Egypt-Saudi islands deal comes amid structural economic issues

Egypt-Saudi islands deal comes amid structural economic issues

Protests against deal with Saudi Arabia over Tiran and Sanafir islands highlight structural economic issues and political tensions in Egypt.

“The people call for the fall of the regime,” a slogan made familiar during the 2011 uprising in Egypt, rang eerily through the streets of Cairo last month. Defying draconian laws, thousands marched in the streets to protest against President el-Sisi’s agreement to transfer sovereignty of two Red Sea islands—Tiran and Sanafir — to Saudi Arabia. Outraged Egyptians accuse him of selling sovereign territory in exchange for ongoing financial backing from Saudi Arabia. In Egypt, all unsanctioned protests are deemed illegal under a law espoused in late 2013. In the past, security forces have not hesitated to use lethal force against peaceful demonstrators.

Fuming Egyptians insist the uninhabited islands of Sanafir and Tiran belong to Egypt, while Saudi and Egyptian officials contend they belong to the Saudis, who in 1950 asked Egypt to temporarily protect them. Located in the Red Sea, these islands are separated by a mere 4km of water. Tiran sits at the mouth of the Gulf of Aqaba on the Strait of Tiran, a strategically important stretch of water used by Israel to access the Red Sea.

As part of the deal, the two nations plan to build a bridge connecting them across the Red Sea, at an estimated cost of $4 billion.

Following the 2011 uprising and the fall of Mubarak’s authoritarian regime, Egypt has been fraught with unrest. Once considered Egypt’s savior, el-Sisi now faces a series of headwinds, including a growing Islamic insurgency in Sinai, a frail economy, and a deeply embittered youth and democracy advocates, who view him as nothing more than Mubarak’s successor.

Beset by security risks, tourism figures have plunged over the last year. According to states statistics agency CAMPAS, Egypt’s number of tourists have declined by 46.3 percent year-over-year. Egypt’s foreign currency reserves are also under intense pressure, tumbling to $17 billion in April from over $36 billion in 2010.

In face of waning foreign investment and tourism revenues, Egypt has become increasingly creative in a desperate attempt to mitigate its ever shrinking reserves. For example, the Central Bank, led by Governor Tarek Amer, recently relieved capital restrictions on foreign-currency deposits this year, permitting businesses to use dollars acquired from the black market.

On March 14, the Central Bank devalued the pound against the U.S. dollar in an effort to ease the foreign currency crunch that is hindering economic activity and foreign investment. It also announced plans to move towards a more flexible exchange rate policy.

Amer also proposed shrinking imports, which cost the country a whopping $80 billion last year, by as much as 25 percent in 2016. “The largest demand for foreign exchange comes from imports, so these measures are a quick fix to improve the balance of payments,” Amer recently stated in an interview with Bloomberg News. The country’s importers and citizens are already suffering the consequences as, despite high demand, Egypt’s ports turned away several wheat and soybean cargoes earlier this year.

Western and regional powers have long considered Egypt a vital Middle Eastern ally and they will undoubtedly ensure that the Egyptian economy remains afloat. However, Egypt’s economic situation remains far from rosy, and as long as it continues to simply scrape by, criticism of the government’s management of the crisis and therefore risk of unrest is likely to escalate.

About Author

Itziar Aguirre

Itziar currently works as a Research Consultant at JLL, a commercial real estate capital intermediary. She holds an MBA in Accounting and Finance from the University of St. Thomas and an MSc in Comparative Politics from the London School of Economics.