The defense industry and other agencies belonging to the Ministry of Defense and the armed forces produce a wide range of goods and services for civilian use. These encompass public infrastructure and housing, household appliances and other consumer goods, industrial chemicals and components, vehicles, raw and processed minerals, and management services. The government presents military economic activity as contributing to national development, generating state revenue, breaking monopolies, and stabilizing prices in civilian markets.
The feasibility of military economic activity is questionable. Military agencies enjoy sweeping tax and customs exemptions, favorable exchange rates, and other subsidies, and retain all profits while transferring losses to the state treasury. Income is used to augment salaries, share dividends among senior officers, build military infrastructure, and purchase and maintain weapons that are not covered by U.S. military assistance. Exemption from financial oversight and audit makes it impossible to verify the cost-benefit of military delivery of public goods and services or how income is used.
The defense industry produces only vintage military technology and exports almost nothing, and its civilian production lines are mostly loss-making. All military companies and agencies depend on government contracts that are awarded on a non-competitive basis. Thousands of retired officers in public sector companies, general authorities, and local government steer contracts to military agencies, and President Abdel-Fattah el-Sisi has also authorized them to form commercial companies to compete in civilian markets. Their expansion into real estate, commodities, and tourism is disrupting the private sector and crowding access to credit.
The National Defense Council reviews only the general outline of the defense budget in the presence of its few key civilian members. Parliamentary oversight is limited to ratifying the defense budget as a single line item, and only the president and the Ministry of Defense have knowledge of and control over overall defense funding and spending. Public dissemination or discussion of the defense budget or any details other than data released by official military spokespersons is prohibited by law.
The defense budget is a modest percentage of gross domestic product and of general state budgets, but does not capture the full extent of defense funding and spending. Military businesses, public works contracts, investments, external assistance, and defense exports produce extra-budgetary income. The cost of purchasing new weapons systems seems to be covered by U.S. Foreign Military Financing, or loans from European banks that must be repaid, and it is not clear if the cost of training, maintenance, repair, and upgrades over the life of these systems is factored in.
The military passes investment costs and operating losses from its businesses to the public purse, and does not account for lost revenue due to the military’s tax and customs exemptions, favorable foreign exchange rates, and subsidized or free factors of production such as labor, energy, and water. The EAF also benefits from dual-use infrastructure built at public expense, and charges military pensions to the general state budget.
The Ministry of Defense and other military agencies retain incomes and budget surpluses in special discretionary funds, and only a special unit of the Ministry of Finance checks their books. Some seventy-four military-owned companies produce defense and civilian products and services with the same tax exemptions, subsidies, and protections as the rest of the military. Investment capital often appears to come from these special funds.
Public works dominate the military economy, especially the Armed Forces Engineering Authority, whose profit line has benefited from a surge in construction contracts since 2013. A portion of this income funds military perquisites and bonuses, and may pay for constructing military infrastructure, importing combat hardware, and maintaining equipment.
The military economy has contradictory effects. Pay, pensions, and procurement contribute to the national economy, and the construction of public infrastructure and housing generates jobs and adds value. But there is no evidence that military agencies are more efficient than private companies, and military-managed projects are plagued by delays, favoritism, and waste. They rely on noncompetitive contracting, crowd out civilian competitors, and impede innovation.
A very high risk of corruption is associated with potentially fraudulent contracts, illegal commission-taking, misuse of state assets, and extraction of illegal fees and bribes in return for licensing the use or rezoning of land controlled by the Ministry of Defense. The unofficial levying of fees and bribes for providing routine services appears to be common. The remit of the powerful Administrative Monitoring Authority does not extend to the military, and it is headed and almost entirely staffed by retired and active EAF officers.
Imbalanced civil-military relations deprive the armed forces of the robust challenges that would help improve their capabilities and performance and evolve more effective responses to national security threats and challenges. This imbalance also removes incentives for internal accountability within the military, impeding the routine monitoring and evaluation that could lead to lesson learning and greater command initiative and operational autonomy. Resistance within the EAF to advice from foreign providers of military assistance also impedes upgrading skills and staying abreast of developments in global military affairs.
The EAF emphasizes procurement at the expense of acquiring genuine military strategic planning capacity, and displays limited ability to maintain, repair, and upgrade equipment and weapons systems. The decade-long failure to resolve a small-scale armed insurgency in North Sinai displays these shortcomings, but foreign officers responsible for bilateral military relationships with the EAF also assess that it would be incapable of conducting large-scale conventional operations.
The armed forces receive sufficient funding and resources, whether from the state budget, foreign assistance, or military businesses. The Sisi administration has allocated significant political attention and material resources to developing military infrastructure and acquiring major combat systems. Arms worth approximately $8.8 billion were imported in 2014–2019, tripling the previous five-year amount and making Egypt the world’s third-largest arms importer.
The absence of a thorough national defense review process prevents Egypt from identifying military needs and measuring the utility of the EAF’s force structure, combat doctrine, and equipment. The opacity of defense funding and spending, coupled with a lack of civilian competence in defense affairs, further compounds the difficulty of monitoring and evaluating military cost-effectiveness. This applies to the local defense industry, as well, which produces only vintage-technology arms and munitions and lacks the capacity to develop technical adaptations and innovations to meet EAF needs.
The EAF often privileges political calculations and personal loyalties over competence in selecting officers for promotion or command appointments. This undermines military professionalism and the ability to deliver effective national defense outcomes. The emphasis on loyalty, obedience, and strict attachment to hierarchy discourage initiative and innovation, leaving the EAF unable to utilize the full potential of mid-level and junior officers and undervaluing its enlisted ranks.
Officer training focuses excessively on technical skills, military education is regarded more as a means to securing promotions and desk assignments than to developing command capacity, and exercises are highly choreographed, defeating their purpose of preparing for realistic combat conditions. Military rejection of any civilian involvement in defense affairs denies the EAF important capabilities, including data-based analysis and planning. Unwillingness to open up to scrutiny and change also bleeds into a reluctance to make effective use of the defense expertise that foreign providers of military assistance offer.