Egypt – Court Blocks Controversial Deal

A nine-month political battle over a controversial deal struck by President Abdel Fattah El-Sisi in a bid to secure badly needed investment and aid from Saudi Arabia appears to have ended in defeat for the president. On January 16, the Supreme Administrative Court upheld a June 2016 ruling by the Administrative Court that Sisi’s agreement to cede control of the islands of Tiran and Sanafir to Riyadh was unconstitutional.
The ruling leaves Sisi on the horns of a dilemma. An attempt to implement the territorial handoff in defiance of the judicial ruling would trigger a constitutional crisis and, based on the public response to the initial announcement of the deal back in April 2016, quite likely a campaign of mass protests. However, the scuttling of the deal with Saudi Arabia will deprive the government of significant financial resources that Sisi was counting on to soothe public discontent over spending cuts the government must make to maintain the support of IMF and other international lenders.
The loss of Saudi oil shipments forced the Egyptian General Petroleum Corporation to issue additional energy tenders on the international market, and there is little chance that it might find a supplier willing to grant the generous payment terms offered by the Saudis, a situation compounded by the free flotation of the Egyptian pound introduced in November.
The outburst of nationalist fervor over what many perceived to be Sisi’s attempt to sell Egyptian territory has amplified public anger over tax rises, soaring food price inflation, and cuts in state subsidies. With the forced flotation of currency exacerbating the economic hardship of ordinary Egyptians, and more austerity and wrenching structural reforms still on the agenda, political tensions look set to rise in the coming year.
That said, while Egypt’s economic travails and Sisi’s perceived servility to the Saudis have brought a definitive end to the president’s prolonged political honeymoon, there is no indication that he faces an imminent direct challenge to his rule. The middle classes continue to prefer the stability of Sisi’s rule, as evident from the failure of a campaign for organize mass anti-austerity protests via social media in November. Moreover, Sisi maintains firm control over the security apparatus and state media, and the crackdown on opposition activists has continued unabated.
The arrival of the first loan tranche from the IMF increased the central bank’s foreign reserves to $24.26 billion at the end of December, equivalent to around five months of import cover. But Egypt is not out of the woods yet. The positive macroeconomic impact of the reform program will be limited in the early going. A weaker pound meanwhile will hurt both private importers and the state, which is the main importer of food commodities and fuel, and also has substantial debt obligations in dollars.
Foreign investors will continue to face hurdles in the shape of outdated regulations, highlighting the need for further reform. In a recent positive step on that score, Egypt’s first bankruptcy law, approved in early January, will simplify and routinize post-bankruptcy procedures, reducing the need for companies or individuals to resort to the courts.
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