In the Grips of the Army: The Egyptian Economy

Traditionally, the Egyptian army plays an important role within the nation’s economy. After the July 23rd Revolution of 1952, when King Farouk of Egypt was overthrown, the Egyptian military seized power. The aim of the new economic policy of the new head of the state, President Gamal Abdel Nasser, was to build socialism. The state nationalized certain enterprises and took measures to optimize production processes to strengthen the economic independence of Egypt. Officers of the Egyptian army formed the new political elite of the country, and some even took charge of large state enterprises. That’s when the military-gone-entrepreneur began to participate in the management of Egypt’s large assets.

Under President Hosni Mubarak, the army's influence on the economy increased. In the 1980–1990s, the NSPO became increasingly involved in agricultural production. Another organization under the Ministry of Defense and Military Production, the Armed Forces Engineering Authority (AFEA), became one of the main government contractors in the construction industry. The army also took part in numerous activities that did not directly affect national security issues, for example, laying telephone lines for the government.

By the time Arab Spring began in Egypt in 2011, the army already controlled numerous large enterprises. As tensions with Israel decreased, Egypt gradually reduced its military spending and tried to commercialize military enterprises, as well as transition its factories to the production of non-military goods. By 2011, the army had a great impact on the Egyptian economy.

When the President Abdel Fattah al-Sisi came to power in 2014, the influence of the army on the economy grew further. In particular, the degree of military involvement in the agricultural sector increased. The army monopolized the production of steel and cement, became a leader in the fishing industry, expanded its involvement in hotel management, pharmaceutical production, and continued to develop its filling station network.

The privileged economic and political position of the army in Egyptian society, the lack of external control, and the closed nature of army organizations make military companies fertile breeding grounds for corruption. In the 1980s, the army received rights to large tracts of land, including those of which, in the event of war, military bases should be located. Sometimes the military used this land to implement their construction projects or sold it to developers.

The influence of the army on the economy may be indirect. To assess the role of the military in the economic life of Egypt, it is necessary to consider many political-military factors. When any state is in a pre-war situation or faces any other political-military instability, the question of the armed forces’ economic efficiency fades into the background.

The large, efficient and fully equipped Egyptian army serves as a deterrent to unfriendly actions.

The role of the military in ensuring the economic stability of Egypt is also manifested in counter-terrorism activities related to ensuring security on the border with Libya and the Sinai Peninsula. ISIS activities have been destabilizing the situation on the Sinai Peninsula for several years and hurts the development of tourism. In 2020, terrorists carried out more than a hundred terrorist attacks and even attacked the gas pipeline linking Egypt and Israel. Perhaps the Egyptian army will one day be able to eliminate the terrorist threat and stabilize the situation in Egypt. This will have a positive effect on business activity and improve the investment climate in the country. Companies directing ships through the Suez Canal will be more confident without the fear of being targeted by terrorist attacks. Tourists will be less afraid to travel to Egyptian resorts. Thus, the struggle of the army and other power structures against terrorism plays an important role in the economic stabilization of Egypt.

The army is one of the main subjects of the Egyptian economy. The armed forces now directly own dozens of companies that cover key sectors of the Egyptian economy, including metallurgy, food, engineering, chemical, oil, and many others. Given that information about the financial activities of military companies is hidden, it is rather difficult to assess their effectiveness. There is no exact information about what share of the country's economy is controlled by the military. The lack of civilian oversight, the presence of tax breaks, and some other advantages that contribute to unfair competition can cause discontent among Egyptians and an increase in the level of social tension in society. Military company IPO’s could be an important step in liberalizing Egypt’s economy, as it will improve the investment climate. Perhaps it will also make the activities of enterprises run by the army more transparent, which will improve production efficiency.

Traditionally, the Egyptian army plays an important role within the nation’s economy. After the July 23^rd Revolution of 1952, when King Farouk of Egypt was overthrown, the Egyptian military seized power. The aim of the new economic policy of the new head of the state, President Gamal Abdel Nasser, was to build socialism. The state nationalized certain enterprises and took measures to optimize production processes to strengthen the economic independence of Egypt. Officers of the Egyptian army formed the new political elite of the country, and some even took charge of large state enterprises. That’s when the military-gone-entrepreneur began to participate in the management of Egypt’s large assets.

In the 1970s, President Anwar Sadat implemented a new economic policy which aimed at transitioning Egypt towards a market economy. The country’s new leadership took measures to privatize enterprises and attract foreign investors to the Egyptian market, which temporarily weakened the army's hold on the economy.

During the military-political confrontation with Israel, Egypt spent a huge chunk of its money in maintaining a high-end national defense system. Military conflicts with Israel and the occupation of the Sinai Peninsula depleted the budget and negatively affected business activity in Egypt. In 1979, the Egyptian-Israeli peace treaty was signed, ending the armed confrontation between Egypt and Israel. For Egypt, the presence of a large and well-established army became less necessary, and the government decided to reduce the size of its armed forces. Such actions threatened to increase unemployment throughout the nation.

In 1975 an international company, the Arab Organization for Industrialization, was established. It was not only an Egypt-owned company, but it also belonged to many Gulf countries. It engaged in weapon production. In 1979, after the signing of the Egyptian-Israeli peace treaty, Cairo became the sole owner of the Arab Organization for Industrialization, which nevertheless retained the privileges of an international company. These privileges remained up until the partial conversion of Egypt’s military production, which took place in the early 1990s.

In 1979, the National Service Projects Organization (NSPO) was established, a state-run corporation aimed at developing Egypt’s economy. This organization was created for Ministry of Defense and Military Production of Egypt to carry out commercial activities. The goods produced at the NSPO enterprises were not only sent for the benefit of the army, but also could be sold in the Egyptian market. Thus, the army could ensure the self-sufficiency of its armed forces and provide work to its downsized military. The government planed that the economic activity of the army would lead to a decrease in the share of military spending in the military budget, and possibly even become a driver for further Egyptian economic development. In 1980, President Anwar Sadat signed a decree allowing the NSPO to work with private Egyptian and foreign companies.

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Under President Hosni Mubarak, the army's influence on the economy increased. In the 1980–1990s, the NSPO became increasingly involved in agricultural production. Another organization under the Ministry of Defense and Military Production, the Armed Forces Engineering Authority (AFEA), became one of the main government contractors in the construction industry. The army also took part in numerous activities that did not directly affect national security issues, for example, laying telephone lines for the government.

In 1991, Egypt launched a program of economic transformation, with its goal being the creation of an economy oriented towards the external market, as well as to reduce the budget deficit, reduce the public sector’s share in the economy, and restore economic growth. By cutting military spending, President Hosni Mubarak allowed the military to expand its participation in the production of civilian products. That is when the process of converting the military production of companies to the jurisdiction of the Ministry of Defense and Military Production and the Arab Organization for Industrialization was launched. Some factories that used to produce military aircraft, missiles and ammunition began to produce trucks, cars, washing machines, televisions, dishes, and other civilian products. In 2003, the Marine Industry and Services Organization was established. It was created to manage maritime industry of the Ministry of Defense and Military Production.

In the 2000s and in the early 2010s, President Hosni Mubarak planned to transfer power to his son Gamal Mubarak, who could become the first non-military president of Egypt. This plan did not suit the military, who feared that their political and economic influence would decrease if Gamal Mubarak came to power. Amid growing discontent in the military and political circles, President Hosni Mubarak expanded economic privileges and benefits for the military. Additionally, the army acquired some industrial and infrastructure facilities related to maritime shipping and land transport, among which was the Alexandria shipyard.

Thus, by the time Arab Spring began in Egypt in 2011, the army already controlled numerous large enterprises. As tensions with Israel decreased, Egypt gradually reduced its military spending and tried to commercialize military enterprises, as well as transition its factories to the production of non-military goods. By 2011, the army had a great impact on the Egyptian economy.

By the Arab Spring in 2011, several large army organizations directly controlled dozens of companies. The NSPO included 32 companies, not counting subsidiaries. The Ministry of Defense and Military Production operated 20 factories; the Arab Organization for Industrialization had control of 11 enterprises that were producing both defense and civilian goods. The Marine Industry and Services Organization owned four companies related to shipbuilding and river transport. The AFEA was a contractor for major government construction projects. The Department of Social Clubs and Hotels operated restaurants, cafes, wedding halls, and hotels. The Armed Forces Medical Service Department owned military hospitals that provided paid medical services to the civilian population. The Armed Forces Land Projects Organization oversaw the sale and development of land held by the army, including the issuance of mining permits.

When the President Abdel Fattah al-Sisi came to power in 2014, the influence of the army on the economy grew further. In particular, the degree of military involvement in the agricultural sector increased. The army monopolized the production of steel and cement, became a leader in the fishing industry, expanded its involvement in hotel management, pharmaceutical production, and continued to develop its filling station network [1].

The Egyptian National Pharmaceutical Company, controlled by the Ministry of Defense and Military Production, supplies medications to the Ministry of Health. The NSPO operates many fish farming and rearing businesses. In addition, the military owns various IT companies. Through the intermediary organization Falcon Group, the army operates private security companies. The military even does business in the financial sector. In particular, the General Intelligence Service operates Eagle Capital for Financial Investments. Through this organization, the military controls some media companies, including the Egyptian Media Group. In many of them, which are not directly controlled by departments, retired and current officers own shares and serve on boards of directors, which allows them to manage enterprises and make profits without affiliating the company with military structures.

A construction is a main branch of the Egyptian economy, on which the army concentrates its commercial activities. The AFEA has become almost the sole contractor for government construction projects, with private sector subcontractors often hired to carry out the work. The AFEA has been and continues to be involved in many major government projects. Among them there are the deepening and widening of the channel of the Suez Canal, the construction of a new administrative capital of Egypt, the construction of residential buildings, schools, hospitals, bridges, and roads [2].

The military often interacts with foreign partners to attract investment and gain access to technology. For example, some companies in the UAE and Saudi Arabia, through partnerships with the AFEA, have invested heavily in mega-construction projects such as Egypt's new administrative capital.

The army has partnered with European and Chinese companies that provide Egypt with access to technology. In addition, these companies provide Egypt with loans. For example, when the AFEA became actively involved in the construction of new electrical substations for the state-owned Egyptian Electricity Holding Company, it did so with the German company Siemens, using money borrowed from German banks. The military company Al-Nasser has signed an agreement with a German international company, ThyssenKrupp, to build six fertilizer plants.

The decentralized management structure of military companies creates competition between them. Since there is no single center for coordinating actions, several army organizations can work in the same sector of the economy at once. For example, the NSPO operates several chemical plants. At the same time, the Ministry of Defense and Military Production owns three military factories that produce the same goods. These include pesticides, pharmaceuticals, and detergents. Enterprises of the Arab Organization for Industrialization and the Ministry of Defense and Military Production, in addition to military products, produce cars, household appliances, and irrigation equipment, which also leads to competition between the two military organizations. In both examples, the production of similar goods leads to economic competition between different military departments.

Often army generals and officers do not have special knowledge and experience in business management. This raises the question of how effective their business management decisions are. In military companies, specialists in specific fields work as middle managers, while current or retired officers and generals become top managers. This can reduce the efficiency of production activities of enterprises.

The conscripts are often used in military enterprises as free labor. A law passed in 1980 allows the army to send thousands of conscripts to work, mainly on farms, filling stations, and in the foodservice and construction industries.

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A strike at a military enterprise is regarded as a violation of national security legislation. The perpetrators would face military court. In violation of Egyptian trade union laws, workers in military establishments are prohibited from joining trade unions.

The social and labor rights of employees of factories belonging to the army are less protected compared to private company employees. Expressions of dissatisfaction by employees of army enterprises about working conditions may lead them facing military court charges.

One of the main advantages of military companies that private companies do not have is tax breaks. This was not always the case, and the Egyptian authorities over the years gradually reduced the tax burden on military-controlled enterprises. The Law on Immunities and Privileges Enjoyed by the Arab Organization for Industrialization, adopted in 1976, exempted it from all types of taxes, duties, and customs duties on all imports and exports. In 1983, a law was passed that exempted the Ministry of Defense and Military Production, and the NSPO from paying certain customs duties. In 1984, the Egyptian authorities passed a law providing military companies with several other tax breaks.

A law passed in 1991 exempted military goods and services sold on the domestic market from value added tax. Later, an addition was made that allowed the military take advantage of the products produced by enterprises under the Ministry of Defense and Military Production, and the Arab Organization for Industrialization.

In 2005, the NSPO was exempted from income tax and some other fees and state duties. In 2015, a decree was issued that exempted about 600 hotels, resorts, and other facilities owned by the military from property taxes. For most military companies, tax incentives are in place, which has become one of the most important competitive advantages of enterprises controlled by the military.

Under Egyptian law, information about businesses owned by the army is classified as state secrets, even if military companies produce pasta, mineral water, or other commercial products. Information on profits, revenues, and taxes is classified. It does not allow civil organizations, including the supreme supervisory authority the Central Auditing Organization, to audit the preparation and maintenance of financial statements of enterprises. In 2012, Hisham Genina, who was then head of the Central Auditing Organization, said that a situation where the main oversight body cannot control the military leasing off facilities for weddings is unacceptable.

In 2018, the new Public Contracts Law was passed, which exempted military companies from civilian audits. The law states that contracts concluded by state orders without holding public tenders are aimed at protecting national security. This allows the customer and contractor to conclude contracts in almost absolute secrecy, which makes such transactions opaque and deprives entrepreneurs of fair competition. The law allows military companies to maintain secrecy when buying or selling businesses. The problem existed before, but after the adoption of the new legal act, it immediately became worse.

In 2020, the international organization Human Rights Watch called on the International Monetary Fund (IMF) not to pay Egypt the next tranche of funds under the loan program until the Egyptian leadership publishes the financial documentation of its military companies. The organization said in a statement that this contradicts the goal of the program, which is to increase the level of transparency in the activities of enterprises, ensure fair competition and combat corruption.

The army does not publish information about military companies and their incomes, revenues, and other financial indicators. This does not allow for an accurate assessment of how much of the Egyptian economy is occupied by the military. In March 2014, the Washington Post reported that the army controlled up to 60% of the Egyptian economy at that time.

In December 2016, at the opening ceremony of a chlorine plant, President Abdel Fattah al-Sisi said that reports about a large share of the army in the country's economy were untrue. According to him, it does not exceed 1.5%–2%, which corresponds to 3–4 trillion Egyptian pounds (equals from 191 to 255 billion dollars). President Abdel Fattah al-Sisi then announced that he would like the army to own half of Egypt's economy.

In September 2019, Colonel Tamer al Rifai announced that the army is participating in the implementation of 2,300 projects in various sectors of the economy of Egypt. According to him, about 5 million people work at the enterprises owned by the army. In June 2020, the head of the AFEA, Major General Ihab al-Far, announced that President Abdel Fattah al-Sisi had instructed government agencies to implement more than 20,000 projects worth more than 4.5 trillion Egyptian pounds (equals 286 billion dollars), of which 25% is implement by the army. He said that the AFEA is implementing 2,800 projects worth 1.1 trillion pounds (about 70 billion dollars) involving 1,440 Egyptian companies and more than 9 million engineers, technicians, and workers across whole country.

The privileged economic and political position of the army in Egyptian society, the lack of external control, and the closed nature of army organizations make military companies fertile breeding grounds for corruption. In the 1980s, the army received rights to large tracts of land, including those of which, in the event of war, military bases should be located. Sometimes the military used this land to implement their construction projects or sold it to developers.

There are also known and specific examples of corruption cases. Major General Samir Farag, who headed the Army Moral Affairs Department in the Ministry of Defense and Military Production and later took over as governor of Luxor, sold land to a businessman at below-market prices. The governor of Aswan retired general Mustafa al-Sayed, appointed the former military as river port managers and set overtly high wages.

In 2016, Hisham Genina, head of Egyptian Central Auditing Organization, published a report on public sector corruption. According to that report, the military was involved in corruption, and the damage from corruption over the past four years amounted to 67.6 billion dollars. Hisham Genina was fired, and President Abdel Fattah al-Sisi formed a special commission, which concluded that Hisham Genina overestimated the scale of corruption, and thus misled the public. Soon, Hisham Genin was arrested on charges of spreading false news, and then he was brought before a military tribunal. The court sentenced him to three years’ probation and a fine.

In early September 2019, businessman Mohammed Ali, who was a contractor for army organizations for several years and implemented infrastructure projects with military companies, posted several videos on his Facebook page. In the published videos, he detailed the corruption schemes in which the military participated in, including representatives from the AFEA. These videos caused a great resonance in Egyptian society and provoked protests in major cities. President Abdel Fattah al-Sisi was forced to issue a statement in which he accused Muhammad Ali of lying.

All in all, military companies have many advantages in Egypt, like tax exemptions and a lack of audit control. In addition, priority on concluding contracts for many project implementations, primarily construction, is readily provided, and without competition. The military companies then outsource most of the work to private firms. This allows the army to create conditions for unfair competition between private companies. In May 2018, the IMF raised concerns about the widespread military involvement in the economy and its impact on both the public and private sectors.

Regarding public procurement, priority is given to military-owned products. Many goods produced by military companies, such as Queen pasta and Safi water, are not considered the best in the Egyptian market. The products are sold not because of their high quality, but due to the supply of these products to army units.

Many members of the Egyptian business community do not like direct competition with military companies. In May 2019, Egyptian businessman Naguib Sawiris stated that the Egyptian army has advantages that deprive entrepreneurs of fair competition. Among these advantages, he named the fact that military companies do not pay taxes and do not need a license to carry out commercial activities.

Anti-competitive practices sometimes ruin private company practice. In 2018, large military investments in the cement sector coincided with the closure of the private cement company al-Qumia, which resulted in more than 2,000 workers being laid off. In September 2016, the government approved the construction of two new metallurgical plants for the Ministry of Defense and Military Production: military investment in the metallurgical sector of the economy increased. In January 2021, the metallurgical company Egypt Iron & Steel Co was closed. In December 2020, thousands of employees at fertilizer company Delta staged a sit-in to protest a regional government’s decision to close the plant. In January 2021, the authorities decided to build a small fertilizer plant with only 500 employees. Probably, the closure of the plant was related to the construction plans of a residential complex not far from it.

In October 2019, during the opening ceremony of the chemicals plant El Nasr Company, President Abdel Fattah al-Sisi stated that military companies related to infrastructure and agriculture should conduct an initial public offering (IPO). According to him, the Egyptians should be able to purchase the securities of these enterprises.

Egypt considered selling shares in some military companies, hoping it would help bring about structural reform to the economy. Ministry of Planning and Economic Development Hala Zayed called the a historic shift in the IPO of military companies in the structure of the Egyptian economy. Announcements on the military company IPO’s were made, among other things, to demonstrate to Egyptians and foreign investors a willingness to reform the economy and improve the investment climate. The move will boost trading on the Egyptian stock exchange, as military companies are bound to attract new investment.

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According to Egypt’s Minister of Planning and Economic Development Hala Zayed, military plans to hold an IPO for the oil company Wataniya Petroleum, which owns a large network of filling stations, as well as enterprises that produce Safi water. She stated that part of the blocks of shares of the companies can first be offered to investors, and then the securities will be sold on the stock exchange. Ayman Soliman, executive director of the Egypt's Sovereign Wealth Fund, said that there were plans to sell up to 100% of the shares in 2021 from ten companies owned by the Ministry of Defense and Military Production.

Following Egyptian law, companies that plan to conduct an IPO must disclose the financial statements of the organization for the last five years, including information on costs, profits, revenues, taxes paid. While such disclosure is necessary for a company's IPO, it is possible that an exception could be made for the military and their companies.

The influence of the army on the economy may be indirect. To assess the role of the military in the economic life of Egypt, it is necessary to consider many political-military factors. When any state is in a pre-war situation or faces any other political-military instability, the question of the armed forces’ economic efficiency fades into the background.

The large, efficient and fully equipped Egyptian army serves as a deterrent to unfriendly actions. For example, Ethiopia, which is building the largest hydroelectric power station of the African continent on the Nile, has not yet completed this project. If the Hydase hydroelectric power station is launched, a blow will be dealt with the Egyptian irrigation system, which, given the rapid growth of the Egyptian population, could lead to a humanitarian catastrophe. Additionally, electricity production at the Aswan hydroelectric power station will decrease. The Ethiopian leaders fears a hypothetical military clash with Egypt, and this is probably the reason for the slowdown in this project’s implementation. Thus, the army is involved in ensuring food and energy security in Egypt. It influences economic processes without directly interfering.

The role of the military in ensuring the economic stability of Egypt is also manifested in counter-terrorism activities related to ensuring security on the border with Libya and the Sinai Peninsula. ISIS [3] activities have been destabilizing the situation on the Sinai Peninsula for several years and hurts the development of tourism. In 2020, terrorists carried out more than a hundred terrorist attacks and even attacked the gas pipeline linking Egypt and Israel. Perhaps the Egyptian army will one day be able to eliminate the terrorist threat and stabilize the situation in Egypt. This will have a positive effect on business activity and improve the investment climate in the country. Companies directing ships through the Suez Canal will be more confident without the fear of being targeted by terrorist attacks. Tourists will be less afraid to travel to Egyptian resorts. Thus, the struggle of the army and other power structures against terrorism plays an important role in the economic stabilization of Egypt.

***

The army is one of the main subjects of the Egyptian economy. The armed forces now directly own dozens of companies that cover key sectors of the Egyptian economy, including metallurgy, food, engineering, chemical, oil, and many others. Given that information about the financial activities of military companies is hidden, it is rather difficult to assess their effectiveness. There is no exact information about what share of the country's economy is controlled by the military. The lack of civilian oversight, the presence of tax breaks, and some other advantages that contribute to unfair competition can cause discontent among Egyptians and an increase in the level of social tension in society. Military company IPO’s could be an important step in liberalizing Egypt’s economy, as it will improve the investment climate. Perhaps it will also make the activities of enterprises run by the army more transparent, which will improve production efficiency.

1. Yezid Sayigh. Owners of the Republic: An Anatomy of Egypt’s Military Economy // Carnegie Endowment for International Peace. 2019. 95-101 pp.

2. Ibid.

3. A terrorist organization prohibited in Russia