Misfortune to Marginalization: The Geopolitical Impact of Structural Economic Failings in Egypt, Tunisia, and Lebanon

The food, energy, and debt crises in the Middle East and North Africa have exacerbated structural economic weaknesses of low- and middle-income countries—particularly Egypt, Tunisia, and Lebanon—creating mounting pressure on domestic political orders and worsening these countries’ geopolitical marginalization.

Introduction

Low- and middle-income countries (LMICs) in the Middle East and North Africa (MENA) have faced a series of interrelated crises in recent years relating to food, energy, and debt. The war in Ukraine has brought to light disparities in the region, underlining that the situation among Arab countries differs. While rising energy prices because of the conflict have resulted in a hydrocarbons windfall for oil-exporting countries, energy importers such as Egypt, Tunisia, and Lebanon have faced higher energy bills, budget constraints, and social pressures. The increase in energy prices has coincided with a food crisis in the region, which, again, the Ukraine war brought to the forefront by leading to a surge in international commodity and food prices. This has accelerated inflation and caused food shortages, fueling social tensions and political instability in several MENA countries. Meanwhile, the capacity of regional LMICs to address the situation has been severely constrained by the soaring levels of debt they have accumulated, along with rising inflation and currency devaluations.

Three of the MENA region’s LMICs—Egypt, Tunisia, and Lebanon—stand out in this regard. All face structural economic weaknesses, are highly indebted, are greatly dependent on imports of food and energy, and either have negotiated agreements with the International Monetary Fund (IMF) or are in need of one. While the political situation may vary among the three countries, politics has been a central problem in each. Egypt is experiencing illusory stability, Tunisia is being buffeted by the inconsistent decisions of a populist regime, and Lebanon is suffering from a destructive stalemate imposed by a political elite that regards reform as a threat to its power. Leaders in all three countries have engaged in damaging short-termism when addressing the imperatives of reform, with a focus on perpetuating their political survival. In contrast, while other regional LMICs, such as Morocco and Jordan, are facing many of the same problems as Egypt, Tunisia, and Lebanon, they have engaged in a more voluntarist approach toward reform, showing greater resilience to regional food and energy shocks.

The food and debt crises in the LMICs of the MENA region, compounded by the impact of energy shocks, have been thrust into the spotlight because of major events that have exacerbated them, notably the coronavirus pandemic and the Ukraine conflict. However, all these crises are primarily structural in nature and are tied to inherent weaknesses in the economies of the LMICs. For instance, although the food crisis in the MENA region has been commonly associated with the reduction in the supply of certain foods because of the war in Ukraine, it actually derives from a prolonged, enduring predicament that has engulfed the region’s food systems. Similarly, the debt crises that countries such as Egypt, Tunisia, and Lebanon are facing are rooted in the political economy and model of economic development that each of these three countries has pursued.

Because the food, energy, and debt crises are structural, they are profoundly reshaping domestic orders as well as the regional political and economic balance of power. In Egypt, Tunisia, and Lebanon, as well as other energy-importing countries, these crises have exacerbated financial tensions that are pushing incumbents into policy choice dilemmas. Regimes are reluctant to implement reforms, as these will impose social and political costs, threatening their constituencies. At the same time, refraining from carrying out reforms and structural readjustments will only aggravate these countries’ dire financial circumstances, creating unsustainable conditions. Presented with such alternatives, leaders in many countries tend to favor the status quo while seeking to dilute reforms.

From a regional geopolitical perspective, these crises have imposed economic and geopolitical realignments that are bolstering hydrocarbon exporters, while increasingly marginalizing energy-poor states. The dependency of energy-importing LMICs on hydrocarbon-exporting countries for aid has undermined their foreign policy autonomy because of the need to toe the line for their funders, or at least satisfy their demands.

The Structural Weaknesses of Arab LMICs

The economies of LMICs in the Middle East and North Africa, especially those of Egypt, Tunisia, and Lebanon, suffer from a series of structural deficiencies. That explains why the food, energy, and debt crises these countries have been facing cannot be attributed simply to the repercussions of the Ukraine conflict or the coronavirus pandemic. It is only by addressing these deficiencies that each of these countries can overcome its difficulties. However, throughout the region, the hard choices imposed on leaders have instead led to situations of deadlock, which will only exacerbate the financial and economic conditions in these countries down the road.

Four Interconnected Reasons for the Food Crisis in LMICs

High food prices, food shortages, and (in some cases) long queues for bread have been the norm in several countries in the MENA region in the past year. This was especially true after the outbreak of the Ukraine war, which led to supply chain disruptions, rising food prices, and restricted access to food. Yet the conflict has been only part of the story, and its impact on food has been uneven among countries in the region. The LMICs have been hit harder than the Gulf states, which expanded their storage capacity and investment in international supply chains after the global food crisis of 2007–2008.1 The current food crisis in the LMICs has been the result of four interlinked problems afflicting the region’s food system: food insecurity; the shift to import dependency, and a related decline in food production for local consumption; the unequal treatment of rural areas and agricultural workers; and a water and environmental crisis.

The Problem of Food Insecurity

The first major problem afflicting food systems in the LMICs of the MENA region is food insecurity—the lack of physical and economic access to enough safe, nourishing food to ensure normal growth and healthy development. This problem has grown in the past decade. In 2021, around 154.3 million people in the region were affected by food insecurity—an increase of 11.6 million people from the preceding year.2 More than a third of the MENA region’s population was moderately or severely food insecure, with no regular access to food.3

The coronavirus pandemic beginning in 2020, and the ensuing supply-chain disruptions, led to rising food insecurity, a situation that was further exacerbated by the start of the conflict in Ukraine in February 2022, which coincided with the economic and financial crises hitting several MENA countries. Ukraine and Russia are major exporters of grain and agricultural products. Prior to the conflict, the two countries were significant suppliers of wheat and maize, contributing 20 and 30 percent of global exports respectively. 4 They were also producers of nearly 80 percent of international exports of sunflower seed products.5

The Ukraine conflict has, therefore, caused significant disruptions in the global food trade and has had a notable impact on food security in the MENA region, given the high levels of food import dependency by MENA countries. The region is the world’s largest grain importer, and half of its imports of wheat—a major ingredient in the food baskets of Arab countries—came from Russia and Ukraine before the war.6 Levels of wheat import dependency are especially high in Egypt and Lebanon, where reliance on both Ukraine and Russia for wheat imports stood in 2020 at 84 percent and 68 percent, respectively (See figure 1 below).7 As a result, LMICs in the region have been acutely vulnerable to the war’s consequences, which disrupted food supplies and pushed up food, fertilizer, and energy prices that increased import bills and negatively affected their trade balances and foreign exchange situation. This strained MENA economies that had already been ailing economically and financially.

Food price inflation in turn, along with the depreciation of local currencies, has led to a decline in consumer purchasing power, particularly in Egypt, Tunisia, and Lebanon. The situation has strained access to food, with the poor and vulnerable, including refugees, at the greatest disadvantage. According to a survey conducted in 2021–2022 in nine of the ten MENA countries, over 50 percent of the population expressed worries about depleting their food supply before having the opportunity to replenish it.8

For example, in Egypt, food prices tripled between 2016 and 2019 following the economic reforms the government had undertaken, in which the Egyptian pound lost 50 percent of its value.9 The rise in international commodity prices after the beginning of the war in Ukraine, as well as currency devaluations in March and October 2022, led to a further increase in food prices.10 In November 2022, Egypt’s food inflation rate was estimated at 30.9 percent, the highest level recorded since November 2017.11

Inflation has also been on the rise in Tunisia. In December 2022, food prices were 14.6 percent higher than in December 2021.12 This increase resulted in shortages of essential food items such as milk, coffee, sugar, and subsidized vegetable oil. Food shortages are still a reality in Tunisia, mainly because of the critical condition of the country’s public finances and debt crisis, which has limited its ability to import essential food products.13

Food price inflation remains highest in Lebanon, however, where the upsurge in international food prices came on top of a severe economic and financial crisis that hit the country starting in late 2019. This led to a currency devaluation, in which the Lebanese pound has lost more than 98 percent of its value, and hyperinflation, with a 500 percent increase in prices between December 2018 and October 2021.14 Lebanon ranks among the top ten countries in the world hardest hit by food price inflation—between January 2023 and April 2023, Lebanon’s food price inflation was the highest globally in both nominal and real terms.15

Import Dependency and the Decline in Food Production for Local Consumption

Another important structural deficiency that explains the current food crisis is the shift in food regimes to import dependency, and the ensuing problem of domestic agricultural production, especially the decline in production to meet local demand. This largely began during the 1980s, when production of and access to food became increasingly internationalized.16 More specifically, the system of commercial capitalism, along with the economic liberalization policies adopted since the 1970s by MENA countries and the incorporation of local agricultural systems into the global economy, motivated states to push for export-oriented, capital-intensive agricultural products that could bring in hard currency.17 Export agriculture has therefore been favored in many countries over the development of agriculture for local food consumption, as the focus of MENA countries has been on optimizing their competitive advantages. States have therefore allowed the international market to determine domestic agricultural policy, with agricultural sectors mainly focused on the large-scale cultivation of cash crops rather than on subsistence farming or local consumption.

This orientation toward producing cash crops has adversely affected domestic food supplies and production, undermining the ability of countries that have become agricultural exporters, such as Egypt, to feed their own population.18 It has also led to distorted incentives and inefficiencies in agricultural production in some countries, with a continuous change in planted cash crops based on market demand.19 For example, in Lebanon, trees are frequently uprooted and replaced to accommodate fluctuating market needs. During the current crisis, for instance, farmers have replaced apple trees, which require expensive fertilizers purchased in scarce U.S. dollars, with apricot trees, which are more cost-effective to cultivate.20

The promotion of export agriculture has coincided with increasing levels of dependency on food imports. Indeed, Arab nations rank among the largest importers of food globally. On average, over 50 percent of the region’s calorie consumption comes from imported food, and this proportion is projected to increase to 64 percent by 2030.21 In Jordan, Kuwait, Lebanon,22 Saudi Arabia, the United Arab Emirates (UAE),23 and Yemen, more than 80 percent of the food consumed is imported. Cereal import dependency is estimated to be over 90 percent in Jordan, Kuwait, Lebanon, Libya, Oman, Saudi Arabia, and the UAE.24 Overall, while the MENA region comprises only 5 percent of the global population, it imports over a quarter of the milk and wheat available in international markets, and spends 4 percent of its GDP on food imports annually.25

This heavy reliance on food imports has contributed directly to food insecurity and the food crisis in the MENA region. It has increased countries’ vulnerability to domestic shocks (such as currency devaluations or economic collapses), as well as to external shocks, such as the war in Ukraine, supply-chain disruptions, and price fluctuations. Dependency on food imports has also represented a “geopolitical liability” to countries, and may undermine their political autonomy.26 Indeed, the global food trade has often been leveraged by powers to advance foreign policy objectives, such as during the two world wars 27 or when the United States considered imposing grain embargoes against the Arab world in response to the Arab oil boycott during the October 1973 Arab-Israeli war.28

The Inequality That Rural Areas and Small Farmers Face

The deficiency of food production in the MENA region is largely tied to another key problem afflicting the food system, this one related to government policies with regard to rural areas and agricultural workers. The urban bias of most policymakers29 and their neglect of the agricultural sector and rural areas have heavily affected domestic agricultural production throughout the region and contributed to food insecurity.30 Low investment in agriculture and increasing urbanization have also led to the loss of agricultural land, which has further undermined production,31 while conflicts in some countries, such as Iraq, Syria, and Yemen, have made access to land very difficult.

The bias against rural areas has gone hand in hand with the displacement and devaluation of agricultural labor, another important structural dimension that helps to explain the food crisis in the region. For example, in Tunisia, starting in the 1970s, the government began neglecting rural areas while increasing its support for coastal cities and the services and light industry sectors.32 These policies prompted hundreds of thousands of Tunisians to migrate from rural areas to cities, prompting a decline in the availability of agricultural laborers, especially among young people, and the abandonment of large tracts of land.33 As a result, more than 45 percent of agricultural laborers were aged over sixty in 2022, and no more than 10 percent of them were younger than thirty-five.34 Indeed, one of the main obstacles Tunisian agricultural laborers have faced since the 1980s is limited access to land and credit, 35 which has resulted from the inadequacy of funding mechanisms from both public and private sources.36 Moreover, while large farmers are spared from paying irrigation and water taxes, the government does impose such taxes on small farmers,37 only accelerating their growing impoverishment.38 An increasing number of small farmers have been compelled to abandon farming because of the lack of support they receive.39

Similarly, in Lebanon, the civil war of 1975–1990, state policies, and modes of land ownership and land distribution have led to massive displacement from rural areas to urban centers.40 This has brought on labor shortages in the agricultural sector and a loss of indigenous knowledge of sustainable food production practices. And while the decline in agricultural labor has been offset by hiring migrants and refugees, the increasing dependency on migrant workers has only further devalued agricultural labor and increased labor exploitation, including that of children, as most farmers are seasonal workers and employed informally.41 Moreover, since the category of “farmer” does not have a legal status in Lebanon, agricultural workers do not enjoy decent working conditions or social protection, and face discrimination in terms of remuneration and treatment.42 These circumstances, along with the neglect of rural areas, have led to a lack of investment in technological innovation when it comes to food production, contributing to low productivity and an environmental crisis.

Another key problem that agricultural laborers must deal with relates to the marginalization, exclusion, and inequality they experience as a result of the economic systems in each of these three countries. The promotion of capital-intensive, export-oriented agriculture in Egypt, Tunisia, and Lebanon has meant that activities revolve around capital accumulation patterns that benefit national and foreign investors involved in large-scale farming, while devaluing and excluding small-scale farmers.43 For example, in Egypt, the emphasis on promoting large-scale agriculture intended for export, which has been consistent throughout the presidencies of Hosni Mubarak and Abdel Fattah el-Sisi, has entailed favoring major Egyptian and foreign investors, particularly Gulf investors, by granting them easy and privileged access to resources.44 This is largely reflected in the ongoing expansion of Gulf investments in Egyptian agriculture (a trend dating back to the Mubarak years) and the distribution of large plots of land to Gulf investors, while the needs of small-scale farmers have been largely neglected.45

The neglect of small farmers is also evident in their exclusion from the formulation of agricultural projects and policies. For example, since the presidency of Anwar Sadat, rural areas in Egypt have been disregarded in government strategies to promote food production.46 Moreover, despite the proliferation of agricultural projects under the Sisi regime, small farmers and agricultural workers remain marginalized and absent from these projects. Rather, the projects have been dominated by the president, military-owned companies, and major national and foreign investors, further reducing the input of small farmers in important decisions affecting the agricultural sector.47

In Lebanon,48 Tunisia,49 and Egypt,50 a small number of big investors and landlords control large swaths of land, while small-scale farmers, who make up a majority of farmers, have access only to small, fragmented landholdings. This has entrenched inequalities and the marginalization of small farmers by empowering larger landholders and merchants,51 while further concentrating wealth and power in the hands of a few.52

For example, changes in land tenancy in Egypt followed the implementation of Law 96 of 1992, which nullified legislation established by former president Gamal Abdel Nasser granting long-term leasing rights to small farmers.53 This led to the displacement of over 1 million tenants and an over 400 percent increase in rents, causing great disruptions in productivity.54 Such legal changes to land ownership, in conjunction with economic liberalization, exacerbated land concentration. For instance, between 1990 and 2000 the proportion of farms smaller than 1 feddan (4,200 square meters) increased from 36.7 percent to 48.5 percent of all land. A majority of Egyptian farmers, around 93 percent, work on plots of land smaller than 5 feddans (21,000 square meters), whereas a mere 3 percent of landowners possess nearly 35 percent of all agricultural land, with an average holding of 10 feddans (42,000 square meters) each.55 This disparity in land distribution has exacerbated inequalities between small farmers and large capitalists, contributing to the overall impoverishment of farmers, who cannot guarantee their own food security. This disparity has also affected local production, since large capitalists are export-oriented while small farmers focus largely on meeting the demands of the local market.

Disparities in land ownership have also prevailed in Tunisia, where access to land for small-scale farmers has deteriorated since the country won its independence from France in 1956.56 In the 1970s, especially after the adoption of structural adjustment policies, state lands were no longer granted to farmers’ cooperatives as they had been previously. Instead, they were given to private investment companies and large farmers.57 This coincided in the 1980s with a shift toward crops relying on large-scale mechanized irrigation, which required fewer agricultural workers.58 Under president Zine el-Abidine Ben Ali (1987–2011), patronage and corruption prevailed as those closest to the regime were given access to the most fertile lands and were granted monopolies over the export of agricultural products, exacerbating inequalities.59 For instance, in 2004–2005 (the years for which the latest figures are available), 88 percent of Tunisian farmers cultivated 39 percent of agricultural land, while 1 percent cultivated almost a quarter of the land.60 This marginalization of small farmers and food producers had important consequences as it has led to a loss of traditional sustainable farming practices, exacerbating the current environmental crisis in the region.

An Environmental and Water Crisis

Throughout the region, the promotion of agriculture for export and the capital-intensive nature of production have led to an environmental crisis because of unsustainable food production practices. The heavy use of agrochemicals,61 such as synthetic fertilizers and pesticides, to maximize crop yields and profits has undermined land productivity, caused soil salinization, and led to environmental damage as chemicals have leached into and contaminated soil, negatively affecting agricultural productivity.62

Environmental problems have also arisen because of the growing dependency on monoculture farming.63 This is a practice of large-scale commercial farming that involves planting only one crop in a large area of land, which depletes the soil of essential nutrients and contributes to the loss of biodiversity. This raises the risk of crop failure, reduces agricultural productivity, causes land degradation, and increases the likelihood of food shortages.64 Land degradation has also been caused by major hydrological projects to accommodate capital-intensive, large-scale farming.65 As a result, between 1961 and 2013, per capita arable land in the Arab world decreased by 70 percent.66

The crisis of environmental sustainability is most clearly reflected in the growing deficit and contamination of water resources in the region. For example, in Lebanon, the use of agrochemicals, excessive groundwater extraction, and the release of untreated sewage, industrial effluents, and agricultural runoff have led to water pollution.67 One estimate is that over half of the country’s water resources are contaminated.68 Water pollution not only affects drinking water quality,69 but also adversely impacts agricultural production and food safety, since the contaminated water is largely used for irrigation—without being treated, which causes the bacterial contamination of irrigated plants.70

The problem of water contamination has been exacerbated by water shortages throughout the MENA region as a result of inefficient irrigation systems, poor water management structures, and overexploitation of groundwater resources, which collectively have led to groundwater and aquifer depletion.71 The region has the lowest availability of freshwater resources per person in the world. At present, it has per capita water availability of 1,100 cubic meters annually, whereas the global annual average stands at 8,900 cubic meters.72 However, forecasts suggest that this may decline to 550 cubic meters by the year 2050.73

For instance, in the past four decades Lebanon has seen a decrease in surface water resources of more than 55 percent, and a decline in discharge from the Litani, Damour, and Kabir rivers of 40 percent.74 Similarly, in Egypt, projects geared toward growing agricultural products for export, such as the New Valley, or Toshka, irrigation project or the Sharq al-Owaynat land reclamation project, are depleting water resources and jeopardizing their long-term viability, especially given the substantial reduction in the Nile’s waters and in non-renewable groundwater in various regions.75

The crisis of environmental sustainability in the MENA region is being further exacerbated by climate change, as aridity and periodic droughts have become endemic features of the region. According to projections, the Middle East and North Africa will face the most severe impacts of climate change as a result of reduced precipitation and rising temperatures, which will have major consequences for existing agricultural systems and further strain limited resources. For example, because of dryness in the winter of 2021–2022, wheat yields were below average in central Tunisia, Morocco, Syria, and Iraq.76 In Tunisia, which received only half its usual average rainfall after September 2022, the dam filling rate stood at just 30.3 percent in 2023, in contrast with an average of 53.1 percent in the previous three years.77 The impact on cereal production has been acute, with expectations of a drop from 7.5 million quintals in 2022 to a mere 2.5 million in 2023.78

Countries that rely heavily on rural economies and dryland agriculture will be particularly vulnerable to climate change, as they are highly sensitive to shifts in seasonal weather patterns. This means that the rural poor, who depend heavily on agriculture and have a limited capacity to adapt, will be disproportionately affected by these changes in weather. Overall, projections suggest that agricultural production could decrease by 21 percent by 2080, with potential losses reaching up to 40 percent in Morocco and Algeria.79

Structural Vulnerabilities and Energy Shocks in Arab LMICs

The energy shock caused by the war in Ukraine revealed significant structural vulnerabilities already present among hydrocarbon-importing LMICs of the MENA region. These weaknesses primarily revolved around two main challenges. First, they highlighted pressure that higher oil and gas prices placed on costly energy subsidy regimes in the region. And second, they showed the limited progress that Middle Eastern and North African countries have made in transitioning to renewable energy sources and diversifying their energy mix, resulting in a continuing high level of dependency on hydrocarbons.80

During the six months that followed the outbreak of the Ukraine war, oil and gas prices surged noticeably. Oil prices fluctuated between $80 and $122 per barrel—significantly higher than prices during the period from 2014 to 2021, after prices had decreased over the previous decade.81 Natural gas prices, in turn, tripled during the six months after the Russian invasion, before returning to pre-war levels in 2023.82 However, the energy shock not only impacted prices, but also exacerbated energy security risks, bringing uncertainty to global energy markets and the investment landscape because of the sanctions imposed on Russia, a major energy producer.83 This means that the long-term effects of the energy shock on political economies in the MENA region are likely to persist.

The energy shock had another major regional impact in widening the economic divide between net energy exporters and importers. It strengthened major hydrocarbon exporters, among them the Gulf Cooperation Council (GCC) states, and helped stabilize large oil-rich countries such as Algeria, Iraq, and Libya. In parallel, it exacerbated preexisting structural deficiencies in energy-importing countries, namely Egypt, Tunisia, and Lebanon. While major exporters took advantage of this windfall economically and politically, energy-importing countries had to turn to the International Monetary Fund (IMF) for assistance because of their deteriorating fiscal situations. Hydrocarbon exporters also benefited from the effort of European countries to substitute the Russian oil and gas they had consumed with oil and gas from MENA exporting countries, notably Algeria,84 Libya,85 Qatar,86 and the UAE.87 This led to the signing of new energy deals and investments to boost European hydrocarbon supplies from the MENA region.

According to the IMF, Middle Eastern countries—especially the Gulf states—will continue to benefit from high oil and gas prices and opportunities to ramp up their market shares. Oil revenues are expected to reach $1.3 trillion over the next four years.88 In the case of Algeria, which is resource-rich and labor-abundant, rising export earnings allowed the country in 2022 to achieve its first current account surplus since 2013.89 As a result, the country’s parliament approved in 2023 the largest budget in Algerian history, with a 25 percent increase from 2022 levels and measures to consolidate short-term social stability—higher salaries, unemployment compensation, and expanded social safety nets.90

In Iraq, after several months of domestic tensions in 2022, the oil windfall permitted the country to enjoy a level of stability not seen in the past two decades.91 This could be attributed to a collective desire among various political factions, particularly within the Shiite community, to restore and maintain civil peace. In June 2023, Mohammed Shia al-Sudani’s government passed the largest budget in Iraq’s history through the parliament, which was intended to finance the expansion of essential services, including electricity and water provision, massive public-sector hiring, and the construction of new infrastructure and housing in major cities. In the short term, this ambitious budget will contribute to consolidating a fragile political settlement through rent distribution. However, the high level of spending could be destabilizing in the future.92

In sharp contrast, energy importers in the MENA region have faced significant misfortune since 2022 due to the surge in energy prices.93 Among them, Egypt and Tunisia were particularly hard hit as they were still struggling with the aftermath of the coronavirus pandemic and a decade of weak economic growth. Egypt’s energy import bill exploded, rising from $8.5 billion in 2021 to $13.5 billion in 2022; it is estimated that it will stabilize at $14 billion in 2023.94 The energy subsidy budget increased from 0.3 percent of GDP in 2021 to 0.8 percent in 2022, and to 1 percent in 2023. Similarly, in Tunisia, rising energy and commodity prices led to a sharp deterioration in the country’s external accounts and public finances situation. The current account deficit widened from 6 percent of GDP in 2021 to 8.5 percent in 2022 because of the rising import bill.95

In both countries, the constrained fiscal space limited the ability of their governments to engage in public-sector hiring, which has historically played a major role in stabilizing their social contracts. Consequently, unemployment in Egypt and Tunisia remains high, especially as Gulf countries, in favoring hiring their own nationals for their labor markets in the past decade, have had a limited capacity to absorb surplus labor from LMICs. This, coupled with declining investments from Gulf countries in LMICs—especially after oil prices fell in the second half of 2014—has further tested social contracts there.96

The war in Ukraine has also had dramatic consequences in Lebanon, as the country had already been grappling with hyperinflation since it defaulted on its foreign debt in March–June 2020. As a result, the population’s purchasing power deteriorated precipitously. In 2021, Lebanon witnessed severe shortages due to distributors holding back stock while awaiting an official rise in prices as subsidies were gradually lifted. Smuggling of fuel to Syria, where prices were higher, further compounded the fuel crisis, which negatively affected the state’s ability to provide essential services, such as healthcare, to the population. The fuel and electricity shortages also forced Lebanon’s largest hospitals to reduce their activities and people had to wait in lines for hours to fill their cars with gasoline out of fear of rising prices after the lifting of subsidies in summer 2021.97 This crisis also severely undermined the government’s capacity to provide electricity, increasing the public’s reliance on private neighborhood generators. Not surprisingly, thousands of businesses had to close down because of the energy crisis.98

The energy shock exposed significant structural weaknesses in energy-importing countries. First, energy subsidy reform has proven to be challenging for many of them. The sharp rise in energy prices brought to light the complexities and resistance associated with reducing or eliminating energy subsidies. These subsidies often strain government budgets, discourage efficient energy use, and are politically sensitive because of concerns that removing them may lead to public unrest and social instability. Second, the MENA region’s slower progress in transitioning to sustainable energy sources has left it heavily reliant on hydrocarbons. Despite increasing global awareness of the need for cleaner energy solutions, the region’s dependency on fossil fuels has hindered its ability to diversify energy resources and potentially adjust the supply side to address increasing energy demand. This dependency on hydrocarbons not only impacts energy security but also makes the region vulnerable to fluctuations in global oil and gas prices.

Throughout the MENA region, the subsidization of energy has been a prevalent practice for decades.99 Energy importers have adopted this approach, offering electricity, natural gas, and gasoline to households and businesses at prices significantly below the global market average. Energy subsidies have become a cornerstone of political stability and a defining aspect of the social contract of many energy-importing LMICs. While the intentions behind these subsidies—such as fostering industrial growth and reducing social inequalities—are legitimate, they have also had negative consequences. Subsidies lead to excessive hydrocarbon consumption and encourage businesses to focus on rent-seeking energy-intensive activities.100 They also strain government finances, diverting funds away from crucial public goods such as expanding infrastructure, healthcare, and education.101

However, despite this, energy subsidies have been difficult to reform. In both Tunisia and Egypt, the partial adjustments to subsidy regimes that have occurred since 2011 were carried out under great fiscal pressure. In Egypt’s case, despite a series of reforms between 2014 and 2019, the authorities have been unable to phase out energy subsidies. In July 2014, the reform of fuel subsidies provoked a 78 percent surge in gasoline prices when compared to 2013, and a 64 percent increase in diesel prices. This impacted most consumers, especially low-income households.102 The Sisi administration implemented subsidy reductions for several energy-intensive industries such as cement, fertilizer, glass production, and ceramics. The decision was driven by the fact that fuel subsidies alone accounted for over a fifth of the 2013 budget. The reforms were aimed at addressing the budget deficit and creating fiscal space to tackle rising unemployment and slow economic growth.

In late 2016, in response to IMF conditions, the government engaged in another round of price increases for electricity and fuel, leading to an agreement over Egypt’s IMF program. During that period, the government implemented a targeted energy subsidy regime instead of the old universal one, and implemented price hikes of 30–50 percent for bottled gas and electricity supplies, with relatively lower increases for the business sector.103 However, the shift in the subsidy regime did not improve living conditions for the poor, who were supposed to be the main beneficiaries. Indeed, while the reduction of energy subsidies resulted in savings equivalent to approximately 5.4 percent of GDP, there was a minimal increase in social pensions, including cash transfer programs, to the poor. In 2021, social pensions only rose by 0.07 percent of GDP, and by 2023 they had only increased to 0.3 percent of GDP.104 This is significantly below the average of 0.9 percent for countries in the lower middle-income category (to which Egypt belongs). It also falls far short of the already low average for the MENA region, which is 0.42 percent of GDP.105

Despite the substantial reduction in Egypt’s energy subsidy budget, which declined from 5.72 percent of GDP in 2013 to 0.3 percent of GDP in 2021, the efforts to phase out subsidies continued.106 However, the impact of the Ukraine war on oil and natural gas prices led the government to extend the period for subsidizing electricity, though it had previously planned to cease doing so by the end of 2022.107

In Tunisia, the issue of energy subsidy reform has always been highly political. Over the past decade of democratization, protests and public pressure have consistently thwarted attempts by successive governments to implement reforms. As a result, the energy subsidy budget increased annually by around 15 percent between 2010 and 2020, as short-lived governments abandoned reform efforts when confronted with social discontent.108 In 2014, the IMF recognized the significant implications of removing energy subsidies, including the potential rise in price levels, the impact on the competitiveness of local energy-consuming industries, and the vulnerability to global market price fluctuations.109 Consequently, the organization recommended introducing an automatic price adjustment mechanism to gradually align domestic prices with international ones. However, its implementation has been inconsistent, with governments opting for discretionary applications because of their fear of further social dissatisfaction.

The price shock triggered by the war in Ukraine led to a 129 percent increase in Tunisia’s energy subsidy budget between 2021 and 2022, compelling the government to take action. In 2022, fuel prices were increased five times, leading to a cumulative 20.4 percent rise during the year.110 Additionally, electricity prices rose by 12 percent and natural gas by 16.6 percent.111 However, the government refrained from implementing further automatic price adjustments because of concerns surrounding the referendum on a new constitution following President Kais Saied’s seizure of power in July 2021 and the legislative elections of December 2022. The regime’s popularity and legitimacy deficit contributed to the decision to freeze price adjustments. Since the start of 2023, there have been no further fuel price increases, as authorities fear that such actions will disrupt social stability. Despite a drop in international oil prices, the average price of one liter of gasoline at the pump in Tunisia remained close to 55 percent of the international price in May 2023. Consequently, the budgetary cost of the subsidy has notably increased in the past two years, reaching nearly 10 percent of GDP.112 The complexity and volatility of Tunisia’s political landscape have hindered effective energy subsidy reform in the country.

Since the financial collapse in 2019, Lebanon’s economy has continued its descent into the ashes. The central bank, Banque du Liban, had subsidized fuel, wheat, and medicine by keeping these products at the country’s pegged currency rate, which was 1,507 Lebanese pounds to the U.S. dollar until January 2023, and was devalued to 15,000 Lebanese pounds to the U.S. dollar in February 2023.113 However, given the dwindling supply of foreign currency, the central bank announced in summer 2021 that it would gradually lift fuel subsidies, and in September 2022 it lifted all remaining fuel subsidies. This decision led to higher fuel prices and increased pressure on the local currency, which continued to lose value as the economic crisis became entrenched. As a consequence of this, gas station owners started pricing gasoline and other fuel products at the country’s “parallel market rate,” leading to a further deterioration of the population’s standard of living.114

By the end of 2022, Lebanon’s crippling economic and financial crisis had plunged 60 percent of its population into poverty.115 As the country’s finances worsened, its subsidy system crashed. Currently, more than 145,000 Lebanese households living in dire poverty receive monthly cash assistance through direct electronic transfers.116 However, there remains a substantial gap in addressing the needs of the 220,000 households that are enduring extreme poverty.117 To bridge this gap, it is imperative not only to extend the reach of the social safety net, but also to augment public expenditures on social assistance, which would encompass cash transfers and social support services.118

Contrary to the official narrative, in Egypt and Tunisia, as in Lebanon, the hesitancy to reform energy subsidies goes beyond concerns about public unrest. There are also significant vested interests involved, with certain categories of society profiting from the subsidization of energy, specifically politically connected businessmen in Tunisia and the armed forces in Egypt. These groups have emerged as influential lobbies opposing substantial reform because they hold considerable sway in sectors that benefit directly from energy subsidies.119 Moreover, the existing subsidy regimes heavily influence their investment choices. The fact that the process of phasing out energy subsidies has encountered resistance over the course of a decade underscores the formidable veto powers wielded by politically connected actors. These vested interests have played a pivotal role in shaping the outcomes of subsidy-related policies, highlighting the challenges of implementing substantial energy-sector reform.120

Many companies, especially those in energy-intensive industries, are unable to adapt easily to reform measures, which leaves them with limited options. This can include accepting lower profit margins, substituting energy products, and becoming more resource efficient, all of which are difficult and costly to achieve. Or it can involve increasing prices, which might feed an inflationary trend. Transitioning toward a fairer social contract that replaces subsidies with income support mechanisms also poses major challenges. Not only do politically connected interest groups resist such changes, the state’s weak capacity to establish an efficient infrastructure of social safety nets and cash transfer mechanisms also hinders progress. This is typically the case in Tunisia.

The challenges involved in reforming subsidy regimes often lead governments to favor short-term solutions. This is especially true given the significant reliance of key economic sectors on hydrocarbons, along with the limited progress in energy transition. The transportation sector is a good example. In Egypt, transportation is the largest consumer of oil products, at 57 percent of total consumption, followed by construction at 14 percent, industry at 13 percent, and the power sector at 11 percent.121 Similarly, in Tunisia, transportation accounted for 51 percent of energy consumption in 2021, followed by industry at 23 percent, and households at 21 percent.122

Across these countries, the fact that transportation sectors have the highest energy consumption makes subsidy reform more difficult to implement. The reason for this is that the cost of transportation has a direct impact on inflation, industry expenses, and the overall cost of living. Additionally, reforming energy subsidies requires a far-reaching overhaul of public policies relating to transportation, which can be complex and requires an approach that is both strategic and comprehensive. Addressing high energy consumption in transportation sectors is critical for promoting sustainable and efficient energy use. This involves not only subsidy reform but also investment in connectivity, urban mobility, and alternative energy sources for improving and expanding public transportation in order to reduce reliance on energy-intensive modes of transportation.

A second structural weakness highlighted by the energy shock is the limited success of LMICs to significantly diversify their energy mix. Among LMICs in the MENA region, only Jordan and Morocco have made substantial progress in this regard, surpassing Egypt, Tunisia and Lebanon (see figure 2). In Jordan, the Renewable Energy Law of 2012 set a target of securing 10 percent of the country’s energy mix from renewables by 2020, primarily from wind and solar power sources.123 Remarkably, this goal was reached and surpassed, with solar and wind power accounting for 20 percent of the mix. This has strengthened the country’s resilience to energy shocks. Jordan aims to further expand the share of renewables to 30 percent by 2030, demonstrating its commitment to renewable energy development. Similarly, Morocco has made strides in diversifying its energy production. The share of renewables in energy generation rose from 10 percent in 2012 to nearly 20 percent by 2021, before the outbreak of the Ukraine war.124

In contrast, Egypt, Tunisia, and Lebanon have lagged behind in transitioning to renewables. In the past decade, Egypt’s share of renewables in the electricity production increased from 9.36 percent in 2011 to only 12 percent in 2022.125 Tunisia is also facing significant challenges, with renewables representing a mere 4 percent of electricity production in 2021.126 Lebanon moved from 5 percent of its electricity coming from renewables in 2011 to 9.38 percent in 2021.127 This positive evolution was important as the country’s economic and financial crises forced many people to invest in solar power because of the prohibitive cost of fossil fuels. However, the shift to solar power has been largely haphazard, with limited supervision or regulation by state institutions, which is important to avoid future environmental problems.128 For Egypt, Tunisia, and Lebanon, closing the gap in renewables is crucial so that they can improve their energy security, reduce their dependency on fossil fuels, and mitigate the impact of energy price shocks.

A Debt Crisis That Was Predictable

The current debt crisis in Egypt, Tunisia, and Lebanon has been long in the making. Regionally, debt ratios, or the percentage of public debt to GDP, began increasing in MENA countries after the 2008 global financial crisis (see figure 3), and this trend accelerated further after the Arab uprisings of 2010–2011. The rise in debt ratios was driven largely by expansionary fiscal policies adopted by Arab regimes and a decline in economic growth rates during that period. In 2019, public debt to GDP ratios exceeded 65 percent in Egypt, Tunisia, and Lebanon—a level regarded as substantially risky for developing countries.129 These high debt ratios made the MENA countries especially vulnerable to the external shocks that hit global markets in the years that followed.

When the coronavirus pandemic struck in 2020, for instance, it caused a severe region-wide economic downturn, prompting MENA governments to intervene to assist businesses and households. This increased state expenditures, but it also coincided with reduced government revenues, leading to wider fiscal deficits. The situation became worse following the outbreak of the Ukraine war, when high levels of import dependency on food and fuel raised the import bills of LMICs, adding to their deficits and debt. At first, countries increased subsidies to ease the impact on households. By then, Egypt, Tunisia, and Lebanon had debt ratios surpassing 80 percent. Moreover, as of February 2022, in an attempt to reduce their trade deficit, increase their foreign currency reserves, and curb the soaring inflation rates driven by energy and food prices, a number of MENA countries devalued their currency and increased domestic interest rates.130 With interest rates surpassing economic growth, and fiscal deficits very high, the countries’ debt dynamics quickly deteriorated.131 This situation exacerbated Lebanon’s financial turmoil, as the country had already defaulted on its foreign debt in 2020, and it created greater uncertainty about Tunisia’s and Egypt’s debt sustainability.

As with the food crisis, the debt crisis that MENA countries face is structural and is mainly a consequence of the model of economic development that countries such as Egypt, Tunisia, and Lebanon have adopted. This model is characterized largely by underinvestment in productive sectors, the excessive growth of services, the promotion of speculative investments (particularly in real estate) largely funded by debt financing, and the channeling of rent streams from society to a small group of well-connected elites.

For example, the current debt crisis in Egypt, where the debt ratio is more than 88 percent of GDP,132 is rooted in the new version of Egyptian state capitalism spearheaded by the Sisi administration, as well as in the nature of Egypt’s political economy. Specifically, after Sisi came to power in 2013, Egypt’s political economy was characterized by a reconfigured ruling coalition that consisted predominantly of a limited group of coercive state entities.133 The strength of this coalition revolved around creating an economy that benefited select privileged groups, largely through the development of a civilian-military economy. To secure the military’s political loyalty, Sisi’s strategy has been to give it control over projects for the development of desert areas involving construction, real estate, and infrastructure.134 This has also entailed granting a more central role to the armed forces in the Egyptian economy135 that encompasses a wide range of sectors, including gas stations, agriculture, construction, hospitality, transportation, and more. At the same time, private-sector businesses have been gradually crowded out of the economy.136

A main driver of Egypt’s debt crisis has been the unrestrained spending by the military on nonproductive megaprojects in the real estate sector that are led by military-owned firms, as well as expenditures on weapons. The most notable of these megaprojects are the construction of the new Suez Canal, with an $8 billion price tag,137 and the $59 billion New Administrative Capital.138 The military has also allocated significant funds to importing arms, amounting to $12.72 billion between 2013 and 2022, according to the Stockholm International Peace Research Institute arms transfers database.139 In 2013–2017, there was an increase of more than 200 percent in arms imports compared to 2008–2012.140 By 2020, Egypt ranked as the third-largest arms importer globally.141

The main problem with these large-scale projects is that since the Egyptian economy does not generate enough added value to offset the enormous capital investments it has made, the country’s megaprojects are mainly funded through debt financing, both domestic and foreign. This, coupled with the state’s overreliance on short-term debt to finance its budget, has made the Egyptian economy increasingly vulnerable to external shocks, among them the global rise in interest rates. Since Egypt is the world’s largest wheat importer, the increase in commodity prices triggered by the Ukraine war meant a substantial rise in Egypt’s import bill and a decline in the country’s foreign reserves. As investors began worrying about Egypt’s ability to manage its exchange rate, they withdrew around $22 billion from Egypt’s local debt market between January and September 2022, leading to a further decrease in the country’s reserves.142 Egypt’s debt crisis thus grew more severe because of the exchange rate devaluation and the significant rise in debt servicing costs.

Another key factor behind Egypt’s debt crisis and recurring financial imbalances is the structure of the country’s economy—specifically the lack of investment in productive and tradable sectors, such as manufacturing and agriculture.143 This has not only led to weak productivity in the economy; it has also meant Egypt has been unable to diversify its position in the global market and the international division of labor by advancing toward the production of more high value–added goods and services. In fact, the economic sectors that have been growing since 2016 are non-tradable, non-productive sectors. Their growth has not ameliorated Egypt’s balance of payments situation through an increase in exports or a decrease in import dependency. That is why Egypt has continued to face the same financial problems time and again.144

Similarly, in Lebanon, the debt crisis is structural and rooted in the nature of Lebanon’s political economy, especially during the post–civil war period. After 1993, the country followed an economic model centered on increasing its public debt. The state issued Lebanese pound–dominated treasury bonds as well as Eurobonds (denominated in U.S. dollars). By 2020, the public debt totaled around $90 billion, 37 percent of which was made up of Eurobonds.145 Lebanon thus had the highest debt-to-GDP ratio in the MENA region, equivalent to around 150 percent in 2020,146 and the third-highest debt-to-GDP ratio in the world after Greece and Japan. The country’s debt-to-GDP ratio is expected to reach 185 percent by 2024,147 largely because of the dramatic decline in GDP rates and the stock of debt the country has carried over from the pre-2019 period.

One of the main factors behind the crisis in Lebanon is the inability of the Lebanese government to fulfill its obligations to repay the Eurobonds issued in the past, with the government first defaulting on its debt in the period March–June 2020. Another important aspect of Lebanon’s public debt is that a significant portion of its treasury bonds and Eurobonds were held by domestic banks and represented a substantial share of their assets.148 These banks invested a small portion of people’s deposits in government-issued bonds, while around two-thirds of deposits were invested with the central bank—either as reserves or as loans from the domestic banks to the central bank. The central bank then used the money to acquire treasury bonds and Eurobonds. This meant that a majority of bank deposits were invested in government debt and that banks were heavily exposed to this debt. Hence, when the state failed to repay its debt, the central bank couldn’t pay back domestic banks, which in turn couldn’t pay depositors, leading to the current crisis.149

There were two main reasons behind the state’s inability to repay its debt. The first was related to the corruption that has been endemic in the Lebanese sectarian system and the government’s mismanagement of the budget allocated for infrastructure investment.150 The second reason lay in the structure of the public debt, especially the fact that the rate of return offered to investors for investing in the debt was remarkably high—at times exceeding 35 percent.151 This meant that debt-servicing costs were also exceedingly high—amounting to approximately half of total government income and over a third of total government expenditures annually. This could not be covered by any of the government’s infrastructure investment projects, making a crisis inevitable.

The fact that the rates of return on the public debt were significant could be attributed to the nature of Lebanon’s political economy, especially the presence of crony capitalism and a strong network of interests that has existed between the political class and the banking sector. In fact, the creditors of the government who benefited from the exorbitant interest rates were primarily the political elite, who had access to increasing rents, while the state was left with limited resources to meet basic public needs.152 It is this system, which rested on the channeling of rents from society to well-connected elites through an inflated public debt, that laid the groundwork for the Lebanese collapse.

Lebanon’s substantial annual funding requirements therefore left it extremely vulnerable to external shocks. The decline in capital inflows, which had started in 2011, first pushed the central bank into adopting risky financial engineering mechanisms. Then, starting from 2016, Lebanese banks started offering remarkably high interest rates to attract new deposits in U.S. dollars.153 However, this system was unsustainable and led to a banking, fiscal, and currency crisis in 2019 and a default in 2020.154 Since then, the country has grappled with hyperinflation, a major devaluation of its currency, a rise in import bills, high poverty rates, and a sharp decline in living standards, not to mention a drastic reduction in its GDP by about half.155

In Tunisia, the circumstances differed somewhat from Egypt and Lebanon. Following the popular uprising of 2010–2011, the country benefited from significant capital inflows from various sources, including low-interest loans, deposits in Tunisia’s central bank, U.S.-backed loans, and macro-financial assistance from the European Union (EU), among others.156 This “democratic rent”—financial support from international partners motivated by Tunisia’s democratization process—provided a lifeline to the country as it grappled with a steep drop in foreign direct investment157 and the collapse of the tourism sector after a series of terrorist attacks in 2015 and 2016.158

However, because of a sense of confidence among Tunisian decisionmakers that international partners would continue supporting the country’s democratic transition regardless of whether the government undertook the necessary reforms to alleviate the mounting debt burden, no reforms were implemented.159 Instead, the political class relied on these financial inflows to buy time. Their failure to reconcile conflicting economic and sectoral interests hindered reform efforts and exacerbated the public debt crisis.

Tunisia has especially faced the consequences of delayed reforms following the outbreak of the coronavirus pandemic. The economic fallout led to a significant 8.6 percent contraction in real GDP in 2020, the most substantial decline since the country gained independence in 1956.160 While Tunisia attempted to recover, the outbreak of the war in Ukraine in February 2022 further exacerbated its fiscal imbalances. The public debt surged from 42.5 percent of GDP in 2011 to 80 percent in 2022.161 The proportion of short-term debt in Tunisia’s external debt also rose from 21.7 percent in 2011 to 32.4 percent in 2021,162 and the share of short-term debt in relation to total reserves surged from 51 percent in 2011 to 152.5 percent in 2021.163 These trends highlighted the country’s vulnerability to external financing and the sharp decline in long-term sources of hard currency—investment, tourism, and revenues from Tunisia’s exports of phosphate. Similar to Egypt and Lebanon, Tunisia’s heightened dependence on energy and food imports, as well as rising global interest rates, only compounded its need for foreign currency. The situation deteriorated significantly after 2019, when Tunisia lost access to international financial markets because of periodic downgrades by major rating agencies.164

Confronted with this worsening situation, Tunisia sought a new program with the IMF. In October 2022, the two sides concluded a technical agreement, pending approval by the IMF board. Saied’s reluctance to embrace reforms prompted the IMF to continue demanding measures that would show the president’s commitment to a challenging four-year reform program (2023–2027).165 However, in April 2023 Saied rejected the IMF conditions, describing them as “diktats,” which caused Tunisian bonds to further depreciate in international markets.166 This aggravated the decline in the country’s credit rating and posed a threat to Tunisia’s debt sustainability.167

Tunisia’s inability to meet its spending requirements and secure substantial international financial support began to affect its ability to procure essential imports. Since 2022, products such as sugar, vegetable oil, rice, coffee, and milk have become scarce in supermarkets. Escalating tensions linked to periodic shortages have accelerated emigration and jeopardized social stability in Tunisia. Consequently, in August 2022, the EU, through the European Bank for Reconstruction and Development, signed a sovereign-guaranteed loan agreement worth €150 million euros (approximately $158,000 at current rates) with Tunisia’s state cereals office to bolster grain imports.168 The deteriorating financial situation and the government’s inability to secure a bailout worsened the financial predicament of state-owned enterprises, which were estimated to carry debt equivalent to 15 percent of GDP in 2022.169 As a result, the debt crisis had a cascading impact on the subsidy system and food supply.

The Impact of the Crises on the Domestic and Geopolitical Levels

The interconnected food, energy, and debt crises are fundamentally reshaping the political and economic landscapes of Egypt, Tunisia, and Lebanon, with far-reaching implications for power dynamics across the MENA region. At the domestic level, these crises are intensifying the pressures faced by ruling elites, who now have to resolve critical policy dilemmas. A failure to address these mounting challenges will only exacerbate the worsening situations in these countries. From a geopolitical perspective, in turn, these crises have triggered region-wide economic realignments that are bolstering hydrocarbon-exporting nations while weakening energy-poor states.

Conflicting Interests and Policy Dilemmas in Egypt, Tunisia, and Lebanon

The food, energy, and debt crises have posed complex challenges for leaders in Egypt, Tunisia, and Lebanon. All three countries are lacking crucial external financial support, with Egypt losing the geopolitical rent that had been provided by the Gulf states in the aftermath of the 2013 coup d’état and Tunisia losing its “democratic rent” from Western partners and institutions.170 Lebanon, in turn, has not implemented the reform package necessary to unlock financial assistance from the IMF. As a result, the countries are struggling to find a way out of their crisis, not to mention tackle their structural deficiencies. The dilemma of their regimes is that the reforms needed to secure financial assistance to help with addressing their crisis will create conflicting interests between different power centers in their societies, which will have a destabilizing effect on ruling coalitions, and may indeed reshape them.

Political elites in Egypt, Tunisia, and Lebanon, struggling with numerous problems, are reluctant to consider a transformation of their economic models. Instead, they have tended to preserve the status quo, often through an escalating recourse to violence, despite the shortcomings of such an approach. They perceive the existing state of affairs as preferable to the uncertainties that would accompany reform. Consequently, political, military, security, and economic elites—the main interest groups in Egypt, Tunisia, and Lebanon—have managed to impose stalemate, engaging in effective wars of attrition to avoid surrendering what is vital to them, even as economic conditions deteriorate.171

The Egyptian authorities, for example, are today faced with the imperative of generating foreign currency inflows to help pay off $28 billion in maturing debt and interest and fund the current-account deficit by the end of 2023, in addition to another $20 billion in 2024.172 As a result of this, they find themselves entangled in a series of conflicting imperatives that epitomize the profound dilemmas they face. Since Sisi’s rise to power in 2013, the Egyptian regime has given priority to military-owned enterprises in infrastructure projects and has expanded their dominance over sectors of the economy to the detriment of private businesses, even those that were previously connected to the late president Hosni Mubarak. The country’s current financial constraints are forcing the regime to engage in a delicate balancing act as it navigates among different factions within the armed forces while also attempting to respond to IMF demands.173 The challenge lies in implementing reforms while avoiding measures that could trigger domestic resistance, destabilize the military, and compromise the relationship of dependency that exists between Sisi and Egypt’s generals. As the government seeks to minimize the potential backlash from the ruling elites and segments of society, its temptation to dilute IMF reforms will only increase.

After the beginning of the war in Ukraine, and given the increasing costs of debt servicing, the government had little choice but to sell off public assets. The Egyptian authorities unveiled a plan to reevaluate the state’s involvement in the economy, seeking to revitalize the private sector’s contribution. In June 2022, the government announced a State Ownership Policy, outlining its intention to exit from certain economic sectors, reduce its participation in others, and increase its involvement in select areas.174 The timing was intentional and sought to influence loan negotiations with the IMF. The IMF had insisted on structural reforms that would level the playing field for the private sector.

In late 2022, Egypt reached an agreement with the IMF for a $3 billion loan under a forty-six-month Extended Fund Facility arrangement. In early February 2023, the government announced that it would sell shares in thirty-two state-owned enterprises by March 2024.175 Among these enterprises, two military-run companies were proposed for partial sale during what was purported to be an initial privatization round.176 The decision to reform the state ownership framework and make shares of military-owned companies available to private investors was influenced by the IMF’s evaluation of public sector enterprises, released in July 2021.177 The IMF’s objective was to reduce the government’s and the military’s involvement in the economy while creating an environment conducive to foreign investment. It recommended that the government centralize state ownership within a single entity and initiate the transfer of military-owned companies to what it termed the “public business sector.”178 This would bring the companies under the government’s regulations for procurement, financial reporting, and revenue submission. It was evident that, if applied, the policy would impact the operating environment of military companies and power arrangements in Egypt. As a result, the IMF agreement faced resistance.179

In fact, the government has failed to open military companies to private investors. The authorities have continually postponed the privatization process, citing technical reasons and policy complexities regarding financial transparency, profitability, and legal constraints.180 Its hesitancy on the matter, despite the potential interest shown by international private investors in acquiring shares in military companies, reflects the government’s dilemmas. Indeed, the military’s influential political position is expected to ensure that once private investors invest in military enterprises, these will have a steady stream of sizable public contracts and exclusive access to production resources, such as land and foreign currency, at favorable exchange rates. Private-sector investment could secure assured dividends, even for underperforming companies. Furthermore, the capitalization of military enterprises through private investors could potentially inject additional revenues into state coffers.181 Yet the government seems to lack the political will to curtail the military’s involvement in the economy. It even seems unable to slow the military’s expansion and acquisition of businesses, a trend that has been on the rise since Sisi took office. In early 2023, the president actually allocated new lands to the army, undermining the government’s credibility on introducing reforms.182

Sisi’s reluctance should be understood in light of the military’s substantial veto power. In fact, on multiple occasions the military has disrupted major investments from the UAE (one of the president’s closest political allies) and has resisted efforts to open its companies up to private investors.183 This status quo suggests that both Sisi and the Egyptian military are unwilling to reevaluate the military’s role in the economy. The attitude of the IMF and international partners, in turn, has created an anomalous situation. Rather than pressing Egypt on reform, they have shown a repeated willingness to inject funds into the country. This has allowed the regime to buy time, in the hope that the IMF will lose interest and wager on a hypothetical improvement of the economy. However, the IMF’s delay in conducting the initial program review seemed to put serious pressure on the regime.184 The success of these reviews is essential for the disbursement of the loan tranches. The IMF decided to postpone the first review because it would have revealed the government’s poor execution of the reform program, which would have damaged the IMF’s reputation as an international lender. 185 In the absence of control over the military, Egypt could be heading into severe economic headwinds that would lead to a dramatic social crisis.

In Tunisia, financial tensions are also creating acute policy dilemmas. For Saied to accept IMF conditionalities risks eroding his base of support. Yet rejecting an agreement with the organization risks triggering a systemic crisis given the exposure of state-owned banks. Securing IMF funding has become an intricate challenge for Tunisia, as Saied has sought to balance between negotiating with the organization and rejecting a fiscal adjustment program.186

In October 2022, Tunis and the IMF agreed to a $1.9 billion, forty-eight-month reform package that outlined crucial measures, including cutting the public-sector wage bill, reducing subsidies, reforming state-owned enterprises, and promoting competition.187 Despite the initial understanding, Saied refused to endorse the IMF measures. The authorities were expected to gradually increase fuel prices and enact a law on state-owned enterprises, but the president refused to implement these measures.188 Saied believes the IMF is undermining Tunisia’s sovereignty.189 His populist style has ended up placing him in open conflict with the Tunisian General Labor Union, the business elites, and the central bank.190 Saied’s unpredictability has only reinforced the deadlock in the negotiation process with the IMF, isolating Tunisia further.191

In the absence of reforms and an IMF deal, in 2022 the Tunisian government began cutting imports and reorganizing the supply of markets.192 Shortages of basic foods, electricity, and hydrocarbons became frequent, putting pressure not only on the segment of the middle class that is dependent on the state, but also on vulnerable social groups in urban and rural areas.193 Tunisia’s inability to cover its spending needs and secure substantial international financial support has begun causing problems in the purchase of essential imports.194 Frequent shortages and the economy’s deterioration are threatening to spark a social crisis, while the absence of an IMF bailout is increasing the risks of a destabilizing debt default.195

The fact that the Gulf and European countries will not assist Tunisia either, added to the worsening relations with multilateral institutions and the inability to access international capital markets, is seriously aggravating the country’s debt vulnerabilities. Political turmoil or potential shocks from rising energy prices could push Tunisia into a desperate situation. The country’s isolation from donors, investors, and partners, as well as slow growth prospects, high unemployment, and soaring inflation, will only aggravate political and socioeconomic risks. For now, Saied is buying time by focusing his efforts on fighting purported internal enemies, while using the migration crisis in Europe as leverage with his European neighbors.196 Saied’s rejection of an EU financial aid package in October 2023 underscored Tunisia’s worsening relationship with the EU and its growing reliance on illegal migration as form of blackmail to help sustain the country financially.197

Lebanon, in its turn, is facing an unprecedented economic, social, and political collapse.198

To tackle its crisis, it is essential to begin by acknowledging the responsibility of the country’s elites for the dire state of affairs and establish, in the short term, a clear framework for distributing losses, with a significant share of the burden assigned to the banking sector. However, because of the politics involved, this has been extremely hard. These losses, which are immense and surpass the country’s GDP several times over, have in no way prompted a reform of the financial system. This has eroded any hope of recovery and pushed at least 60 percent of the population below the poverty line.199

The resistance to reform in Lebanon can be attributed to several underlying factors. First, the persistent struggle for power among sectarian elites in the country mirrors the deeply entrenched clientelist system of governance. The delay in implementing reforms cannot simply be attributed to the allocation of losses. It represents a battle for supremacy within a deeply factional system in which making compromises on sharing the burdens of reform could be perceived as political capitulation. In this zero-sum game, concessions made to facilitate reform may benefit political rivals, making all politicians reluctant to do anything that might shift the power balance to their disadvantage.

Second, rather than obstructing reforms, Lebanon’s failure to implement the staff-level agreement with the IMF, signed in April 2022, has inadvertently hastened the unraveling of social safety nets and a radical decline in social benefits. At the same time, economic realities have de facto imposed certain reform measures on the state. This was evident in the way Lebanon was forced to dismantle its subsidy system in 2021–2022 because of its dwindling foreign currency reserves, which had to be preserved to finance imports. However, this was done without any negotiated consensus nationally about how the burdens should be shared among different social groups. Not surprisingly, the state’s policies ended up disproportionately affecting the most vulnerable social categories, which only augmented societal fragility.200 The main beneficiaries of the situation were influential social groups that possessed the means to safeguard their interests. A notable example is Lebanon’s influential banking lobby, which has vehemently opposed reforms, fearing that banks may be saddled with the lion’s share of the country’s financial losses.201

In Egypt, Tunisia, and Lebanon, economic reform would require curbing the influence of veto players and reshaping ruling coalitions. This means reconsidering the military’s involvement in the economy in Egypt, restructuring the economy in Tunisia, and curbing the influence of the financial sector and opportunistic sectarian elites in Lebanon. These reforms are politically sensitive and may adversely affect ruling coalitions and the state-dependent middle classes, and could lead to an increase in the number of people living in poverty. Balancing the need for economic reform with the preservation of social stability has become a delicate task in such circumstances. That is why elites in power have often fallen back on preserving the status quo, even if such situations are impossible to sustain indefinitely. The impact of this unmanageable balancing act—engaging in the appearance of change so that very little effectively changes—is not only having negative repercussions inside Egypt, Tunisia, and Lebanon; it is also affecting the three countries’ regional standing.

The Geopolitical Reconfiguration of the Middle East and North Africa

While the politics of financial assistance have revealed the political and economic dilemmas of LMICs and their struggle for stability, it has also brought to light growing regional imbalances. In particular, Egypt’s, Tunisia’s, and Lebanon’s economic problems have increased their financial needs and therefore their geopolitical dependency on regional funders. The three countries have sought assistance from the IMF and other states, but the outcomes of their negotiations have differed significantly.

Egypt initially attempted to secure financial support from its GCC partners, but is finding this increasingly difficult today because the conditions imposed are onerous. In Tunisia’s case, stalled negotiations with the IMF and Saied’s erratic attitude in refusing to endorse reform have effectively distanced the country from its historical financial partners, namely the G7 countries and the IMF.202 Similarly, Lebanon has been left hanging by many of its Western and GCC partners, who feel that there is no impetus in the country to implement IMF reforms amid political stalemate.203

In seeking financial assistance, Egypt and Tunisia have had to reorient their foreign policies. They have aligned themselves with the political interests of their funders, or have paid a price for refusing to do so. In Egypt’s case, political and security considerations were the funders’ primary concern after the 2013 coup d’état. This compelled Egypt to side with the leading Gulf countries, such as Saudi Arabia and the UAE, in their conflict with Qatar.204 Egypt even went as far as to declare that it would hand over the two Egyptian Red Sea islands of Tiran and Sanafir to Saudi Arabia, which provoked protests at home, though administrative control of the islands has yet to actually change hands.

However, in the past year, the attitude of the GCC countries has changed. They are now seeking higher returns on investment and are keen to secure control over Egyptian state assets, some of which hold strategic value, such as seaports and public utilities.205 This shift in focus comes as concerns grow about Egypt’s economic stability, driven by the country’s requiring more frequent and larger financial bailouts. As a result, Gulf governments have developed a keen interest in Egypt’s macroeconomic policies.206 The Gulf countries, in line with IMF conditions, are putting pressure on Egypt to reduce the military’s involvement in the economy and increase the financial transparency of state-owned enterprises.207 These demands have created tensions with Cairo, particularly over the valuation of certain assets, revealing underlying geopolitical tensions that were previously concealed.208 This was also reflected in the delayed handover of Tiran and Sanafir to the Saudis.

Tunisia has faced a similar situation. The country was at a critical juncture following Saied’s power grab in July 2021, after a decade of financial assistance and access to low-interest loans. The president’s actions isolated Tunisia without a clear backup plan, and despite initial expectations that Saudi Arabia, Kuwait, and the UAE would step in to help, the responsibility has fallen on European countries.209 The government’s failure to secure funding underlined its serious lack of financial resources available for consolidating the regime and managing social tensions. This forced Tunisia to rely solely on financial support from Algeria, resulting in loans, deposits, and preferentially-priced natural gas supplies amounting to $800 million since Saied seized power.210

However, this financial reliance came with a price tag: Tunisia’s increasing alignment with Algeria in its conflict with Morocco.211 Historically, Tunisia had maintained neutrality between the two rival countries, but its financial dependency on Algiers altered that. 212 Saied’s official reception of leaders from the Polisario Front in Tunis in September 2022 demonstrated that Tunisia was leaning toward the Algerian position on the Western Sahara conflict. This led to a diplomatic crisis between Tunis and Rabat as both governments recalled their ambassadors in August 2022.213

Because of its inherently sectarian character, Lebanon finds itself torn apart internally, a division that further hinders its relationships with regional nations. This internal discord has transformed the country into a microcosm of Middle Eastern rivalries, effectively preventing it from receiving substantial assistance. Despite Lebanon’s relatively modest regional influence, its precarious financial standing is significantly affected by the absence of a unified stance toward the country in the region. This, in part, stems from the absence of a consensus within Lebanon regarding its own regional role and affiliations.

What these episodes show is how financial necessity can ultimately impose damaging geopolitical outcomes and undermine political autonomy. Egypt’s initial dependency on, and alignment with, the GCC states illustrated how the former Arab powerhouse could no longer lay claim to such a status. Today, this image has changed little as the GCC states seek to impose more economic conditions on Egypt, showing how far the county’s once dominant regional standing has receded. Similarly, Tunisia’s financial vulnerabilities and strained relationship with international financial institutions, added to its lack of support from Gulf countries and European doubts about Saied’s commitment to reform, have exacerbated the country’s debt problems. The challenges faced by Egypt and Tunisia have only underlined a process of regional marginalization in which both countries have lost their previous vanguard roles in postcolonial Arab history, making them increasingly irrelevant in a changing regional and global geopolitical environment.

As for Lebanon, the country has always been a playing field for regional rivalries, while holding an important geographical position given that it borders Israel. However, it also remains weak and has been unable to set the regional political agenda. After its devastating civil war (1975–1990), Lebanon had the potential to evolve into a financially significant regional hub. However, the county was again transformed into a battleground for regional opponents seeking influence. Unfortunately, renewed divisions among regional players, which were reflected in intra-Lebanese divisions, fractured Lebanon after 2005, the year the Syrian army withdrew from the country after a twenty-nine-year presence. This entangled the country even further in a web of regional conflicts and rivalries.

Conclusion

Middle East and North African governments are facing daunting prospects for long-term stability and development. The risks are higher for LMICs that are reeling from a lost decade because of economic stagnation and a heavy reliance on energy and food imports. This is especially true of Egypt, Tunisia, and Lebanon, countries in a situation of debt distress. While Egypt and Tunisia might yet escape politically destabilizing debt defaults, they are still lacking any credible vision for long-term development and economic transformations that might overcome the structural weaknesses of their economies.

In the coming years, these countries will face a crucial challenge in trying to achieve inclusive development. Answering this challenge won’t be easy; it implies forcibly restructuring their polities and curbing the influence of strong interest groups—the military in Egypt, rentier economic elites in Tunisia, and political and financial elites in Lebanon. So far, these elites have been trying to deflect socioeconomic pressure by resorting to populist and authoritarian strategies in the cases of Tunisia and Egypt, or by preserving a detrimental political stalemate in Lebanon. These strategies have failed to address the structural causes at the origins of the food, energy, and debt crises in each of the three countries. Both the governments of the three countries, with their short-termism, and the IMF, with its apolitical programmatic approach that does not prioritize the root causes hampering economic development, have been unable to implement structural change.

Addressing the food crisis requires revisiting food systems that predominate in the MENA region and working toward ones that are more equitable and sustainable. This involves linking food security to social justice and social and economic equity. Such a step would necessitate, first and foremost, rethinking the prevalent mode of large-scale food production by revaluing subsistence farming and small-scale agricultural production for local consumption. This would go hand in hand with supporting small-scale farmers, giving them more agency and control over resources, and addressing key issues of inequality, access, marginalization, and the unequal patterns of land ownership to which they have been subjected. The process would be important to ensure a diversified food supply and reduce vulnerability to external shocks, such as price fluctuations and supply-chain disruptions. It would also provide more food security to, and improve the living conditions of, rural communities, while contributing to environmental sustainability. Indeed, small-scale farmers are known to employ more sustainable farming practices than large ones. Sustainable techniques are important to promote biodiversity and decrease the harmful effects of large-scale and monoculture farming on the environment.

Similarly, to mitigate the impact of energy price shocks on LMICs in the MENA region and improve their energy security, countries need to implement subsidy reforms while simultaneously accelerating transitions to renewable energies. Uncertainty in the energy market may incentivize and hasten the adoption of low-carbon solutions. However, the shift to a low-carbon future relies heavily on a country’s ability to finance existing energy deficits as well as projects that facilitate an energy transition. While this challenge is particularly pronounced in Egypt, Tunisia, and Lebanon, given their fiscal constraints and the burdens they are facing because of their existing debts, governments can and should create more fiscal space by implementing tax reforms that broaden the tax base, eliminate loopholes, and enhance tax compliance across all categories of taxpayers. This reform would encompass the introduction of direct, well-targeted, and progressive tax measures, while reevaluating exemption policies that predominantly benefit affluent individuals and organizations.

To address the debt crisis and escape the recurrent financial problems they have been facing, the three countries also need to revisit the model of economic development that has prevailed in the MENA region. This has largely been defined by clientelism and crony capitalism, insufficient investment in productive sectors, disproportionate growth of the services industries, and a predominance of speculative investments, particularly in the real estate sector. Indeed, Egypt, Tunisia, and Lebanon face a critical challenge that they have failed to address: the unsustainability of their economic systems, political settlements, and current structures of power relations. The militarization of Egypt’s economy is stifling the private sector and undermining development prospects for the shrinking middle classes. In Tunisia, reform will involve negotiating the state’s relations with capital and labor representatives to reach a deal that can spur political dynamism by dismantling the rent-based economy and creating jobs to preserve Tunisians’ purchasing power. In Lebanon, the war of attrition between elites and their unwillingness to make systemic changes has led to the country’s collapse, one of whose potential outcomes is that it may facilitate greater civil conflict.

Current political arrangements in the three countries are especially unstable and fragile given the widespread sense of despair and disenchantment among citizens. Political parties are weak, civic spaces are shrinking, inequality is growing, the rural-urban divide is deepening, the societies are increasingly fractured, and the old social contract rooted in the exchange of material benefits for political loyalty is unsustainable. And as levels of repression and surveillance soar and socioeconomic suffering intensifies, anger is building up and hope is vanishing. The likelihood that new protests will erupt looms ever closer on the horizon. It is thus vital for these countries to embark on a path toward agreeing on new political settlements, based on new social contracts and new governance mechanisms that are grounded in the rule of law and inclusive political and economic development.

While key structural changes should be decided and adopted domestically, international financial institutions could play an important role in encouraging and helping countries to adapt to challenges related to food security, climate change, and energy transition. However, these institutions should adapt their approaches to the complex and specific realities that each of these countries is facing while accounting for the political context in these countries and working to prioritize the root causes that are hampering development. For example, the IMF should seriously rethink the design and management of its programs and their conditionalities and adapt them to the new types of development challenges, such as climate change, food insecurity, the energy transition, and the digital transformation. Their programs should also be socially acceptable and be based on inclusive social and economic dialogues to ensure that countries are able to achieve long-term transformation and inclusive development.
Acknowledgments

The authors are grateful for the intellectual contributions of Amr Adly, Mayssoun Sukarieh, and Ishac Diwan in three articles they coauthored that informed this paper, all written for the Malcolm H. Kerr Carnegie Middle East Center. Amr Adly coauthored with Hamza Meddeb an article titled “How Rising Debt Has Increased Egypt’s and Tunisia’s Geopolitical Peripheralization.” Mayssoun Sukarieh coauthored an article with Nur Arafeh titled “Breaking the Cycle: Toward a New Imaginary of the Food System in Lebanon.” The section in this paper on the food crisis in the Middle East draws on the conceptual framework developed by Sukarieh in the latter article. And Ishac Diwan authored an article titled “The New Debt Crisis of the Middle East: Political Economy to the Rescue?” The authors would also like to thank all participants who attended a workshop in Beirut held by the Political Economy Program of the Malcolm H. Kerr Carnegie Middle East Center on May 8–9, 2023, to discuss issues covered in this paper.

Notes

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