by Brandan Martini
On April 10, Saudi Arabia’s King Salman delivered an unprecedented and historic speech before Egypt’s parliament as part of a five-day visit in which Riyadh and Cairo signed numerous agreements across a variety of sectors. King Salman called for Saudi Arabia and Egypt to unite against various threats facing the Arab world, ranging from economic stagnation to the continued rise of terrorism. The visit was significant because of its role in Riyadh’s vision of Egypt serving as a force for regional stability.
These agreements indicate a warming in the relationship between the two states, and they align with Riyadh’s foreign policy strategy of purchasing good will from neighboring states. However, given the Saudi economy’s host of problems in this era of cheap oil, can the kingdom continue to afford such a money-hungry friend as Egypt?
Saudi Arabia has played an especially important role in boosting Egypt’s economy since the ouster of former President Mohammed Morsi in 2013. Soon after the Egyptian military took over the government in Cairo, Saudi Arabia agreed to a $5 billion economic aid package to Egypt in the form of an injection of oil and cash into the country’s central bank. The deals signed by Egypt and Saudi Arabia, which are predominantly economic and strategic, continue the trend of Saudi playing a pivotal role in Egypt’s economy. These plans include heavy Saudi investment in the areas of agriculture, industry, and infrastructure, which is part of a larger push by Saudi Arabia for long-term developmental investments in Egypt. In addition, King Salman also discussed the need for a Pan-Arab defense force, a plan often championed by Egypt’s Abdel Fattah el-Sisi.
The Major Plans
Saudi Arabia is planning a package of $16 billion worth of investments into Egypt’s economy. Although the 2013 Saudi aid basically amounted to a cash donation, these investments are meant to hold long-term value for both countries and will be equally split between the Egyptian government and the Saudi Public Investment Fund (PIF). These investments represent a large financial boon for Egypt, which has struggled to spur economic growth throughout the post-Mubarak era. Political instability and jihadist terrorism have severely damaged Egypt’s foreign investment climate and tourism sector, both of which are crucial to Egypt’s foreign currency needs.
Saudi and Egyptian officials inked an agreement to establish an economic free-trade zone in Egypt’s Sinai region. The Sinai has been a focal point in the rise of militant extremist groups such as Ansar Beit al-Maqdis, an Islamic State offshoot responsible the killing of 224 people in the October 2015 downing of a plane leaving the South Sinai resort city of Sharm el-Sheik. Terrorism in Egypt, the majority of which originates from the restive Sinai, has been one of the most daunting issues faced by Egypt. The establishment of an economic free-trade zone in the Sinai is part of a long-term plan to stabilize and develop the Sinai region economically, mainly through large agricultural developments. The Egyptian government hopes that the addition of millions of new jobs in the near term can steer the unemployed away from militancy.
One of the agreements includes plans for the creation of the joint-venture company, Gosoor ElMahabba, to oversee the investment of $337 million into a six-square kilometer industrial zone surrounding Egypt’s newly expanded Suez Canal. The recent expansion to the Suez Canal costs $8.2 billion and is projected to more than double the $5.5 billion per year revenue the canal generates.
During the visit, Egypt announced the transfer of two Red Sea islands, Tiran and Sanafir, back to Saudi control. Originally, Saudi Arabia gave these islands to Egypt in 1950 amid concerns that Israel might attempt to seize them. The transfer of this territory back to the kingdom caused mass protests in a number of Egyptian cities, with many Egyptians across the political spectrum criticizing Sisi for giving away what many protesters see as Egyptian land. The island of Tiran has been mentioned in relation to plans for a future bridge that would cross the island and span the Red Sea. During his speech, King Salman said that the bridge would be a “qualitative transformation that will increase trade between the two continents to unprecedented levels,” while Sisi added that it marked “a new chapter on the road of Arab joint action,” referencing the long-planned Joint-Arab defense force. However, officials have not yet announced details regarding the timeline of the bridge’s construction.
Due to security issues, a number of states have long opposed the idea of a bridge linking Egypt and Saudi Arabia. The Jordanians and Israelis have voiced concerns about such a bridge enabling militants to travel between the two countries with greater ease. Tel Aviv also fears that any ship sailing with an Israeli flag could become a target.
Can Riyadh Afford this Relationship with Cairo?
Given the global stagnation of oil prices and costly military spending in Yemen and Syria, Saudi Arabia’s policy of maintaining such expensive alliances seems increasingly unsustainable. With much of Saudi Arabia’s economic future in question, the prospect of injecting so much money into Egypt is risky, especially when some of that money has been directed toward Egypt’s Suez Canal project. Although the $8.2 billion expansion of the canal is projected to more than double its $5.5 billion per year revenues, that revenue, in addition to the number of ships crossing the canal, has been stagnant since 2008. This combined with an uncertain political climate, and a Sinai that scares away both tourists and foreign investors, Saudi Arabia is taking a risk by putting so many eggs in Egypt’s basket.
The kingdom’s support of Egypt factors into Saudi Arabia’s long-term plan to balance its oil revenues with foreign investment. If these large-scale investments pay off, it will bring Deputy Crown Prince’s recently declared strategic vision for 2030 that much closer to realization. Additionally, countries like Egypt are increasingly turning to wealthy Persian Gulf sheikdoms and away from the U.S. for investment and financial aid. As the Sunni-Shi’ite conflict intensifies and Washington-Tehran relations slowly thaw, resource-poor Sunni Arab states will grow increasingly dependent on the GCC’s financial support.
Ultimately, Saudi Arabia’s strengthened relationship with Egypt, its largest Sunni ally, will result in much needed capital for Egypt as well as much needed foreign investment opportunities for the kingdom. Whether Saudi Arabia can afford to keep spending in this manner over the long run remains to be seen.
Brandan Martini is a contributor to Gulf State Analytics (@GulfStateAnalyt), a Washington, DC-based risk consultancy.