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Egypt and Pakistan have much in common. They’re large, Muslim-majority states dominated by economically and politically powerful militaries. Both are lower-middle-income countries whose economies, over the past two decades, have trailed behind emerging and frontier markets like Bangladesh, Indonesia, Malaysia, the Philippines, and Vietnam.

For decades, Egypt and Pakistan have also relied on the largesse of Gulf Arab states in times of need. Financial support from Gulf Arab states, always seen as a given, was never tied to economic reform. But in a surprise for Egypt and Pakistan, the days of Gulf inflows without reform are coming to an end.

Riyadh’s Economic Support for Cairo and Islamabad

From 2011 to 2019, Egypt received roughly $92 billion in inflows from countries belonging to the Gulf Cooperation Council (GCC). These sums include aid, investment, and deposits with its central bank.

In recent years, Pakistan — plagued by balance of payments crises — has also been aided by central bank deposits and oil on deferred payment from Saudi Arabia. It’s received similar assistance from the United Arab Emirates (UAE).

There’s ample precedent for such interventions by Riyadh, including in 1998, when U.S. sanctions hit Islamabad after it tested nuclear weapons in response to New Delhi’s. Then Saudi ruler at the time, King Fahd, told Pakistan’s envoy to Riyadh, “We will support you more than you expect of us.” The kingdom provided Pakistan with a four-year, $3.4 billion oil financing arrangement.

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Today, Saudi Arabia and other GCC states remain interested in contributing to economic stabilization efforts in Egypt and Pakistan. Last June, Saudi Arabia agreed to $7.7 billion in deals with Egypt, including for a $1.5 billion wind power project. In January, Saudi Arabia said it would consider expanding its deposits with Pakistan’s central bank. And it’s revived talks on a long-discussed $10 billion oil refinery.

The New Normal

These more recently proposed inflows, however, are taking slower to materialize. The reason is this: Saudi Arabia, as well as Emirati and other Gulf Arab states, are signaling that there are new rules in their bilateral relationships with Egypt and Pakistan. They’re now demanding economic reform. And they’re looking to go beyond aid. Instead, they are keen on acquiring equity in state-owned companies.

Last month, at the World Economic Forum in Davos, Saudi Minister of Finance Mohammed Bin Abdullah Al-Jadaan said, “We used to give direct grants and deposits without strings attached and we are changing that. We are working with multilateral institutions to actually say we need to see reforms.”

Al-Jadaan added, “We are taxing our people, we are expecting also others to do the same, to do their efforts. We want to help but we want you also to do your part.”

So the Saudis and other Gulf states are aligning with multilaterals, like the International Monetary Fund (IMF), in the push to get countries like Egypt and Pakistan to expand their domestic revenue collection by taxing their own people.

Saudi Arabia also appears to be calling for Egypt’s military to reduce its massive footprint in the economy. Commentators aligned with the Saudi government have publicly criticized the Egyptian military’s dominant economic role, triggering a backlash from voices linked to Cairo.

According to Yezid Sayigh, author of an authoritative study on the Egyptian military’s economic empire, the military manages “approximately one-quarter of total government spending in housing and public infrastructure.” Its influence extends beyond those sectors. Pakistan’s military services play a similar role, running housing societies, banks, and energy companies.

These calls by Riyadh-aligned figures for Egypt’s military to retreat from business don’t come out of a vacuum. Egypt’s new agreement with the IMF requires it to reduce the military’s footprint in the economy. Whether that actually happens remains to be seen. But it seems clear that GCC states are backing this new IMF demand.

These calls for the Egyptian military to retreat from the economic domain make sense. So too do demands by Riyadh and the IMF for a political consensus between the major parties in divided Pakistan on their respective agreements.

Military companies crowd out more efficient private sector investment. And Pakistan cannot attract sustained foreign direct investment until it attains macroeconomic and political stability. They are tied.

The Saudis also have their own interests in mind. They and other energy-rich Gulf Arab states are looking to acquire equity in profitable public sector enterprises in Egypt and Pakistan. And they will be engaging their counterparts in Cairo and Islamabad — desperate to liquidate assets to generate foreign exchange — from a position of strength.

GCC states will probably prove to be tough negotiators. The ignominy of this moment should provide the rulers of Egypt and Pakistan with the motivation to reform on their own initiative.

Arif Rafiq is the editor of Globely News. Rafiq has contributed commentary and analysis on global issues for publications such as Foreign Affairs, Foreign Policy, the New Republic, the New York Times, and POLITICO Magazine.

He has appeared on numerous broadcast outlets, including Al Jazeera English, the BBC World Service, CNN International, and National Public Radio.

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