The late February reception of the American Chamber of Commerce in Egypt was a swanky affair. Wine flowed in the majestic foyer of the new Grand Egyptian Museum, the buffet brimmed with sushi, and a harpist played soothing music. Despite the festive environs, however, the Egyptian businessmen I met were despondent. These commanders of industry were in a dour mood because the Egyptian economy was in freefall.

Today’s precipitous decline was set in motion nearly a decade ago, when Cairo embarked on an unsustainable spending spree, borrowing money for profligate outlays on weapons, megaprojects, and infrastructure. Making matters worse, during this period the military’s role in the economy dramatically expanded, choking off the private sector and disincentivizing foreign direct investment. The downward trajectory of the most populous Arab country should concern Washington greatly.

The quagmire is deep. Since President Abdel Fattah el-Sisi was elected in 2014, the state’s external debt has more than tripled to nearly $160 billion. This year, 45 percent of Egypt’s budget will be devoted to servicing the national debt. Meanwhile, inflation hovers around 30 percent, and food prices have increased over the past year by more than 60 percent.

To be sure, the deterioration is not all Sisi’s fault. Covid-19 and the war in Ukraine further stressed Egypt’s economy, curtailing tourism—12 percent of GDP—and driving up commodity prices, especially wheat. Last year, Saudi Arabia, Qatar, and the United Arab Emirates delivered $22 billion in investments and Central Bank deposits to cover recurrent state deficits and stabilize the financial situation in Cairo. As with previous Gulf bailouts, however, the support failed to stem the crisis.

Facing an inflection point, in December, Sisi signed Egypt up for yet another International Monetary Fund (IMF) program. The conditional arrangement promised to deliver $3 billion in cash and the prospect of an additional $14 billion in regional and international investment and financing. In return, Egypt committed to floating the currency and curtailing the military’s role in the economy. The Egyptian pound was floated and has devalued by 50 percent to date. But Sisi has yet to follow through on his pledge to reduce the military’s reported control over an estimated 30-40 percent of the economy.

Inflow of capital from the Gulf is predicated on military divestment from the economy. To this end, in February, the government published a list of some thirty-two military-owned companies to be sold off. Initial optimistic appraisals of this initiative quickly faded, however, when it emerged that only minority shares in these enterprises were on offer. While some assets on the block may be appealing, Gulf investors are unlikely to enthusiastically invest in non-controlling interests in opaquely operated—and perhaps overvalued—state-owned enterprises.

Like oil-rich Gulf States, the IMF is also skeptical about Sisi’s commitment to actually sideline the military from the Egyptian economy. The first review in the four-year program was slated for March 15, but the IMF has delayed the evaluation—and the disbursal of loan tranches—until Cairo makes progress on privatization.

Sisi’s reticence to undertake this reform is understandable. He’s a former flag officer, and his regime relies heavily on the continued support of the military. But Sisi has few options. This past January, Saudi Arabia—Cairo’s financier of last resort—made it clear the days of unconditional grants and enormous string-free deposits in the Egyptian Central Bank were over. Henceforth, Gulf capital will flow to Egypt only if there is a return on investment.

Egypt already owes $23 billion to the IMF, and it remains unclear whether the state will eventually meet its onerous obligation to the fund. There is little indication in any event that Cairo is changing its approach to spending. To wit, in February Egypt issued $1.5 billion in so-called “sukuk” financial instruments, bonds paying 11% interest. The sukuk are intended to enable the state to repay its Eurobonds debt, whose interest rate was only 5.57%. So even as Egypt is borrowing from the IMF, it is accruing more debt, borrowing more money at even higher interest rates to repay outstanding liabilities.

Meanwhile, average Egyptians are struggling. Amidst skyrocketing inflation, the nearly one-third of the population living below the poverty line—making less than $3.80 per day—is having a harder time making ends meet. The middle class has also been hit hard. Since Sisi took power, the Egyptian pound has lost nearly 80 percent of its value—50 percent alone over the past year—effectively wiping out life savings. Food staples like bread, rice, and meat are all more expensive, and strains on foreign currency reserves have resulted in spikes in cost and limited availability of some medications. Meanwhile, Egypt’s wealthiest, anecdotally at least, are increasingly moving into gated communities and compounds on the outskirts of Cairo.

Ultimately, Sisi may relent, embrace IMF reforms, and stanch Egypt’s downward trajectory. Absent a significant course correction, however, it’s difficult to imagine the situation changing for the better. Should the crisis persist, the bitter experience of the 2011 Revolution would seem to mitigate against wide-scale protest. Still, things could get worse. Egypt could see episodic spontaneous protests, increased crime, more capital flight, and heightened repression. Like Tunisia and Lebanon, Egyptians may try to migrate, either legally or illegally, via boat to Europe.

The Biden administration seems to recognize that Egypt has a problem, albeit not a particularly urgent one. At a joint press conference this past January, Secretary of State Antony Blinken described Egypt’s economic difficulties as a “challenge,” in contrast to his Egyptian counterpart, who characterized the situation as a “crisis.” Meanwhile, Washington is attributing the financial crunch to a “perfect storm” of Covid-19 and the war in Ukraine—as exogenous rather than endogenous factors such as Egypt’s ill-advised economic policies. More than a month after the IMF postponed its program review, Washington has yet to publicly comment on Egypt’s reticence to meet its IMF obligations.

With a population nearing 110 million, Egypt has been described as “too big to fail.” Hesitant to move the military out of the economy and without its traditional Gulf financial safety net, however, a further deterioration is possible. While Washington may not yet be seized with concern about developments in Egypt, it appears that Egyptians increasingly are. Notwithstanding the regime’s notorious intolerance for dissent, during a recent visit to Cairo, a number of Egyptians I met expressed a surprising nostalgia for the good old days of former President Hosni Mubarak.

David Schenker is a senior fellow at the Washington Institute for Near East Policy and a former assistant secretary of state for Near East affairs during the Trump administration.

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