02:02

China is building a new Egyptian capital in the desert under its Belt and Road Initiative

China is building a new Egyptian capital in the desert under its Belt and Road Initiative

The Egyptian pound has lost almost half of its value against the US dollar since March and rising prices for basic food commodities has sent the annual headline inflation rate soaring.

The crisis forced Cairo to seek a bailout from the International Monetary Fund (IMF), which in December approved a US$3 billion loan under the Extended Fund Facility to provide some relief.

As part of the IMF deal, China Development Bank will inject US$1 billion into the Egyptian economy and the Chinese-dominated Asian Infrastructure Investment Bank will contribute US$400 million. Egypt is also aiming to obtain US$500 million in Chinese yuan-dominated panda bonds.

In addition, the World Bank will provide US$1.1 billion, the African Development Bank US$300 million, the Arab Monetary Fund US$300 million, and US$2 billion would come in the form of committed purchases of public sector assets, including from partners in the Gulf Cooperation Council.

However, the IMF imposed stringent measures such a shift to a flexible exchange rate regime, divestment of state-owned assets, curbs on the military’s outsized role in the economy and slower implementation of public investment projects.

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Amid the turmoil, work on Chinese-backed projects progresses on Egypt’s mega infrastructure projects, including the US$59 billion new administrative capital in the Egyptian desert about 50km (30 miles) east of Cairo.

The city will house new ministry buildings, a business district with Africa’s tallest skyscraper, and gated suburbs.

According to Khalil Al-Anani, a senior fellow at the Arab Centre Washington DC and an associate professor of political science at the Doha Institute for Graduate Studies in Qatar, China is Egypt’s fourth-biggest creditor, with almost US$8 billion in outstanding debts, or about 5 per cent of Egypt’s total external debt of US$155.7 billion.

“Despite the controversy surrounding this large amount of Chinese debt and concerns over Egypt’s ability to repay it, the Sisi regime has persisted in continuing to borrow from China,” Al-Anani said in a paper published by the centre in late January.

“Not surprisingly, China has invested heavily in several infrastructure projects that are directly connected to the [Belt and Road Initiative],” he said, singling out the SETC-Zone, which was established in 2008, and valued for its location and logistical strengths.

Citing data by China’s National Development and Reform Commission, he said the SETC-Zone was a major hub for Chinese products, boasting around 102 Chinese companies, US$1.2 billion dollars of investment, 30,000 new jobs, and over US$2.5 billion in sales.

Nevertheless, China is unlikely to position itself as Egypt’s main rescuer given that Egypt is a major economy in the region and likely to get help from other countries, according to John Calabrese, head of the Middle East-Asia Project at American University in Washington.

Calabrese said that in some ways, “China is fortunate. Nobody wants to see Egypt collapse.”

He said the IMF conditions were “stringent” but, provided the Egyptian government could meet them, would put the country on the right track to meet its debt obligations – a benefit for China.

But various countries had been cautious in offering help before the IMF deal went through.

“The unfortunate thing is, though, at least as I understand it, that China prefers to do all these things bilaterally. If somehow all major creditors – including China – could find a way to present a unified front to address debt distress – including writing off, not just writing down some loans – everybody’s interests would seem to be well served,” Calabrese said.

He said Egypt’s economic developments raised interesting questions about the status of existing Chinese projects in Egypt and whether China was prepared to issue new project loans.

Calabrese said Qin’s recent promise that China would speed up development of belt and road projects “seems directly at odds with the IMF’s stipulation that Cairo slow down public investments”.

He also said the terms of the IMF deal could present China with opportunities, not just dilemmas.

“Cairo is poised to release a plan to sell some state-owned assets to private investors and list government-owned companies on the Egyptian Exchange, with an unspecified number of other important companies to be sold later,” he said.

“It will be interesting to watch whether Chinese investors will join Saudi and Emirati counterparts in seeking to acquire stakes in Egyptian public enterprises, and if so in which sectors,” Calabrese said.

01:25

China-funded infrastructure across Africa force difficult decisions for its leaders

China-funded infrastructure across Africa force difficult decisions for its leaders

Mohammed Soliman, director of the strategic technologies and cybersecurity programme at the Middle East Institute, said he expected investment momentum to slow for several reasons.

First, China was experiencing domestic economic stress related to the recent strict Covid-19 lockdowns as well as the effects of great power competition, such as growing trade disruptions and lack of access to key materials, Soliman said.

“Chinese investments also carry a perceived risk in Egypt, which is seeking to avoid attaching itself to one side in an era of intensifying US-China great power competition,” he said.

He said Egypt was facing a dilemma shared by many nations around the world.

“While in pursuit of their national interests, countries now have to contend with an international political landscape that has become multipolar and where maintaining good relations with great powers is essential,” Soliman said.

To its benefit, Egypt had a long history of non-alignment and a strong track record of managing complex relations, Soliman said. “Cairo’s playbook for non-alignment was honed during the Cold War and is ready to be used again,” he said.

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A specialist in Egyptian studies at a Chinese university, who declined to be named, said China had strong reasons to maintain good economic, trade and investment relations with Egypt and Sisi had been very successful in handling his country’s ties with China and the United States.

“Both China and the US are worried about losing Egypt and about Egypt falling to the other side. To prevent this, it is better to increase investment or maintain a certain investment scale … This constitutes a key factor for Egypt to attract China’s and US’ investment,” he said.

“It can be seen from the speeches of Chinese leaders from high levels and Egyptian leaders that the momentum of the belt and road will not be weakened in Egypt, especially in the current process of economic difficulties in Egypt, China will actively complete the existing major projects while continuing to invest in new projects in Egypt.”