How Egypt wound up in the center of a Gulf Cooperation Council dispute on Qatar

FROM LEFT: Saudi Foreign Minister Adel al-Jubeir, Emirati Foreign Minister Abdullah bin Zayed al-Nahyan and Bahraini Foreign Minister Khalid bin Ahmad al-Khalifa attend a Cairo news conference in July after their meeting that discussed the diplomatic situation with Qatar. (Khaled Elfiqi/Pool/European Pressphoto Agency)

Egypt is at the ideological center of the ongoing dispute between Qatar and its fellow Gulf Cooperation Council members Saudi Arabia, the United Arab Emirates and Bahrain.

Since the 2011 Arab Spring uprisings, Egypt has been a bellwether for both political and economic reform in the wider Middle East and North Africa. It is also the focal point of experimental efforts of the gulf states to exercise policies of financial and political intervention. How the current GCC crisis unfolds in Egypt can tell us much about the new norms of foreign intervention ­— whether economic, political or military — in the region.

How and why do GCC states support Egypt?

Well before the boycott of Qatar began in June, Egypt was a key battleground for gulf countries vying for international influence. While Qatar backed the Muslim Brotherhood, Saudi Arabia and the UAE supported the military and current regime of President Abdel Fatah al-Sissi.

In an effort to shore up Egypt’s political stability since its 2013 coup, the UAE and Saudi Arabia have used a number of financial tools, including deposits into the Egyptian central bank, favorable loans, in-kind donations of oil and gas shipments, and promises of foreign direct investment in sectors like real estate and agriculture. There has been some volatility in the flow of GCC financial support to Egypt over the past four years. The past year has been especially difficult for Egypt, as it sought assistance from traditional multilateral finance sources like the World Bank and International Monetary Fund to address its fiscal crisis and stabilize its currency. The UAE and Saudi Arabia are turning on the support flows again to Egypt, in foreign direct investments from state-related entities, particularly in real estate.

However, this foreign aid and investment is not charity, even when its target is a primary foreign policy priority. Economic statecraft, particularly from the UAE, is often funded by investment vehicles made up of the private resources of public figures, which could benefit the state and its related commercial entities.

While Egypt holds a useful geographic and political position, its economic interests remain precariously divided between factions in the GCC dispute. While it is no longer indebted to Qatar for loans extended after 2011 (having made repayments in 2016 and 2014), outstanding debt payments to other gulf states will weigh heavily on its spending commitments in the coming years.

How Qatari natural gas complicates Egypt’s position

Egypt also remains dependent on Qatar for its supplies of liquefied natural gas (LNG). Behind Qatar’s primary export markets in Asia and India, Egypt is a major purchaser of Qatari LNG. Egypt’s own ability to meet its energy needs has been decreasing because of both supply and financial obstacles. The reliance on natural gas became problematic in 2014, when domestic gas production fell by 22.3 percent from 2009 levels. New exploration contracts were halted after the uprisings of 2011 and 2013, as demand for electricity production surged from a growing population.

Qatar exported more than 30 percent of total global supply of LNG in 2016. Its largest customer base in the Middle East are the UAE, Egypt and Jordan. Qatar’s conflict with the UAE and Egypt now calls into question the sustainability of that commercial relationship.

Egypt’s control over the Suez Canal puts it in a powerful position to determine the flow of Qatari LNG to Europe, but it also risks Egypt’s reputation should it attempt to disrupt trade flows through the international gateway. For now, Egypt has found a middle ground, barring Qatari vessels from stopping along the way in Egypt’s ports and its economic zones, but allowing passage via the canal. If the GCC crisis were to escalate with increased commercial sanctions on Qatar and its trading partners, the economic consequences would be global.

Testing austerity measures

Egypt is also a test case of some of the austerity measures the GCC states need to implement at home, though GCC states are generally much better positioned to pick and choose among structural reforms. Egypt is going through a full-fledged structural adjustment, with a fiscal deficit, inflation problem, and disincentives to foreign direct investment and tourism — its main source of foreign currency earnings. The GCC states are watching how the reduction of subsidies of wheat and gasoline will affect Egyptian society. Egypt remains a test case of how society responds to mechanisms of economic governance at the behest of a strong security state.

Some scholars argue that the opportunity cost of government spending on energy consumption — in the form of subsidies — props up inefficient industries at the cost of other government portfolios. More spending on energy means less state funds are available for health and education, which make better long-term investments. Egyptians face high unemployment and obstacles to economic inclusion, especially for women. Working abroad in the GCC has been a necessary respite for many Egyptian families, though the future is uncertain for those in Qatar.

For now, investment in Egypt’s political stability and economic growth remains a foreign policy priority of the UAE and Saudi Arabia. Governments and policymakers might take advantage of the learning opportunities the experimental nature of the varied economic reform agenda unfolding across the MENA region.

The dispute between Qatar and the quartet including Egypt and the GCC states (Saudi Arabia, the UAE and Bahrain) is in many ways a dispute about the exercise of economic statecraft. Qatar uses its economic resources to support regional political movements from below and the opposing states support what they term secular governance with a strong overarching state. These competing visions of governance have deep pockets, sustained by aid and investment portfolios that have the capacity to reshape, and disrupt, the political economy of the entire region.

Karen E. Young is a senior resident scholar at the Arab Gulf States Institute in Washington. She is the author of “The Political Economy of Energy, Finance and Security in the United Arab Emirates: Between the Majilis and the Market,” (Palgrave, 2014). Follow her @ProfessorKaren

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