Summary

• The economies of Egypt and Tunisia are characterised by weak private sectors, insiderism, and the dominance of key constituencies that maintain regime leaders in power.
• The severe weaknesses of these economies have provoked recurrent crises and cause hardship for their populations, which threatens social and political instability as well as greater migration towards Europe.
• The EU wants to ensure that the financial assistance it provides contributes to promoting fundamental reform. But Egyptian and Tunisian leaders have resisted policy change for political and ideological reasons, relying in part on support from Gulf countries.
• Europeans need to ground their economic assistance in a better understanding of political dynamics and regional trends to ensure that they gain the greatest possible influence for the funding they provide.
• Europeans should adopt more achievable, more targeted policy requests for economic and financial reforms in each country, and work as closely as possible with Gulf partners, which are already making greater demands of Cairo and Tunis in return for the support they give.

Crisis economies

The crises of the last few years have split the states of the Middle East and North Africa into winners and losers. While major energy-exporting countries flourished as hydrocarbon prices rose, others have been hit by a succession of shocks that include rising import prices, capital outflows, and falling growth. Among the region’s faltering economies, Egypt and Tunisia have attracted particular concern in Europe, because of the risk that economic distress could lead to instability and irregular migration directly affecting European countries. European policymakers have been involved in extensive efforts to shore up these economies: the European Union agreed a major financial assistance package with Egypt, and has pursued lengthy discussions with Tunisia aimed at implementing an equivalent deal. Both countries’ economies harbour severe unresolved economic weaknesses.

The economic situations in Egypt and Tunisia are distinct in many ways. Egypt’s size and geopolitical significance stand in contrast to Tunisia’s comparatively modest international profile, and outside powers treat each country differently as a consequence. In Egypt, the army dominates economic life, while Tunisia has a powerful public sector union, the UGTT, and a milieu of oligarchs. And Egypt has consistently engaged with the IMF, while Tunisia’s prickly president, Kais Saied, rejects what he brands the IMF’s “diktats”. Nevertheless, structural similarities between the two countries’ economic problems outweigh the contrasts. Both suffer from an economy weighted towards a narrow elite, an anaemic private sector, and persistent deficits that have led to onerous debt burdens.

Egypt and Tunisia are also alike in the challenges they pose for European efforts to offer economic support. With both countries, the EU faces a similar dilemma: how to balance providing short-term assistance to stave off economic collapse with the longer-term objective of encouraging reforms that would set the countries on a better economic path. The dilemma arises because Egypt’s and Tunisia’s leaders both resist key reforms that would involve taking on vested interests on whose support the leaders rely, as well as going against some of their central ideological convictions. As a result, Egypt’s president, Abdel Fattah al-Sisi, and Tunisia’s Saied have tried to push international partners to provide support without fully committing to make the changes that their partners would like to see. In dealing with the EU and individual member states, they have sought to gain financial assistance on favourable terms by pointing to the risk of instability associated with economic troubles and to the importance of continuing cooperation in areas such as migration. Such pressures tempt European decision-makers to prop up these countries’ economies in the short term.

Yet it would be a mistake to give help that effectively allows Egypt and Tunisia to continue to duck the need to undertake meaningful reforms. Instead, the goal of Europeans should be to leverage the prospect of financial support to obtain as much change in Egypt’s and Tunisia’s economic policies as possible. In Egypt’s case, that means persuading the country to follow through on the commitments it has given to the IMF; with Tunisia, it means finding a way to get the government to sign up to a credible reform agenda. To succeed, European policymakers need to understand precisely what reforms are needed but also which political factors are shaping Sisi’s and Saied’s policies. Moreover, they need to take the actions of other influential powers into account – not only the IMF (in which, of course, Europe has significant influence) but also the Gulf Arab monarchies, whose financial firepower makes them hugely important actors across the region. A greater sensitivity to the political and regional context surrounding Egyptian and Tunisian economic policymaking is essential if European officials are to use the influence they have as effectively as possible.

This policy brief analyses the economic situation and political context in Egypt and Tunisia, as well as the stance that Gulf states have adopted towards economic support for these countries. It argues that both countries need a fundamentally new economic model, but that their governing regimes can be expected to resist at least some of the reforms that are needed. It tracks the evolving contours of Gulf states’ “bailout diplomacy” and finds overlap between these states’ demands and those of Europe and the IMF, alongside continuing divergences. Based on this analysis, the policy brief argues that Europeans need to hold firm to the conditions they have tried to attach to financial assistance – but they should also develop political strategies to ensure those conditions gain traction. Europeans’ new strategies towards assistance for Egypt and Tunisia should involve a clearer prioritisation of achievable goals, adjusting the framing of reform initiatives to minimise the resistance that can be anticipated, and greater coordination with Gulf partners to increase the alignment between their position and European demands. Alongside desk research, the paper draws on interviews and private conversations conducted by the authors with officials and experts associated with or based in the countries examined.

Egypt’s regime-directed economy

In the early months of 2024, Egypt received a four-part economic windfall. In February, the government announced a deal worth $35 billion with the UAE for rights to develop the Ras Al-Hekma peninsula on Egypt’s Mediterranean coast. The following month, the IMF announced it would unblock a suspended 2022 support package for Cairo and increase its size from $3 billion to $8 billion after the government agreed to devalue the Egyptian pound and move to a flexible exchange rate regime. Not long afterwards, the EU and Egypt concluded a strategic partnership, as part of which the EU promised €7.4 billion in loans and grants to help stabilise the Egyptian economy and support cooperation on migration and other areas. Then the World Bank announced a new support package for Egypt of over $6 billion, taking the total of new financing promised to Egypt to $57 billion.

These agreements came at a critical moment for Egypt. Over the preceding two years, the country had suffered an intensifying economic crisis marked by a spiralling debt burden, rapidly rising inflation, and a severe shortage of foreign currency. The country’s public-debt-to-GDP ratio stood at 95.9 per cent at the end of the 2022-23 fiscal year. Debt service payments accounted for a daunting 43 per cent of government revenue. Within Egypt’s debt, the share held by external creditors had mounted rapidly and reached $168 billion in December 2023. In February 2022, Russia’s full-scale invasion of Ukraine led to a rapid rise in the price of food and oil imports, while fears about the economic impact of the war and rising interest rates elsewhere prompted investors to pull their money out of Egypt in large quantities; an outflow of around $20 billion took place in the months immediately after the Russian invasion. As a result, Egypt’s foreign currency reserves sank to dangerously low levels – a trend that was amplified when the conflict in Gaza cut Egypt’s earnings from tourism and Suez Canal traffic. In September 2023, Egypt held $35 billion in foreign reserves but faced an external financing need estimated at $22 billion in 2024.

Despite a sharp devaluation in the Egyptian pound since 2022, the currency was trading on the black market at more than twice the official rate at the end of January this year. The expectation of a further devaluation led to a sharp fall in remittances, one of the country’s main sources of foreign currency, as Egyptians overseas waited to obtain a better rate. By February 2024, consumer inflation stood at 35 per cent. Price rises and the shortage of foreign currency meant that Egypt’s debt crisis was matched by a plummeting standard of living for the country’s population. Power cuts became routine as the country prioritised gas supplies for export, Meanwhile, people struggled to pay for staple foods; for example, the price of onions increased by 400 per cent in a year, and sugar was being sold at up to 275 per cent above normal rates on the black market, as Egyptians often searched in vain to find it in the shops.

In the short term, the raft of new funding commitments for Egypt from external partners has stabilised the country’s economy. The massive investment from the UAE in February helped reduce the black market rate for the Egyptian pound to less than 50 to the dollar, which made it easier to bring the official rate into alignment through devaluation (a move that Sisi had evidently postponed until after last autumn’s presidential election to avoid any further rise in the price of imported food). Egypt’s foreign currency reserves have recovered to reach $46 billion, reportedly the highest level on record. Despite the devaluation in March, inflation has fallen to 27.5 per cent, its lowest level for a year, which suggests that many items were already priced in line with the black market rate. Foreign interest in Egyptian bonds has shot up to record levels since the deals. The World Bank now predicts that Egypt’s GDP will grow at 4.2 per cent in 2024-25, rising to 4.6 per cent the following year.

Nevertheless, if the immediate crisis is past, the underlying problems of the Egyptian economy persist. While external shocks such as covid-19 and the wars in Ukraine and Gaza precipitated Egypt’s economic crisis, they only exacerbated existing weaknesses. The inflow of financing gives Egypt breathing space – but it could also be taken by Sisi as an excuse to avoid undertaking fundamental policy changes. As the former deputy prime minister Ziad Bahaa Eldin told the Financial Times, Egypt could either “rely on these new inflows to defer reform and continue to run the economy in the same way that brought about the current crisis, or … use it as an opportunity to adjust policy.”

The failings of Egypt’s economic model

The economist Khalid Ikram has described two fundamental challenges that the Egyptian economy has struggled with for decades: generating enough growth to provide jobs for its steadily increasing population (with the labour force currently growing by 600,000 people a year); and procuring enough foreign currency to pay for essential imports, including food, oil, and machinery.[1] Between 1965 and 2016, GDP growth averaged 4.7 per cent – below the rate needed to provide an improving quality of life to the population.[2] While changes in the economy occurred, such as a shift from agriculture to manufacturing, there was no fundamental transformation as in other developing countries. In the words of the economist Amr Adly, Egypt’s role in the global division of labour “is stuck in the supply of low-value added primary materials or low-skilled and labour-intensive goods and services.”[3]

The rate of economic expansion has not kept pace with that of population growth, meaning many Egyptians were unable to benefit from the growth in the economy. Even in relatively buoyant periods, such as the decade before 2011, increased activity was concentrated in certain sectors and primarily benefited large firms with connections to the regime. A telling sign of the weakness of the economy was the failure of new and small firms to grow over time, since such firms tend to be a primary engine of increasing employment.[4] Meanwhile, a growing proportion of employment moved to the informal sector, and poverty rates have climbed steadily since the 1990s.[5] Economic benefits were extremely unevenly distributed, setting the stage for the 2011 protest movement that dislodged President Hosni Mubarak.

Although economic policies varied between different regimes before 2011, the government consistently ran a budget deficit, with the gap between expenditures and revenues averaging 11.5 per cent of GDP between 1965 and 2016.[6] With a very limited tax base, and extensive subsidies spent on food and fuel, the government lacked the resources to invest in the country’s infrastructure or to develop human capital through investing in health and education. The government’s need for credit reduced the funding available for private sector investment. Meanwhile, the failure to develop a genuinely productive private sector that could attract foreign direct investment at scale and produce tradeable goods with significant added value meant that exports remained constrained. It also meant the country’s need for foreign currency could only be met with the assistance of rents (such as transit charges for the Suez Canal), foreign aid, remittances, and external borrowing.[7]

When Sisi took power in 2013, these structural weaknesses had been exacerbated by the turmoil that followed the 2011 uprising. The increase in foreign investment that took place in 2005-9 was reversed, the tourist industry collapsed, growth stagnated between 1.8 and 2.2 per cent between 2011 and 2014, and foreign exchange reserves fell from $35 billion in 2010 to $14.5 billion in 2013. Sisi initially turned to the Gulf countries of Saudi Arabia, the UAE, and Kuwait to plug the gap in Egypt’s finances: eager to support a regime that had displaced their pantomime villain, the Muslim Brotherhood, they deposited billions of dollars in Egypt’s central bank and gave credit on petroleum product imports and cash grants. In total, according to an Egyptian minister, Egypt received $23 billion from Gulf Arab partners in the 18 months after Sisi seized power.

From 2015, Sisi embarked on a programme of external borrowing, which quadrupled between 2015 and the end of 2023; as a proportion of GDP, external debt surged from 15 per cent when Sisi seized power to more than 35 per cent in 2022. Among these loans, Egypt agreed a three-year $12 billion programme with the IMF in 2016 and further support of $7.9 billion in 2020, as well as the 2022 and 2024 agreements discussed earlier. Egypt is now the IMF’s second largest borrower after Argentina, owing nearly $11 billion at the end of May 2024. As a condition of the 2016 IMF loan, Egypt devalued its currency by 48 per cent. Raising interest rates to contain the resulting surge in inflation, Egypt maintained the highest real interest rates in the world between 2017 and 2021, drawing in additional flows of hot money that added to its stock of foreign exchange.

The IMF’s 2016 programme was supposed to enable the Egyptian government to pursue policies that would “correct external imbalances and restore competitiveness, place the budget deficit and public debt on a declining path, boost growth and create jobs while protecting vulnerable groups.” Yet, while growth rates and employment went up for a period, no fundamental transformation of the Egyptian economy took place that would allow it to meet the programme’s objectives of restoring macroeconomic stability and promoting inclusive growth in the longer term.

Instead, Sisi used the money that gushed into Egypt to pay for a massive programme of infrastructure and construction, focused on a series of “mega-projects” such as the new administrative capital which cost $59 billion and an $8 billion expansion of the Suez Canal, as well as highways and a lengthy monorail. For Sisi, the mega-projects served multiple purposes. They promised a quick if short-term boost to growth and employment in a way that did not require innovation but allowed the state bureaucracy to perform a familiar task of centrally driven large-scale construction. Sisi has consistently cited the millions of jobs the mega-projects create as a justification for continuing them. They also embody his vision of state-driven national renewal and stand as symbols of the “new republic” that he claims to be creating.

But the regime’s focus on state-driven projects in the construction and real estate sectors is also a way of cementing Sisi’s political position by rewarding the supporters of the regime, above all the military. Egypt’s military has always played an important role in the economy, but under Sisi its economic footprint has expanded massively. Sisi has described the army as the “motor of national development.” Government spending since 2013 has been directed largely through the army or associated firms, as well as other regime-owned enterprises. Much of the government’s infrastructure programme is run through the army’s Engineering Authority and Mega-Projects Department, along with the New Urban Communities Authority (NUCA), which employs many former army officers. The company overseeing the construction of the new administrative capital is jointly owned by NUCA and the ministry of defence.

The military owns or controls of much of Egypt’s land, which allows it to profit from marketisation: by managing the release of land for development, the state can engineer artificial shortages which increase the value of the plots that regime-linked enterprises sell on for private development. In this way, the military and other groups connected to the regime have a vested interest in its continuation in power.

However, the value of these state-driven construction and real estate projects is questionable. The lack of transparency surrounding the military’s economic role and the frequent absence of competitive tendering mean the mega-projects’ value for money is hard to assess. They are largely carried out without feasibility studies or forward economic planning. More importantly, because they are producing essentially non-tradeable assets, they do not contribute to the state’s foreign currency needs. The Egyptian state’s massive spending on the construction and real estate sectors has come at the expense of investment that could have driven Egypt’s industrial development or progress in global value chains. At best, some initiatives such as the Ras Al-Hekma deal could lead to an increase in revenues from tourism, but that is unpredictable and easily affected by instability in the Middle East.

Together, the state’s persistent deficits, the role of the military in the economy, and spending on non-tradeable sectors such as construction and real estate have inhibited the dynamism of private firms, particularly in the sectors that could help move Egypt up the value chain and drive export growth. Private investment in Egypt is extremely low, totalling just over 4 per cent in 2022, seemingly reflecting the growth of the military economy and its advantages over private sector competitors such as the exemption from many taxes it enjoys, alongside the lack of oversight by official bodies, access to state contracts without tendering, and in some cases the use of conscript labour. The lack of investment prevents Egyptian firms from increasing productivity and contributing to strengthening Egypt’s growth, employment, and exports. The weakness of private firms in tradeable sectors is evident in Egypt’s failure to increase its exports in a sustained way after the devaluation of 2016.

These failures, combined with inflation and cuts to subsidies that Egypt undertook after the 2016 IMF deal, have depressed Egyptians’ living standards. The World Bank expects the poverty rate to have increased significantly since it was last assessed at 29.7 per cent in 2019. Restrictions on public sector wage growth since 2016 have particularly affected fixed-wage workers such as teachers, doctors, and nurses, reducing their real incomes in a way that may have a knock-on impact on the services they provide. The expansion of the state’s cash transfer programme, Takaful and Karama, has helped the worst off but it has not affected the situation of those trying to escape poverty – or those at risk of falling into it. Overall, the quality of public services, notably health and education, remains very poor.

The prospects for change

The recent expanded IMF programme was based on an agreement between the Egyptian government and the fund to undertake further reforms, whose purpose was to address the failings that have persisted since the 2016 loan. The key measures were for Egypt to shift to a flexible exchange rate regime, to tighten monetary and fiscal policy, to slow down infrastructure spending, to increase social spending, and to carry out reforms to level the playing field between state and private firms, as outlined in Egypt’s 2022 State Ownership Policy. As argued earlier, the most important reforms for improving growth and employment are those that promote a dynamic, export-focused private sector. While reducing spending on mega-projects and levelling the playing field are vital, there are limits to how far government spending should be cut, given the need to invest in human capital as well as to address the growing impact of climate change and undertake a transition towards a renewable energy-based economy.

How likely is the government to carry out these changes? The finance ministry recently released a budget plan for 2024-2025 that purportedly addresses several of the goals agreed with the IMF.  A presidential statement suggests the new government will focus on developing human capital and boosting the private sector as an engine of growth. The government also announced a cut in bread subsidies, raising the price of a standard loaf fourfold. The budget indicates that the increased spending will be found through raising the country’s tax take by the ambitious figure of 30 per cent and limiting public investments by state entities to a total of $20 billion. The EU-Egypt Investment Conference held at the end of June 2024 saw €40 billion in deals signed between European and Egyptian companies, including in renewable energy and green hydrogen, suggesting some confidence that the business environment in Egypt will improve.

Nevertheless, it is clear that Sisi remains attached to the model of state spending on mega-projects: as he said earlier this year, the economic arguments in favour of halting grand projects might be sound, but “I employ 5-6 million people, tell me … how could we shut all this down?” Moreover, Sisi depends on the military and the security establishment for his political support. Unlike previous leaders, he has not built a political party that could provide a counterweight to the military’s dominance. Sisi’s economic model not only conforms to his paternalistic vision but also provides a way of rewarding the military for its continued support. This means it is hard to imagine Sisi taking steps that would curtail the security establishment’s role in the economy in any significant way. The State Ownership Policy, which the IMF linked its agreement to, bears this out. As the political scientist Yezid Sayigh has shown, the policy’s treatment of the military is ambiguous. Strategic sectors are exempt from the objective of reducing the state’s economic footprint, and the policy excludes real estate altogether. It also does not apply to military entities that manage public works projects but which are not registered as companies.

These factors make it likely that Sisi and the government he oversees will try to muddle through, making some gestures towards reform while avoiding any steps that would threaten the economic position of his regime’s supporters. After all, Sisi might well draw the conclusion from the recent finance packages offered by the IMF and the EU – agreed in spite of Egypt’s failure to comply with past commitments – that he can get away with half-measures or even less. When they agreed to offer support despite the absence of completed reforms, the IMF and the EU were evidently swayed by the strain that the war in Gaza is placing on Egypt and the risk that economic collapse could lead to outflows of migration. But the risk is that this approach could undermine the credibility of the conditions attached to the latest packages. Europeans need to find a way of making sure that they get some traction for the funding they are providing, and of convincing Sisi that he must make at least some changes to continue receiving their money. They must persuade him that they do not see Egypt as too big, or too strategically important, to fail, and that continued disbursements under current programmes really do depend on Egypt meeting the most important of the conditions it has agreed to.

Tunisia’s trapped transition

On 16 July 2023, Tunisian leaders may have thought they had received an economic windfall of their own when Team Europe came to town. The high-profile delegation of Dutch prime minister Mark Rutte, European Commission president Ursula Von der Leyen, and Italian prime minister Giorgia Meloni signed a memorandum of understanding with President Saied. This MoU promised to continue budget support, worth €150m annually, and agreed roughly €450m of infrastructure spending, an initial €105m for migration management, and an estimated €900m in macro-financial assistance over a number of years. If European policymakers thought this agreement would help stabilise the country and control irregular migration from Tunisia, they were mistaken, as was Saied. European promises of macro-financial assistance were conditioned on the president obtaining a deal from the IMF, which he rejected, stating he would not accept “diktats”.

The MoU came at a precarious time for Tunisia’s economy. Its credit rating had just been downgraded to CCC- (extremely rare for a ‘sovereign’, and signifying extremely high risk of default) following the news that Tunis required a forecast $15.1 billion of external financing by the end of 2024 to cover spiralling debt repayments but had no clear plan for obtaining it. Cut off from international credit markets, Tunisia’s government turned to domestic credit and is continuing to hoover up an expected $6.5 billion over 2024 (12 per cent of Tunisia’s GDP) in credit that Tunisian banks could otherwise have given to finance private sector growth. Just when Tunisia needs it most, FDI is at record lows, having consistently shrunk since the early 2000s;[8] today it stands at just 0.8 per cent GDP (compared to an average in the Middle East and North Africa region of 2.3 per cent of GDP), with EU states responsible for 85 per cent of that investment. 

A lack of growth is driving Tunisia’s decline. Projected real growth of 1.9 per cent for this year means the country will still not have even recovered from the 8.6 per cent contraction caused by the covid-19 pandemic in 2020. To make matters worse, severe drought has undermined an otherwise growing agricultural sector, reducing grain harvests by 80 per cent in 2023. This forced the state deeper into domestic financing, spending $780m on wheat imports alone over the first seven months of 2023 to try to alleviate the shortages.

Low growth, high external debt repayments, and emergency demands on additional imports have made Tunisia desperate for foreign exchange – a dynamic worsened by the global inflationary spike caused by Russia’s invasion of Ukraine. This caused Tunisia’s fuel import costs to jump 370 per cent in the first half of 2022. By the summer, big shortages became evident in consumer basics from food to fuel and medicines, which are largely imported by the state. Today, tourism and remittances help keep Tunisia’s current account deficit manageable – they brought in $2.23 billion and $2.7 billion respectively in 2023. These injections of foreign currency alongside quirks in global markets such as the inflated price of olive oil have saved Tunisia from bankruptcy, allowing the state to maintain debt repayments and necessary imports.

Given Tunisia is struggling to stay afloat economically, the disconnect between Europe’s dependence on an IMF loan to enable macro-financial assistance and Saied’s insistence that he will never take one becomes all the more dangerous. While he often boasted in the early days of his regime that (undisclosed) friends would ride to the rescue, Saied has been unable to attract enough of them to make any meaningful difference. Since 2022, Tunisia has received around $500m from Saudi Arabia, while Algeria has officially loaned $200m, half of which was deposited in the central bank of Tunisia to stabilise the currency.[9] Algiers has also unofficially provided considerable ‘soft assistance’ by enabling repayments to be delayed almost indefinitely, allowing Tunisia to buy power and fuel on credit. Libya’s central bank also provided a €400m soft loan to the central bank of Tunisia to help with currency stability. While these may help keep Tunisia afloat, and a bare minimum of imports arriving in the short term, more high-interest loans will ultimately just hasten the path to bankruptcy.

A Franken-economy

Tunisia’s journey to the economic cliff edge is a long time in the making. For decades, its economy has been moulded by political factors, such as the way in which the initial welfare state developed a minority class of protected ‘insiders’ with outsized influence, and a precarious majority of ‘outsiders’ – whose destitution and dependencies would eventually shatter the system.[10]

Although Tunisia’s bloated public sector is usually the focus of economic criticism by diplomats and international institutions, its private sector is also grossly deformed and unable to provide the growth or employment Tunisia needs. Both sectors are afflicted by the same root problem: a state-centric economy that remains highly interventionist but disregards the national interest in favour of tending to the ‘insider’ groups that have progressively captured the policymaking process. These groups are made up of a small cadre of oligarchs who dominate domestic industry alongside a large minority of formal employees. They leverage their access, resources, and insight into the state’s functioning and ability to effectively organise into lobbyists or trade unions such as the UGTT; both groups steer state policy and resources towards protecting and growing their interests. This necessarily comes at the opportunity cost of inclusive or growth-orientated policies. Meanwhile, most Tunisians live precariously outside this state-economic model, unable to meaningfully engage with the private sector as employees or entrepreneurs and unable to access the rights and benefits of their formally employed compatriots.

Over time, this dynamic has driven deep distortions across Tunisia’s economy, most notably in the functioning of the private sector, which should be the country’s main employer and growth driver. This in turn affects the labour market and the productivity of both the public and private sectors.

The monopolies enjoyed by Tunisia’s oligarchs over core industries and services are protected by byzantine regulation and licensing requirements that are impossible to satisfy without the right connections, along with highly protected credit channels. This collectively prevents domestic competition from emerging, forcing other Tunisian enterprises to either stay small or enter the informal economy. The difficulty of starting or growing a business lies behind Tunisia’s large number of informal one-person enterprises, which account for roughly 9 in 10 of self-employed workers in Tunisia.

Meanwhile, a dual investment regime protects the oligarchs from outside competition and forces foreign companies to partner with a local firms to sell on the Tunisian market. State-owned-enterprises (SOEs) and other ‘official’ industry also benefit from state-subsidised raw materials, with many producing goods that are bought and distributed by other state sellers at protected price points. This effectively means the state guarantees their revenues, and thus oligarchs’ market share and profits. SOEs therefore have no need to be competitive, innovative, or efficient, or to expand beyond Tunisia’s relatively small domestic market.  

As such, the private sector acts as a drag on the Tunisian state. The financial commitments to these insider cartels (subsidy spending alone reached 7.2 per cent of GDP in 2023) and their excessive political influence leave few resources for any other industrial planning. All the while, the state’s finances are highly vulnerable to the inflationary shocks of the key goods (such as fuels) purchased on the global market to subsidise these industries.

Tunisia’s private sector has become an enabler of corruption that empowers rent-seeking behaviour. This has created an economically toxic environment, spawning further cultural and structural problems. One notable impact is in Tunisia’s labour market – such as the way in which heavy labour regulations, initially designed to protect Tunisians’ socio-economic rights, have become a disincentivising burden to private sector hiring: insiders do not want or need to take on the costs while outsiders already live too precariously to do so. So, officially almost half of private sector hires are informal, meaning labour regulations have the opposite of their intended effect. Nevertheless, Tunisia’s strong unions and bureaucratic class ensure that the social costs of even discussing these issues – such as the risk of strikes – are too high for any government to entertain. As a result, Tunisia’s official unemployment rate sits about 10 percentage points higher than the average in the Middle East and North Africa region.

The damage to the labour market caused by limited employment options harms social mobility and has helped bloat the public sector and SOEs. The lack of dynamism in both the labour market and private sector causes a downward spiral that deskills Tunisia’s workforce. Education is often simply a route to public sector employment. As a result roughly 63 per cent of Tunisians are classified as low-educated despite significant education drives since 2011, while highly skilled Tunisians seek to migrate.

These distortions mean there huge inequality between the roughly 4 in 10 of Tunisians who work precariously in the informal sector and the formally employed (let alone the oligarch class). It also means that jobs and economic activity are centralised in Tunisia’s capital. Without the influence of the oligarchs, or the contracts to secure organised representation through a union, outsiders have no other means to voice discontent than through protest. In 2011 this was sufficient to unseat a long-standing dictator. Since then, the political class has sought to use public sector hiring drives as a pressure valve for a disgruntled street.

These dynamics have driven the public sector, including SOEs, towards becoming entities that exist to employ and pay salaries over any other function. Therefore, not only is public sector productivity crashing, with the Tunisian Anti-Corruption Association finding that civil servants only work an average of eight minutes per day, but the state is reducing into little more than another economic anchor. This is a dangerous dynamic given the state cannot afford to hire many more people with the public sector wage bill already at 14.4 per cent of GDP. In comparison, the Middle East and North Africa region averages at 9.8 per cent of GDP. (The World Bank considers this region to have the highest rate of public sector salaries worldwide.) Meanwhile, second-order economic impacts such as an underdeveloped workforce, lack of innovation, and a brain drain mean the state struggles to afford or cater for key sectors such as healthcare.

The combination of the lack of competition, innovation, resources for investment, and a deskilling labour force are driving Tunisian deindustrialisation. This is evident in the industrial sector’s share of Tunisian value-added exports, which decreased 5 per cent between 2010 and 2022. It is also why Tunisia’s association agreement with the EU, signed in 1995, has failed to facilitate any real growth in exports. This explains why phosphate exports – once a cornerstone of the Tunisian economy – have collapsed in recent years, declining a further 15.8 per cent during 2023 despite the government’s hopes it would start generating foreign currencies once more.

At the same time, economic reforms imposed by the IMF and others have only exacerbated these problems given they target the social spending that props up the system rather than address the structural flaws that cause it to be dysfunctional. Tunisia’s problem is not the deep involvement of the state in the economy per se, it is the grossly uneven way the state involves itself in the economy.

If the Tunisian economy is to rebalance without collapsing, it needs an industrial plan to: formalise the informal sector to grow the tax base; remove private-sector red tape and create incentives to grow small or informal enterprises into the medium-sized enterprises needed to drive employment and growth; reorientate subsistence funding towards people rather than SOEs; reduce the power of cartels and use the freed-up revenues to invest in new infrastructure and new industries across the country rather than just in the capital.

Drowning in debt

Given Tunisia’s import requirements and economic structure it has long run a current account deficit. Prior to 2011, the foreign exchange needed by the government largely came in via FDI. However, the revolution caused twin economic shocks: a reduction in economic activity and the immediate lowering of Tunisia’s credit rating for no other reason than its transition from dictatorship to democracy. The heavy debts taken on in 2011 to keep Tunisia ticking along eventually forced the government to go to the IMF for follow-up loans to avoid a financial crash. Unlike in other cases of structurally flawed economies such as Ukraine, IMF conditionality focused on downsizing the public sector and other liberalising measures rather than reversing the structural distortions of powerful insider groups to jumpstart the private sector.

The failure to secure another IMF loan following the covid-19 recession, and quickfire credit ratings downgrades in March 2022 and June 2023, prevented Tunisia from accessing the Eurobond market. This meant it was unable to borrow more than half of what it needed to meet repayment obligations for 2023, forcing Tunis to use foreign exchange reserves to finance external obligations and to draw on local credit to finance domestic needs. Despite these emergency measures, the state still had to restrict spending to key expenses such as salaries, pensions, and debt servicing while postponing other payments, eventually leading to product shortages.

Today, Tunisia’s debt crisis is one of high-interest fees for short-term debts coalescing with maturing loans requiring large repayments to cover the initial borrowed amount (the principal). This leaves the government with simultaneous repayment challenges. The greatest financial drain on the Tunisian state coffers are the steep interest repayments, which currently total the equivalent of almost 10 per cent of GDP. The government needs assistance to refinance the large principal payments on mature loans so it can escape this interest whirlpool.[11] Without any external financing to help it refinance these mature loans obligations to delay these principal repayments, Tunisia will be forced to drastically squeeze public expenditures.

The government is struggling through this debt crisis just as the chickens come home to roost for the Tunisian economy’s deformities and the financial consequences of the past decade of short-term political patches to serious problems. In short, just as Tunisia is at its most cash-strapped, its bloated SOEs, responsible for Tunisia’s everyday running, are starting to crash.

Having long become dysfunctional, many SOEs are now incurring deep losses. For some, their operating costs have been covered by state-backed loans, while for others the state simply continues to cover their costs. Most worryingly, the opacity of Saied’s regime means the scale of this problem is not fully known. The arrears annually met by the state are estimated to be worth hundreds of millions of dollars. The accumulated debts to cover SOEs’ compounding losses, however, are estimated to be 20-40 per cent of GDP. These debts are spread across roughly 110 SOEs covering every sector of the Tunisian economy. Over the past ten years these firms have been forced into taking on debt to cover ever deeper losses stemming from high wage bills and unpaid subsidies supposed to cover state-set price controls. The most vulnerable of these SOEs are, furthermore, load-bearing pillars of Tunisia’s economy and social order, such as the Tunisian Company of Electricity and Gas, and the Cereals Office.

These worsening debts are also a core driver of Tunisia’s current shortages of key goods. While Tunisian domestic producers are under-delivering for a variety of reasons, the SOEs that are supposed to purchase and distribute core goods cannot sustain their purchase rates let alone increase them, and the state lacks the foreign capital to intervene. For example, as drought reduced Tunisia’s durum wheat harvest by two-thirds between 2022 and 2023, the Cereals Office was incapable of filling the gap, resulting in an 18 per cent fall in the availability of wheat in Tunisia in 2023.

The government has tried to manage this crisis through a misguided attempt at combatting speculation and enhancing price controls. But it has failed to halt the price inflation of goods such as food. Ultimately, a mixture of profiteering and high import prices have driven and sustained recent inflation in Tunisia.[12] This can only be tackled through competition and more effective trade policy – two solutions that Tunisia is unable to pursue due to vested interests, structural economic problems, and the constrictions of the debt trap.

These constraints have also hit Tunisian exports, which in turn exacerbates pre-existing dynamics that are driving the depreciation of the dinar. The currency’s nominal exchange rate has been fixed during this time of rising inflation, with the central bank intending this measure to help keep Tunisians solvent. But if the currency continues to lose value while foreign currencies get scarcer, this could create a system of dual exchange rates. Eventually this will lead to either big corrections that further undermine Tunisians’ spending power (as in Egypt) or lead to a loss of confidence in the economy and a run on the banks (as in Libya).

Into the storm

Tunisia is being buffeted by an economic crisis caused by structural deformities and exacerbated by devastating debt obligations. But instead of steering the country to calmer waters, its president seems to be heading deeper into the storm.

With outside financing scarce, Saied’s illiberal regime has turned to local sources to finance debt repayments and try to satisfy public spending requirements. Instead of addressing the roots of the problem, Saied is aggravating Tunisia’s domestic shortages by attempting to scapegoat wholesalers and ill-defined “speculators” for the scarcity of basic goods. Such inflammatory statements have put off domestic and foreign businesses from making new investment for fear it may eventually be confiscated. Fears over where Saied’s erratic governance might lead have not just triggered a drop in domestic investment but also in deposited savings, an issue already exacerbated by squeezed middle-class incomes.[13]

Saied has few remaining cards to play. The most significant is to sell off state assets, but his erratic and harsh governing style and tetchy diplomatic behaviour only further deter investors from wanting to buy or manage Tunisian assets.  Already, the president’s growing authoritarianism led the World Bank to temporarily freeze budget support operations in 2022 and then halt discussions on future work in March 2023 after Saied railed against sub-Saharan Africans, accusing them of trying to alter Tunisian demographics. While rumours regularly circulate that the president is considering defaulting on Tunisia’s debts, this would be a disaster. It would not help Tunisia’s balance of payments crisis, which is the fundamental driver of that debt. It would massively devalue the state assets Saied may one day seek to sell. And it would almost certainly instigate a period of capital flight, thereby pushing Tunisia into a deeper recession.

In any case, Tunisia’s high burden of external debt servicing and its continuing current account deficit require a level of foreign exchange that threatens to exhaust the reserves of the central bank.[14] The most straightforward solution would be an IMF loan, which would then open the way to substantial EU macro-financial assistance. But despite the IMF essentially dropping all conditionality to encourage Saied’s government to return to the table with a new proposal, the president refuses to engage with the fund. This leaves both Tunisia and the EU in a difficult position: Tunisia has been unable to secure the foreign currency it requires, while any concession by the EU to Saied would essentially incentivise rent-seeking behaviour, drawing the bloc into underwriting Tunisia’s crumbling economy.

If radical reforms are passed over – which is the likeliest outcome given the president’s dysfunctional governing style – then, leading economists predict, Tunisia is doomed to financial meltdown. The only question will be which of its destabilising dynamics deals the killer blow: either necessary imports deplete foreign exchange reserves, weakening the Tunisian dinar until it is undermined by Libya-style dual exchange rates and a run on the currency; the strain on financing state spending provokes a collapse of Tunisia’s private sector, a depression, and eventually another fiscal crisis; or Saied’s government is slowly consumed by fighting an economic rearguard action, raising taxes, and reducing services to try to avoid bankruptcy, until the Tunisian people decide they can take no more and the country relapses into revolution.

The only way forward for Tunisia is a substantial injection of macro-financial assistance to tide it over its current debt crisis, combined with reforms to set it on a better long-term path. But the IMF impasse has stalled any genuine progress towards this. Saied clearly cannot compensate for the lack of European or IMF money, while strict rules in the EU and significant member states such as Germany mean they are unable to provide financing without a wider deal. The result has been for individual European actors such as Italy to make a recent €50m loan, or the European Commission to break ranks and find mechanisms to release ad hoc spurts of finance, usually under the guise of counter-migration. But this is only empowering Saied in a way that actually weakens European bargaining power. Instead of unilateral engagements, Europeans would be stronger if they took a collective approach, working alongside regional actors or powers such as the United States to identify mechanisms to stop Tunisia drowning in debt and incentivise Saied towards reform. With a combined approach, Europeans could also leverage their weighty trade relations with private sector partners to try to influence Saied to undertake stabilising reforms.

Friends in need: Gulf Arab financial support for Egypt and Tunisia

As the EU considers how to help Egypt and Tunisia out of their difficulties, it needs to pay attention to the role of other creditors and donors. The past few decades have witnessed the rise of non-Western development finance players, which represent a growing share of the financial flows coming into developing countries. They also challenge some of the practices established by Western donors and international financial institutions. In the Middle East and North Africa region, the creditors mainly include China and the Gulf Arab states. These players do not belong to the OECD, nor to the Paris Club; they often maintain a degree of opacity around their financial flows; and they do not traditionally tie their loans and grants to conditions related to human rights or governance reforms in the recipient countries.

In the cases of Egypt and Tunisia, the main major non-Western creditors are the Gulf Arab states, which have at times played a decisive part in supplying much-needed funds to Cairo and Tunis. Importantly for European considerations, in both Egypt and Tunisia, the prospect of Gulf funding has contributed to a sense that they can push back against the conditions that might be attached to European support.

The role of the Gulf states as key providers of development aid and financial support to their Middle Eastern partners is not new. Over decades, Gulf monarchies have injected hundreds of billions of dollars into countries across the Middle East and North Africa to try to stabilise their neighbourhood and project influence. Egypt has been among the largest recipients of this aid; since the 1970s, it has received dozens of billions of dollars in development aid, financial support, loans, and investments. In some instances, the scale of Gulf financing has largely outpaced the aid disbursed through Western and multilateral development agencies, serving not only as a complementary source of financing, but also as a convenient alternative when recipient countries want to bypass the conditionalities attached to Western aid. These large aid packages provide the Gulf states with significant leverage and influence in the recipient countries. They have regularly made use of this assistance to shape political developments in their neighbourhood.

In recent years, however, the attitude of Gulf countries towards the financial support they provide and the conditions they attach to it has changed as they increasingly rationalise the way they spend oil revenues and seek out profitable investment opportunities. This raises new considerations for European funders about how to cooperate with Gulf donors in the coming years. The changing Gulf approach may open the door to greater coordination on tying the packages to much-needed economic and governance reforms in the recipient countries. However, it could also lead the Gulf states to more predatory behaviours around the acquisition of assets in Egypt and Tunisia.

Fluctuating partnerships

The economic footprint of the Gulf states differs significantly between Egypt and Tunisia. While Egypt is one of the largest recipients of Gulf funding and historically a key regional partner, the relationship with Tunisia has been much more modest and inconsistent over the years, marked by opportunism, suspicion, and frustration.

The leadership of Gulf Arab countries view Egypt’s stability as crucial to the security of their own states and the stability of the regional order. In these regards, Egypt remains a major player in regional Arab affairs as a demographic heavyweight and a key regional military power. The Suez Canal is a vital maritime trade transit route for Gulf states to access Western markets. And millions of Egyptian migrants also work in countries such as Saudi Arabia and the UAE. Gulf Arab governments thus have a strong interest in maintaining the stability of Egypt’s economy.

Despite its weaknesses, the Egyptian economy has been a major recipient of Gulf FDI. Between 2012 and 2023, Egypt cumulatively received $34 billion in FDI from Gulf Cooperation Council (GCC) states, a figure which represents about 20 per cent of the total FDI inflows into Egypt over that period. Gulf states are major aid players too. Between 2013 and 2022, they sent more than $27 billion in official development aid to Egypt, which represented no less than two-thirds of the total amount of international aid sent to the country.[15] Gulf states hold about 20 per cent of Egypt’s total external debt, and between 2013 and 2018 this share reached between a quarter and third of Egypt’s total external debt.[16] Gulf states furthermore provided Egypt with an estimated $50 billion in direct budget support between 2011 and 2022 in the form of grants, soft loans, and central bank deposits, to support the distressed Egyptian economy. For both official development assistance and financial bailout support, Egypt is by far the largest recipient of aid from Gulf states globally.

Over the years, the relationship between Egypt and its Gulf partners has undergone numerous ups and downs. The Gulf states have expressed their growing frustration and reluctance to bail out Egypt’s perennially dysfunctional economy (even as they still step in). And at particular moments, divergences in foreign policies have led Gulf countries to pause their financial support. For instance, in 2016 Saudi Arabia suspended part of its financial assistance in light of the lukewarm support Cairo offered for the Saudi intervention in Yemen; Egyptian reluctance over transferring the islands of Tiran and Sanafir to Saudi Arabia; and, above all, the Sisi’s backing for Bashar al-Assad and Russia in the Syrian war. The Saudi decision also came a year after an audio recording emerged of the Egyptian president saying the Gulf states have “money like rice.” Despite these difficulties, Gulf officials and experts maintain the Egyptian economy is “too big to fail.” Gulf states continue to send support even while their leaders appeared to call on Cairo to enact reforms that could improve Egyptian financial stability. 

In contrast, Gulf financial interventions in Tunisia have been much more modest and circumstantial. Between 2013 and 2022, the Gulf states provided over $625m in official development aid to Tunisia, representing about 5 per cent of the total international aid sent to the country. They also own around 7 per cent of Tunisia’s external debt.

Tunisia’s leadership has had tumultuous relations with Gulf monarchies. In the wake of the Arab uprisings, Qatar, the UAE, and Saudi Arabia vied to influence the post-revolution political transition. As the Islamist Ennahda party came to power, Qatar became a key support of the government through the provision of budget support and investments in Tunisian infrastructure. Saudi Arabia and the UAE reduced their financial support to the country to a minimum.

In recent years, the calming of these Gulf rivalries and Saied’s arrival to power opened new opportunities for Saudi Arabia and the UAE to relaunch relations with Tunisia. However, the country does not appear to be a priority. Despite repeated visits by Saied to Qatar, Saudi Arabia, and the UAE to ask for investment and financial support, they have not returned the embrace. Moreover, Tunisian officials maintain strong suspicion towards Gulf money and external influence; they are likely also sensitive to public opinion towards Gulf influence. In March 2024, Tunisia’s parliament rejected a $150m financing offer from the Qatar Fund for Development out of concern of the risk of dependence on Qatar.

Gulf states’ evolving approach

The covid-19 pandemic and war in Ukraine provoked a major debt crisis across the Middle East and North Africa. Gulf countries benefited from high oil prices throughout the period and pumped billions of dollars into failing economies across the region to buttress other states’ foreign currency reserves. However, during this time Gulf countries also changed the way they disburse their financial support, as they increasingly sought to translate their aid into investment opportunities. Saudi Arabia has a particular challenge with diversifying its economy, especially when compared to countries such as the UAE; it has thus increasingly sought to rationalise the way it spends its oil revenues.

Egypt was a major recipient of covid-era Gulf aid. In 2021, Saudi Arabia deposited $3 billion in Egypt’s central bank and renewed a $2.3 billion deposit that it had already made. In April 2022, Saudi Arabia, the UAE, and Qatar pledged another $22 billion, mainly in the form of central bank deposits, to help Egypt avert a currency crisis.  This was the first time since 2011 that Qatar had coordinated financial support to Egypt with its Gulf neighbours, after years of hostility and competing influence in the Middle East and North Africa region, including in Egypt where Doha had supported Mohammed Morsi, Sisi’s overthrown predecessor. In contrast, Gulf countries were more hesitant to come to the rescue of Tunisia, despite repeated requests from Saied. Only in July 2023 did Saudi Arabia announce it would provide $500m of financial assistance to the country. In April 2024, the Saudi-based International Islamic Trade Finance Corporation also agreed to lend $1.2 billion to Tunisia to support oil imports.

After the start of the Gaza war in October 2023, Gulf countries responded with a new batch of massive investments, which they announced in early 2024. On top of the UAE’s staggering $35 billion bailout investment for the major development project in Ras Al-Hekma, a similar $15 billion project from Saudi Arabia and additional financial support from Qatar are also under discussion, but have not been confirmed yet. In September 2024, Saudi Arabia announced its sovereign wealth fund would invest $5 billion in the Egyptian economy, as a “first phase” of new Saudi investments, following up on investment pledges made in 2022. While details are still unclear, it is possible that this new injection corresponds to the write-off of a long-term Saudi deposit in the Egyptian central bank, set to mature in 2026, transformed into investments. 

These bailout packages reflect an evolution in policy. In recent years, Gulf countries have increasingly tied their financial support packages to more transactional political demands or investment opportunities in strategic national assets of the recipient countries. The long-term perspective of their own declining oil revenues and the priority they are now giving to their own national development agendas are causing Gulf leaders to rationalise their approach to aid and seek greater return on investment over these financial flows.

The financial rescue packages delivered to Egypt since 2021 were negotiated as part of deals to acquire government stakes in major Egyptian companies. Sisi had indeed relaunched a long-awaited plan to privatise dozens of SOEs, under pressure from the IMF to reduce the influence of the state and the army in the economy. To facilitate and depoliticise investments in the Egyptian economy – which have triggered criticism for appearing to be selling Egypt to Gulf influence – Saudi Arabia and the UAE created joint-venture investment vehicles in Egypt; in 2023, Qatar announced it would also create such a vehicle. However, different Gulf countries have different approaches towards such investments: the UAE places greater emphasis on selecting lucrative investments, while Saudi Arabia seems to prioritise a more political agenda. For example, Saudi Arabia has invested massively in Egyptian media, which are dominated by the General Intelligence Service, and in Egypt’s state assets so as to create political leverage.

Translating this financial support into fruitful investment opportunities has, however, proved harder than expected. The future of most of the state assets that the Egyptian government had promised to privatise remains uncertain and many Gulf investment attempts have made little progress. Since the establishment of the Saudi Egyptian Investment Company in August 2022 by Saudi Arabia’s sovereign wealth fund, and the pledge to invest $10 billion in Egypt, only $1.3 billion investments to Egypt have materialised. Riyadh and Abu Dhabi have indicated growing frustration at the lack of progress made in the reforms by Cairo and the continued predominance of the military in Egypt’s economy, which limits their own investment opportunities. In 2022, the UAE lobbied the IMF to ensure that its new lending programme for Egypt would address the country’s need for fiscal reform. In early 2023, the Gulf states withheld some of their investment pledges to put pressure on Egypt to accelerate the privatisation of some government assets at discounted prices. During the 2023 World Economic Forum in Davos, Saudi finance minister Mohammed al-Jadaan made clear that the kingdom’s appetite for bailing out neighbours in crisis had shrunk and called for an end of unconditional aid. Two months later, his statements were echoed by the Qatari finance minister, Ali al-Kuwairi, who said his country would no longer provide aid or subsidies to Egypt and would switch to making investments instead.

In 2024, the Ras Al-Hekma deal appeared to offer a way to soothe such tensions – it would provide the UAE with tangible assets while helping Egypt resolve its severe foreign currency shortage. However, uncertainties remain. It is still unclear what conditions are attached to the deal, including whether the UAE would obtain sovereignty rights on the land of the project. Economists privately query how profitable for the UAE this project will be from an investment perspective. Many of them believe the Ras Al-Hekma deal was led by geopolitical considerations – above all the need to bail Egypt out – rather than by solid investment considerations. Despite frustrations among Gulf policymakers, the degree of their economies’ exposure to Egypt makes it hard for them to resist riding to Cairo’s financial rescue.

The Gulf states and European economic stabilisation efforts in Egypt and Tunisia

Gulf states’ importance to Egypt and Tunisia makes them significant partners for international financial institutions and European countries. On numerous occasions, Gulf financial support has been critical to complementing the limited resources of Western development agencies and banks. Gulf countries, especially Saudi Arabia, have a long-standing working relationship with the IMF. For instance, in 2016 and 2022, Gulf states’ financial contribution was key to bridging the financing gap in IMF loans to Egypt. In 2023, the $500m financial package from Saudi Arabia to Tunisia came after Western capitals pushed Riyadh to intervene as part of an effort to resume IMF talks and convince Tunis to undertake necessary reforms. After this, Saudi Arabia and other Gulf partners made clear that they would not extend further credit without Tunisia signing off on an IMF deal. European officials also confirm their counterparts are keen to cooperate on joint projects with European development agencies such as France’s AFD and German’s GIZ. They regularly coordinate with the Paris Club on debt relief agreements, despite not being official members. They also have also taken part in activities of the Deauville Partnership, a fund and lending platform geared towards financing the transitions states that include Egypt and Tunisia.

Yet questions remain about the extent to which Gulf states’ priorities align with those of Europe. While Gulf countries often cooperate with the IMF and other creditors, they sometimes serve as convenient alternative sources of financing for countries that are reluctant to undertake the IMF’s painful economic reforms, or countries that seek to escape Western pressures on issues such as human rights and governance reform. This was the case for Egypt after the Arab uprisings, when Egypt postponed IMF loans that would have required painful economic reforms after it began to receive significant financial support from Gulf states. In 2023, the Saudi loan to Tunisia came after Saied toured Gulf capitals in pursuit of financial support while repeatedly rejecting the notion of an IMF deal for a $2 billion loan. Although Gulf officials suggest that they increasingly see the benefit of tying financial support to IMF-like conditionalities, they continue to use these financial packages as political tools to advance their interests, sometimes at the expense of the long-term economic stability of the recipient country. Due to the highly political nature of some of these financial packages, GCC countries are also sometimes reluctant to disclose full information about them to the IMF and Paris Club. This makes cooperation on debt restructuring more difficult. 

The trajectory of Gulf policy in recent years suggests there are both areas of alignment and continuing divergent interests between Gulf and European decision-makers. Both have an underlying interest in promoting the stability of Egypt and Tunisia and moving both countries towards more resilient economic models. Both Gulf European states have argued in recent years that Egypt should reduce the role of the state in its economy, limit spending on massive infrastructure projects, and devalue its currency. Gulf and European firms have also both invested in the Egyptian renewable energy sector, which forms part of Gulf plans to diversify their economies away from the current level of reliance on hydrocarbon exports. Gulf countries have called on Middle Eastern and North African borrower governments to improve tax collection rates and complained about the administrative burdens of doing business in Tunisia.

However, in other respects, Gulf and European objectives are at odds. In Egypt, Europeans have an interest in promoting a more transparent, accessible, and open private sector that can form the heart of a more inclusive economic system – and ultimately, perhaps, encourage a degree of political liberalisation. Conversely, key Gulf states such as the UAE and Saudi Arabia have directed much of their investment into sectors such as real estate where they can benefit from privileged access and ties to the elite. They may not see greater transparency and free competition as serving their interests. Moreover, Gulf states ultimately oppose greater political liberalisation in both Egypt and Tunisia.

Political strategies to bring about economic reform

European goals in Egypt and Tunisia are sufficiently similar that it is worth considering them together as part of a common strategy. The EU and some key member states with particular links with the countries involved – or a particular sensitivity to migration (including Italy, France, Germany, Austria, and Greece) – want to avoid economic hardship in Egypt and Tunisia that could lead to political unrest. Their concern is that increased instability could push up outward migration and provide a fertile ground for security risks or geopolitical rivals such as Russia.

More positively, the EU actively wants to promote development that will help these countries become more valuable long-term economic partners, a stable home for investments, and a location for nearshoring important industries. In both cases, the EU and its member states seek to help the countries achieve greater short-term economic stability while trying to set them on a more sustainable economic and social path for the future. In both cases, the priority for reform is to reduce the power of vested interests and to create greater space for a dynamic private sector to foster growth and employment. And again in both cases, there are strong domestic political trends in each country that stand in the way of this goal. In Egypt, it is Sisi’s reliance on the security establishment for his political support, as well as his commitment to a statist economic vision. In Tunisia, it is Saied’s resistance to being seen as subordinate to an international organisation, as well as his broader ideological hostility to a free-market vision of capitalism.

The EU already makes provision of funding conditional on economic reform. This is the right call: without significant changes to these countries’ economic models, European assistance will merely buy time before another economic crisis develops. However, in order to ensure their objective of economic reform gains traction, Europeans need to develop strategies that take account of the politics involved. They need to be realistic about the likely calculations of the Egyptian and Tunisian leaders and the options that are available to them. This will require Europeans to prioritise which reform objectives are most important, to frame their conditions in ways that minimise resistance, and to coordinate with Gulf monarchies.

Egypt: Start small and prioritise

In Egypt, the EU’s current and promised financial assistance is conditioned on a commitment to economic and political reform, and to successful reviews under the IMF programme. However, Sisi may believe that he can continue to receive funding even while only partially complying with the EU’s and the IMF’s conditions. He might walk away if these funders insist on comprehensive reforms that threaten his domestic position. Both in their direct engagement with Egypt and through their influence at the IMF, European officials should therefore emphasise a small number of key priorities among the measures agreed with the IMF that will do the most to help the Egyptian economy deliver sustained improvements in inclusive growth and job creation. Directly attacking the range of firms owned by the military or other parts of the state would face strong opposition, as the record of the government’s unsuccessful efforts to some privatise military-owned firms has shown.

A better approach might involve trying to carve out a space for private sector firms to expand their foothold in some key sectors, particularly export-orientated ones such as intermediate manufactured goods. The EU should focus on fostering growth by increasing the scope for private firms to access capital, technology, and land, further reducing the burden of regulation, and promoting digitalisation.

Among measures that would promote these goals are: a scaling back of spending on mega-projects in favour of investment that develops Egypt’s human capital and provides a foundation for private sector growth; significant steps to increase the tax base, including through equalising the regimes applicable to military-owned firms and private sector firms; and an expansion of the state’s social protection system to reduce the level of hardship experienced by the Egyptian population.

Tunisia: Use smarter conditionality

In Tunisia, Saied is unlikely to walk back his public pronouncements and accept an IMF reform plan. But he could perhaps be quietly convinced to undertake structural reforms targeting the private sector and enabling him to get a grip on state finances – in exchange for financial assistance from a multilateral group of concerned Western actors and Gulf states that are motivated by their political exposure to any Tunisian crash. This approach could provide easier optics, away from the touchy subject of the IMF, by targeting of macro-financial assistance on practical things that will resonate with ordinary Tunisians such as restoring necessary imports. Folded into such an approach would be the restructuring of bilateral and private debts in exchange for reforms to improve help facilitate investment in Tunisia. Both parties could gain what they want under an altered rubric. Saied would avoid a humiliating climbdown that his pride will not allow him to make, while concerned parties can help stabilise the economy through conditioning the financing on measures such as: improving the competitiveness of the private sector by redirecting subsidies to individuals and removing regulations that protect vested interests; removing red tape and facilitating credit to entrepreneurs and helping SMEs grow; designing an industrial plan to expand select industries using money that once went to SOEs; and helping improve the state’s financial health by raising tax receipts through transitioning to more progressive tax regimes. Such changes could also help facilitate mutually beneficial asset sales or greenfield investment in Tunisia.

This kind of conditionality is not only more politically savvy, but it makes better economic sense too. Some of these measures could be tied to particular tranches of financing or debt-forgiveness, while segments of macro-financial assistance could be made conditional on achieving reform milestones that are about ensuring Tunisia being able to properly absorb the assistance. A new deal that helps free up Tunisian resources to focus on industrial planning, and uses the leverage of international actors to help make Tunisia’s private sector more competitive, can then be built upon further by Europeans to the benefit of all. For example, the EU could leverage its large Tunisian expat population to strengthen the economic bonds between the two countries, using credit-based incentives or special investment vehicles to encourage them to use the remittances sent home to instead open up offices for businesses connecting Europe and Tunisia. Regulatory changes would also open the field for private power producers, creating a more fertile environment for European firms to invest in Tunisia’s green energy transition (which would help Tunisia address its reliance on imported fuels). However, the EU will only be able to invest even some of the estimated $27-35 billion needed for such a transition if the Tunisian economy is no longer sinking under debt obligations and has an economy freed from vested interests.[17] Presenting a programme of renewable energy expansion as a way to increase Tunisia’s independence and autonomy could help overcome Saied’s ideological suspicion of private sector-led economic initiatives.

Gulf Arab states: Work to coordinate objectives

In both cases, and particularly in Egypt, the EU will have a greater chance of enforcing its conditions if it has at least partial alignment with Gulf Arab countries. These monarchies do not share the European desire to support political liberalisation and they remain focused on obtaining Egyptian assets in protected sectors such as real estate. Nevertheless, Arab countries have called for economic reforms such as increased tax collection or reduced burdens to doing business that would set economies such as Egypt’s and Tunisia’s on a more sustainable path. European policymakers should coordinate with Gulf officials to ensure their messages to Egypt and Tunisia are aligned as far as possible. They should encourage them to use their influence to promote economic reform, emphasising that economic weakness in North Africa will harm Gulf Arab interests as well as European ones.

*

In both Egypt and Tunisia, the EU has concluded new frameworks for cooperation – the strategic partnership with Egypt and memorandum of understanding with Tunisia – that seek to combine economic support with structural reform, as well as providing for joint action on migration and other areas. But in the case of Egypt, there are reasons to doubt that Sisi is prepared to undertake the full-scale reforms that both the IMF and the EU have called for. And in Tunisia, Saied’s resistance to an IMF deal means that the memorandum of understanding with Tunisia has failed as the basis for economic assistance. The EU has a strong interest in preventing short-term economic instability in both countries. But it should not do this at the expense of essential reforms. A policy that combines economic prescription with political awareness provides the best chance of securing both of these goals.

About the authors

Anthony Dworkin is a senior policy fellow at the European Council on Foreign Relations. He leads the organisation’s work in the areas of human rights, democracy, and multilateralism. Among other subjects, Dworkin has conducted research and written on European policy towards North Africa, European, and US frameworks for counterterrorism, and international cooperation in an era of geopolitical competition.

Camille Lons is a policy fellow and deputy head of the Paris office at the European Council on Foreign Relations, where she works on geoeconomics and relations between China and the Gulf countries.

Tarek Megerisi is a senior policy fellow with the Middle East and North Africa programme at the European Council on Foreign Relations. He has worked with a range of stakeholders over the past ten years, assisting with state transitions following the Arab uprisings.

Acknowledgments

The authors would like to thank Timothy Kaldas for helpful conversations during the research for this paper, and Julien Barnes-Dacey for his comments on earlier drafts. Thanks also to Adam Harrison for editing that improved the paper considerably and to Nastassia Zenovich for designing the graphics.

This policy brief was made possible by support from Fondazione Compagnia di San Paolo.

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[1] Khalid Ikram, The Political Economy of Reforms in Egypt: Issues and Policymaking since 1952, The American University of Cairo Press, 2018, pp. 324-6 (hereafter Ikram, Political Economy).

[2] Ikram, Political Economy, p. 85.

[3] Amr Adly, “A brief history of nation, state, and market”, in Robert Springborg, Amr Adly, Anthony Gorman, Tamir Moustafa, Aisha Saad, Naomi Sakr, and Sarah Smierciak (eds.), Routledge Handbook on Contemporary Egypt (Taylor & Francis, 2023), p. 164 (hereafter Adly, “Brief history”).

[4] Ikram, Political Economy, p. 325.

[5] Adly, “Brief history”, p. 173.

[6] Ikram, Political Economy, p. 94.

[7] Ikram, Political Economy, p. 113.

[8] See graph in Diwan et al. “The Buildup to a Crisis”, p.7.

[9] Diwan et al, “The Buildup to a Crisis”, p.24.

[10] Hertog, S. “Locked Out of Development”, Cambridge University Press, 2022.

[11] World Bank, “Tunisia Economic Monitor”.

[12] World Bank, “Tunisia Economic Monitor”.

[13] Ibid, Same graph on p.7

[14] Ibid.

[15] OECD database, Creditor Reporting System, Gross Disbursements, Constant Prices, USD millions 2022.

[16] World Bank, International Debt Statistics database, external debt stocks, total (DOD, current US$). Counting bilateral debt and multilateral regional funds where GCC lenders are major lenders such as Islamic Development Bank, Arab Fund for Development, OPEC Fund.

[17] World Bank, “Tunisia Economic Monitor”.