by the Egyptian Armed Forces in the Egyptian stock market, before the end of this year.” The presidential instruction was made to explain the state’s vision to fix the chronic flaws of the Egyptian economy. The state leadership's vision, in this regard, is summarized in three parallel tracks.

The first point of target is to minimize the budget deficit and narrow the gap between the national debt and the Gross Domestic Product (GDP). The second track to pursue is to strengthen the role of the local private sector businesses, especially in the industrial sector, by providing them with incentives related to taxation scheduling and infrastructure and facilities utilization. The third point of focus is to expand the size of the Egyptian stock market (EGX), through increasing the number of listed companies, and thus attracting a larger number of local and foreign investors. Here is where the inclusion of military-owned companies came into play.

Unlike what most observers believe, the decision of the Egyptian President to float the military-owned companies is not new and is not precisely motivated by the compounding crises of the COVID-19 pandemic followed by the global standoff around the Russia-Ukraine war. The first time President El-Sisi made such a bold proposal was in October 2019, during a visit to a military-owned medical facility, when he said: “The companies of the Armed Forces ought to have an opportunity in the offerings made by the government… These companies must be listed in the stock market to give the Egyptians the opportunity to acquire shares in them.”

However, in early 2020, the Sovereign Fund of Egypt (SFE) confirmed that the military-owned stocks, to be listed in EGX, will not be exclusively sold to Egyptians. Rather, the SFE will use the economically viable projects of the Armed Forces’ largest commercial enterprise – the National Services Projects Organization (NSPO) – to attract foreign investors, with target sales that aim as high as 100% of offered shares. The SFE is the intermediary to the initial public offerings (IPOs) of the NSPO, per an agreement signed between the SFE and the Armed Forces in February 2020. Yet, one month after that, the COVID-19 pandemic hit Egypt hard and thus the process of creating and listing the stocks of NSPO had to be put on hold.

The news was received with applause by the business people, in the private sector, who have been complaining about their inability to compete against the military-owned companies, especially in the sectors of construction and food industry. Likewise, the political elite, who promote the concept of “the civilian control of the armed forces” as an essential step in the process of democratization welcomed the move. Meanwhile, a great portion of the Egyptian public received the news with unease, perhaps because of the controversy that was raised around the issue of subjecting the military economy to the control of the civilian government or the parliament, in the aftermath of the Arab Spring revolution in 2011.

In theory, floating the commercial companies owned by the autonomous institution of the Egyptian Armed Forces sounds like an ideal step in the right direction. However, in practice, this crucial step needs to be taken at a slow pace. Otherwise, it may entail more harm than good to the coherence of the nation-state as a whole. Jumping the gun by sidelining the military involvement in the economy before building a stable democracy that is capable of containing a durable liberal economic structure, may jeopardize the entire political and economic steadiness of the nation-state.

The backbone of the Nation-State

The National Services Projects Organization (NSPO) supervises a group of companies that work in different sectors, ranging from bottling water to construction and real estate. The NSPO is the backbone of the autonomous military-economic system, and the military-economic system is the backbone of the Egyptian nation-state.

The NSPO was founded in 1979, but it took off as a successful economic enterprise, in the early 1980s, when the Field Marshal, Abdel Halim Abu Ghazala, took the position of the Minister of Defense. Abu Ghazala was very popular among the military personnel, as well as the general public, because of his forward thinking and ambition to develop and grow the military institution, especially on the level of armament and capacity building. To achieve that goal, Abu Ghazala made the best use of the annual military that Egypt started to receive from the United States, at that time, per the stipulations of the peace treaty signed between Egypt and Israel in 1979.

Over the years, the NSPO has become the most successful project of the military-economic system. The autonomy enjoyed by the military institutions and the determination and discipline of the leadership hierarchy or the Armed Forces kept the NSPO immune to the practices of corruption under the Mubarak regime. In 2012, when members of the parliament from the Muslim Brotherhood called for subjecting the military-owned companies to the supervision of the government, they received a fierce response from the leadership of the Supreme Council of Armed Forces (SCAF).

In March 2012, the Assistant Minister of Defense for Financial Affairs held a press conference to highlight the risk of subjecting the military economy to the civilian government, especially when a country was in a case of severe political instability after the revolution. “The business of the [NSPO], which operates in several sectors, has grown from 11 million Egyptian pounds in 1979 to 644 million pounds in 1990 to 6.3 billion pounds in 2011, achieving net profits of 7.7 billion pounds between 1990 and 2011;” he explained. “We will fight for protecting our projects, and will not allow anybody to destroy the efforts that we have been sincerely dedicated to exerting for thirty years… We will not allow anyone to approach the projects of the armed forces.”

However, a great part of what is being said about the dominance of the military over the civilian economy, or that the military economic independence is “creating a state within the state” is not accurate. Most of these claims are based on unfair comparisons between Egypt and other Western states with advanced democratic systems of governance.

In 2012, the then Assistant Minister of Defense for Financial Affairs clarified that the military-owned companies pay taxes and that their intervention in the public market is very limited, and happens only during the time of crisis. In 2018, President El-Sisi said in a televised interview that the involvement of the military in the national economy is somewhere between 2% to 3%. In a recent media interview with the current Prime Minister, he also confirmed that the military intervention in the economy is barely above 1%.

Safety Net in Crises

The performance of each of the three angels of the Egyptian economy – i.e.; the government, the private sector, and the military institution – under the pressure of the COVID-19 pandemic, in 2020, introduced a non-negotiable proof that the independence of the military economy is crucial for preserving the coherence of the nation-state in face of unforeseen crises. At that time, the private sector businesses declined to support the government in managing the crisis and shamelessly abused the state of panic among the people to increase their profits by practicing monopoly over basic medical and food commodities. That immediately prompted the intervention of the Armed Forces, through the NSPO, to assist the civil government throughout the crisis, while halting private sector monopoly over food and medical commodities.

Shortly after, President El-Sisi held a meeting with the leaders of the NSPO, which was broadcast live on national television, to thank them. At the end of the meeting, President El-Sisi addressed the public citizens by saying that the purpose of visiting NSPO facilities is to “explore the readiness of the Armed Forces to assist the civil government in managing the crisis, and to assure the Egyptians that there is a ‘parallel arrangement’ ready to satisfy people’s needs.”

This was not the first time for the Armed Forces to intervene to save the Egyptians in times of economic or political crises. The NSPO is currently playing a tremendous role in fulfilling people’s needs from food products throughout the crisis resulting from the Russia-Ukraine war. Needless to mention the role that the Armed Forces played in preserving the coherence of the state following the Arab Spring revolution that ousted Mubarak in 2011. The Supreme Council of Armed Forces (SCAF), which led the country in the transitional phase that followed Mubarak’s removal from power, declared in March 2012, that the military institution had to support the state budget with nearly 2.5 billion Egyptian pounds, in addition to lending the Central Bank of Egypt (CBE) one billion dollars to enhance its foreign reserves.

When presenting the economic reform roadmap, in May, the Prime Minister explained that the state dominance over national projects, mostly via military-owned institutions, was a necessity to keep the economy flowing in the absence of the foreign investors who withdrew their businesses during the security turmoil that followed the removal of the Muslim Brotherhood regime, in 2013. “Over the period from 2015 to 2021, the state-led national projects created more than five million jobs for the Egyptian youth and re-empowered the local private sector companies by inviting them to act as contractors in these projects;” Prime Minister Madbouly explained. “That is not to say that these national projects are to be postponed or slowed down, in the coming period. They remain a priority and we will continue working on them as they proved to be of great importance to the Egyptian citizens, and are also paving the way for the return of foreign investments.”

Rather than appreciating the role of the military institution in enhancing Egypt’s economy, the private sector tycoons, and some academic experts, find muse in blaming the success of the military institution for the incompetency of the private sector. They say that the Armed Forces’ enterprises depend on cheap labor from the conscripted soldiers and are not required to pay taxes on their commercial sales, and thus the military-owned companies have a comparative advantage, in terms of pricing the goods, over the private sector businesses.

Careful Steps Forward

The military economy has always been the safety net that the nation-state leaned on, in the difficult times of political turbulence and economic crises. In that sense, keeping the military economy strong, by maintaining its independence from the civil economy, is crucial for ensuring a smooth transition from the existing futile economic system to the desired open market economy. Only then, ideally, the government may be allowed the luxury of discussing the viability of floating the military economy. Moreover, allowing foreign investments to infiltrate into the autonomous economic system of the Egyptian Armed Forces, without having a proper safety network around it, will expose the military institution to several strategic nuances.

Understanding these critical facts, the Egyptian state is trying to find a middle ground that enables it to proceed with the market liberalization plan, without exposing the military economic structure to risk. Last week, the director of the Sovereign Fund of Egypt (SFE) told the media that the SFE is creating a sub-fund that is dedicated to managing the state-owned stocks, including the stocks of military-owned companies, that will be listed on the stock market.

In April, the SFE president said that they had already completed the legal reframing of two military-owned companies to list on the EGX before the summer. The two military-owned companies are The National Company for the Sale and Distribution of Petroleum Products (Wataniya), and the National Company for Producing Natural Water (Safi). Both companies are very successful and thus are expected to be highly attractive to both local and foreign investors. Meanwhile, the SFE is working with the leadership of the Armed Forces’ NSPO on the legal reframing of other companies to list in the EGX before the end of the year, per President El-Sisi's instructions.

The success of the military-owned Wataniya and Safi companies in passing the test of showing up at the EGX lists, for the first time in the history of the Egyptian state, is essential for the success of the entire market liberalization plan that the government is full determined to pursue till the end. It will be, also, a huge step forward in untying one of the large knots that is complicating the process of democratization.

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