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In Egypt, Military Companies ‘Detrimental’ for Economy

Egyptian military
Egyptian soldiers stand guard during an organized tour for diplomats to mark the 150th anniversary of the inauguration of the Suez Canal, in the northeastern city of Ismailia on November 17, 2019. Photo: Khaled DESOUKI / AFP

Egypt’s President Abdel Fattah al-Sisi raised eyebrows in early November 2019 when he suggested that military companies be listed on the Egyptian stock exchange. The idea marks the latest step in the building of a military economy that dates back to the Nasser era, has gradually expanded over time and taken a leap since al-Sisi assumed office in 2014.

Egypt embarked on an extensive economic reform programme as a condition of a loan from the International Monetary Fund (IMF) in 2016. The goal was to improve Egypt’s fiscal position and economic growth, mainly by cutting subsidies on fuel, electricity and water, devaluing the Egyptian pound (EGP) and structurally reforming the economy by smoothing regulations and limiting red tape to bolster the private sector, attract foreign investment, increase exports and decrease the dependency on imports.

The first part of the reforms was successful. Egypt’s economy grew by 5.5 per cent in 2018, its foreign currency reserves increased greatly and its budget deficit declined. The gains came at a cost, however. Poverty has increased and Egyptian’s overall purchasing power has been hammered by the devaluation and inflation. The promise was and is that this should even out in the mid- to long term as the macroeconomic improvements trickle down to ordinary citizens, facilitated by private sector development and investments.

However, the second part of the reforms has not materialized so far. Private sector activity, as measured by the Purchasing Managers’ Index, is mostly contracting, and non-oil foreign direct investment remains consistently low or is even shrinking.

There are several possible culprits, in and outside Egypt. Some blame slowing global foreign direct investment, others the red tape and regulatory challenges businesses still face in Egypt. Yet more and more fingers are pointing to the increasing role of Egypt’s army in the economy.

‘The armed forces’ economic activity through an expanding network of military enterprises is central to Egypt’s long-term structural underperformance and its failure to properly benefit from the difficult and important reforms it has undertaken in the past few years,’ researcher Timothy Kaldas wrote in a Bloomberg op-ed.

Army activities “definitely” hinder private sector development, political economist Kareem AbdelBary told Fanack previously. Even one of Egypt’s richest and most influential business tycoons, Naguib Sawiris, who strongly supported al-Sisi when he came to power, said in a TV interview that the economic role of the army deters investors.

The army is involved in a wide array of sectors. This started under President Gamal Abdel Nasser (1956-70), when the army began to produce its own supplies ranging from trucks to food. With the liberalization policies of Nasser’s successor, Anwar Sadat, army companies signed contracts with private sector parties. After peace was established with Israel in 1979, the lack of an imminent military threat removed the necessity to maintain a large military. However, the army had already become too powerful to be simply scaled down and made politically irrelevant. To appease the army leadership, Sadat and later Hosni Mubarak granted military companies more freedom to grow their business interests, enabling them to remain an important factor in Egypt’s power structure, an Egyptian researcher who asked to remain anonymous told Fanack.

Nevertheless, the army’s political role did decline under Mubarak in favour of the police, Mubarak’s business cronies and his sons. Hence, when protests broke out against Mubarak in January 2011, the army did not step in and allowed him to be forced out.

When general-turned-president al-Sisi seized power from the Muslim Brotherhood, who briefly ruled from 2012-2013, the military returned to the top of the food chain. “What we see recently is that the army conglomerate is growing,” the researcher said. And it is doing so more openly than before.

The Ministry of Military Production is proud of its strategy to expand its factories, enter new production lines such as solar panels, sign cooperation agreements with foreign companies and start exporting its products. Most recently, the ministry joined a high-level visit to Germany and signed a memorandum of understanding with German company DMG Mori to set up ‘smart’ factories for medical products in Egypt. In 2018-2019, the ministry’s revenues exceeded $804 million, according to Minister of Military Production Mohamed al-Assar, almost five times higher than in 2013-2014.

The army wants the people to know it is them building roads and bridges, the researcher said. The Engineering Authority of the Armed Forces – whose former head is now minister of transport – also plays a lead role in al-Sisi’s national projects such as the extension of the Suez Canal and construction of a new administrative capital in the desert east of Cairo. This feeds into a nationalist narrative that a strong army is the pillar of a strong and prosperous Egypt, whether it is through fighting its enemies, building new infrastructure or supplying cheap food commodities to the market, according to the researcher.

The army is also expanding into new territory. The Military Intelligence Service entered Egypt’s media landscape when it bought the major DMC TV channel, which hosts many of the pro-government talk shows and popular Ramadan soap operas. By doing so, the army is in control of a large part of the information that reaches Egyptian living rooms, together with the General Intelligence Service, which owns another major media group.

Through tax benefits, fewer regulatory restrictions, land for free and access to cheap labour through conscripts – who are often dispatched to work at army-run factories, gas stations and farms – army firms have a strong competitive advantage over private ones. “They are basically running a slave economy, with conscripts paid 200-250 EGP [around $12-15] per month,” the researcher said.

When it comes to infrastructure and construction projects, the army has been granted several no-bid contracts, and usually hires subcontractors for the actual building while taking a cut for itself. Al-Sisi has described this euphemistically as the army ‘supervising’ projects and cooperating rather than competing with the private sector. Army-run hotels and conference or wedding centres are exempted from the 14 per cent value-added tax, which was implemented in 2016 as part of the IMF-mandated economic reform programme.

The army’s actual share of the civilian economy is unknown, mostly because parts of the army budget are kept out of the official state budget. Parliament has no oversight over or say in the military budget. “Everybody who tells you how big the army interests are is lying,” the researcher said. Even if the army companies are productive and run efficiently, they still channel money out of the regular economy into the army’s budget. “And who knows where this money ends? What if it is the billion-dollar purchases of heavy military from abroad?”

Since 2014, Egypt’s arms imports have tripled, making it the world’s third largest arms importer. Major purchases have included fighter jets from France and Russia and submarines from Germany.

An example of how the army disrupts the private market was its opening of a large cement factory earlier in 2019. The cement market was already facing an oversupply, and after the army-run factory started operating, several other factories were either forced to close their doors or to cut their production and lay off staff.

Also this year, the military established an oil and gas exploration company. A source in the sector told Fanack that this company was awarded multiple concessions that were kept out of the regular tenders for international oil companies.

Army involvement has started to run even deeper in the past year, with the former army spokesperson managing Dubci, a would-be competitor of the international ride-hailing company Uber. Cairo was plastered with billboards and banners promoting Dubci, although the app is not yet operational. The army also announced the launch of a Netflix-type service, although this is not yet operational either.

As its businesses gain visibility, the army is becoming increasingly susceptible to criticism, which poses a risk to the narrative of the army as guardian of the state. The protests on 20 September that were sparked by videos posted by subcontractor and actor Mohamed Ali, in which he accused the army of corruption and wasting public money, underlined this risk. Some insiders seem to realize this. The army denied that it owned Dubci. It also denied having a chain of pharmacies, accusing ‘hostile’ social media channels of spreading ‘rumours’.

Meanwhile, international lenders such as the IMF and World Bank have voiced concerns about what appears to be expanding army businesses. ‘Structural reforms need to be broadened and deepened to … strengthen competition, improve accountability and transparency of state-owned enterprises, reduce the role of the state and tackle corruption,’ the IMF said on its website. In its April 2019 review, the World Bank noted, ‘There is a concern that this growing role of the state may be crowding out the unconnected private sector.’

The researcher strongly believes the army’s growing role is not sustainable. “It’s detrimental for the economy,” he said. After years of economic crisis and hardship, this is the last thing Egypt needs.

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