Egypt – Sisi Facing Headwinds

The legal battle over a deal reached between President Abdel Fattah el-Sisi and the government of Saudi Arabia that conditions the delivery of some $24 billion in financial aid and investment to the Cairo government on the transfer of control of two Red Sea islands to Saudi Arabia appears to have reached a final conclusion. In mid-June, more than a year after the original agreement was signed, the Parliament approved the deal, which was ratified by the president on June 25.
Even if the legal question has been decided, the transfer arrangement will continue to be a political issue. Recent polls indicate that nearly one-half of Egyptians believe that the islands belong to Egypt. The fact that opponents have not taken to the streets to protest the latest developments is probably in large part attributable to the state of emergency that was declared following deadly attacks on Coptic Christian churches attributed to ISIL, and was extended until the end of September following a July 4 roadside attack on police in the Sinai.
The unblocking of Saudi financial assistance will help to cushion the impact of austerity measures, particularly on the most vulnerable. However, the evidence suggests that many Egyptians may judge the cost of obtaining the financial buffer to be too high, creating a danger that Sisi will derive little political benefit from his efforts to soften the blow of painful economic reforms.
The president has acknowledged that economic reforms pursued under the terms of a lending agreement reached with the IMF in November 2016 will hurt his popularity, but, to its credit, the government has pushed ahead with an economic reform program that includes tax increases, sharp cutbacks in spending on subsidies, and the loosening of capital controls. In terms of structural reforms, the government has secured passage of a new industrial licensing law and a long-delayed investment law was finally approved in May.
The investment law eliminates some bureaucratic obstacles to new investment, and provides numerous incentives, including a 50% tax discount on investments made in underdeveloped areas, government support for connecting utilities to new projects, the restoration of private-sector free zones exempt from taxes and customs, and a return of one-half of what investors pay to acquire land for industrial projects if construction begins within two years.
In combination with a bankruptcy bill currently before the Parliament, the new measures are seen a vital to creating a more hospitable climate for investment. However, numerous deterrents will persist, security risks chief among them. Moreover, barring clear evidence of widespread public acceptance of the government’s deal with Saudi Arabia, the possibility that the issue might become a catalyst for a popular uprising of the sort that toppled Egyptian governments in 2011 and 2014 cannot be discounted.
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