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Chronicle of the Middle East and North Africa

Egypt Faces Growing Debt Crisis

Egypt Faces Debt Crisis
Egyptian men work in a bakery at a market in Cairo amid soaring prices, on March 17, 2022. Khaled DESOUKI / AFP

Ali Noureddine

Egypt has requested a fresh loan from the International Monetary Fund (IMF) for the fourth time since 2016. The loan, estimated to be worth two to three billion dollars, would assist the government in addressing recent financial and monetary issues. If the IMF grants Egypt’s request, this fresh financial assistance will be added to a pool of prior loans totaling more than USD 24 billion, making Egypt the IMF’s second largest borrower behind Argentina. However, Egypt’s current loan proposal includes a restructure of its past debt, including interest, as well as an extension of the installments, which the IMF has viewed as a negative indicator ahead of the new loan application.

Egypt’s efforts were discussed during the IMF and World Bank’s (WB) annual spring meetings in April. Since then, it has been evident that the Egyptian government would have significant problems in securing the loan, owing to the IMF’s stringent terms and the potential negative impact on people’s livelihoods if conditions are to be met.

Expansionary fiscal policy measures, such as enhanced flexibility in the Egyptian pound to US Dollar exchange rate, were among the most notable proposals discussed by the IMF during the preliminary negotiations. In practice, such measures would lead to a greater devaluation of the Egyptian currency, reducing people’s purchasing power, and possibly provoking public outcry, jeopardizing the Egyptian state’s stability.

The IMF’s additional requirements for the current loan application are no less demanding, notably those connected to expanding privatization, dissolving, restructuring, and liquidating state economic units. Such requirements would effectively result in the dismissal of a considerable number of public sector employees and with that the deterioration of social safety nets. The situation is particularly worrisome for decision-maker, especially when it comes to the country’s armed forces.

Egypt’s administration is aware that it needs to broaden its choices and look for alternatives to the new IMF loan for all of the reasons stated above. Egypt’s President Abdel Fattah El-Sisi has been touring Gulf Cooperation Council (GCC) nations over the past two months, including the Kingdom of Saudi Arabia, Kuwait, and the United Arab Emirates. The Egyptian president traveled to the Gulf Cooperation Council in an attempt to gain assistance from Egypt’s Gulf Cooperation Council partners as the country braces for economic impact.

In the event that it is unable to receive external assistance, whether from the IMF or its GCC allies, the Egyptian government is considering alternative measures. One of these options would be to engage the army in managing the implications of the financial crisis, including the allocation of available capital from the armed forces to maintain the central bank’s residual monetary reserves. The Egyptian army plays a significant economic role that exceeds that of any army in the majority of countries. The military forces control a significant amount of foreign currency in reserve, obtained from exports, through maintaining a network of enterprises that produce food, steel, brass, and other commodities.

 El-Sisi and his history of borrowing

It’s difficult to comprehend the present challenges without considering Egypt’s financial and monetary history since El-Sisi took office in May 2014, which has led to the country’s current problems. El-Sisi has attempted to legitimize his authority by launching a succession of large-scale projects that have been widely panned owing to their high expense. These projects have resulted in a significant amount of obligations and liabilities for the Egyptian government, which have become a chronic burden.  As a result, Egypt has found itself in a never-ending borrowing loop in order to repay its previous debts and interest. The most significant problem here is that these projects were not profitable, resulting in the debts stated above as well as a loss of revenue.

One such project is the construction of the “New Suez Canal,” a 35-kilometer branch of the main canal that cost over USD 8 billion – a considerable sum given Egypt’s resources and economic state. The Egyptian government showered the public with promises about the riches that would be earned via this project and the rise in projected returns. However, a few years after the new canal’s completion, a significant gap arose between the promises made and revenue forecasted by economic feasibility studies on the one hand, and the reality and actual revenues on the other. In summary, El-Sisi’s project failed to improve the Suez Canal’s income since the rise in commercial traffic did not equal the canal’s growth.

As a result, the Egyptian people were burdened with colossal debts that resulted from the government issuing debt securities to fund the enterprise with an interest rate nearing 12% annually. After the project failed to make its expected profits, the Egyptian government had to secure the repayment of these bonds and their interests from the returns it was using to fund its budget.

The “New Administrative Capital” project, whose first phase alone is estimated at USD 25 billion, brought the same picture of big, problematic initiatives aimed only at legitimizing the regime to the fore once more. The project, located 25 kilometers east of Cairo, includes the development of new government buildings, motorways, high-speed rail, luxury real estate, housing complexes, and other attractions. To fund this massive project, Egypt’s government opted to borrow from international banks and organizations once more, increasing a debt that must be repaid. Today, there are serious uncertainties about the project’s predicted economic earnings, which means it will follow in the footsteps of the “New Suez Canal.”

Falling into the IMF loop

Egypt is trapped in a debt cycle, borrowing and re-borrowing to finance the interest-bearing repayment of existing debts, while also grappling with the issue of bringing in hard currency to cover its import bill and budget deficit. Egypt, like every other nation facing a liquidity problem, went to the Extended Fund Facility (EFF) in 2016 for USD 12 billion in funding to implement an IMF-approved economic program. The deal specified that the monies would be disbursed over three payments across three years, with the funds being linked to reforms that would allow Egypt to continue to profit from the installments.

The IMF-imposed reforms included a number of unpleasant measures for the Egyptian people, such as the depreciation of the Egyptian pound and severe austerity measures aimed at reducing the budget deficit, which would reduce the government’s capacity to fund its social security program. The IMF also requested a reduction in subsidized goods like fuel, electricity, and water, which resulted in severe price hikes. In response to the budget deficit demands, the Egyptian government was forced to levy new taxes and raise existing ones, putting a greater strain on the people.

Egypt’s relationship with the IMF continued after the USD 12 billion loan in 2016. Egypt needed further financial help, close to USD 2.77 billion, as a result of the COVID-19, which it acquired through the Rapid Financing Instrument (RFI). Following the RFI loan, the IMF granted a USD 5.2 billion Stand-by Arrangement (SBA) to Egypt.

To top it off, the Egyptian government received an extra USD 2.8 billion in financial assistance as part of the IMF’s Special Drawing Rights (SDR) program, which allows member nations to avoid accruing further debt. When the interest on all three loans Egypt has taken since 2016 is added together, the government’s debt to the IMF exceeds USD 24 billion – a significant sum when compared to other nations’ loans.

The financial crisis reignites

Egypt’s debt crisis is not limited to the IMF. Since El-Sisi took office in 2014, the Egyptian government has had to repeatedly borrow to fund its ambitious goals. It has had to issue foreign bonds and incur new loan obligations from GCC nations, mainly Saudi Arabia, to fund its hard currency demands. As a result, Egypt’s national debt increased from USD 46.5 billion in 2013 to USD 84.7 billion in 2016, and has reportedly reached USD 392 billion by 2021. As the Egyptian government became the victim of its need to perpetually borrow in order to repay prior debt, Egypt’s external debt became a ticking time bomb that threatens the regularity of state finances.

Multiple compounding reasons have triggered a severe financial crisis in Egypt at the start of 2022, prompting the government to request for a fresh loan from the IMF and explore alternatives. To begin with, the US Federal Reserve has been steadily raising interest rates since mid-March, causing capital to flow out of developing nations and into US bond markets and foreign banks. In underdeveloped nations, such policies frequently result in liquidity concerns, as the Egyptian market has recently experienced.

The second element that has affected Egypt’s monetary and financial situation is the Ukrainian conflict and its ramifications on the global economy. The increase in the price of all essential commodities, such as petroleum, wheat, and steel, has increased Egypt’s demand for hard currency to fund the purchase of such items.

These events have increased the strain on Egypt’s balance of payments (BOP), i.e. the gap between inflows and outflows of foreign cash. Any increase in the BOP deficit is also known to have a detrimental impact on the value of the Egyptian currency, which the central bank maintains through reserves.

Egypt’s capacity to service its obligations, including those given by the IMF, is under jeopardy due to the country’s mounting financial problems and the government’s need to borrow continually to finance the repayment of its loans. This explains Egypt’s request to restructure its loans, as well as the IMF’s uncertainty in the scenario, which reflects the country’s current inability to meet its obligations. As a result, Egypt is projected to confront difficult circumstances in the next months, whether financially, socially, or in terms of any potential political unrest.

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