What sets Egypt's economic crisis apart is its vast demographic mass, amplifying the potential suffering resulting from economic mismanagement.
Ali Noureddine
This article was translated from Arabic to English
In early February 2024, the International Monetary Fund reported substantial progress in discussions regarding a comprehensive policy package to be implemented by Egyptian authorities in exchange for a new financing program.
This noteworthy statement, marked by optimism and positivity, served as a clear signal that a final agreement between the involved parties was imminent. This followed a period of speculation and uncertainty surrounding the outcome of the Fund’s mission to Egypt two weeks prior to the statement, conducted in January 2024.
The forthcoming program entails a substantial increase in the funding allocated by the IMF to Egypt. This increase is expected to lead to more stringent corrective conditions imposed by the Fund on the Egyptian authorities.
While Egypt justified its request for an augmented funding level citing recent geopolitical tensions, it becomes evident that the Fund’s adaptability, demonstrated through a swift response to Egyptian demands, is intricately connected to significant political influences.
Even the fundamental aspects of the reform program mutually agreed upon by both parties remain closely tied to political considerations and interests.
Background and Size of the New Financing
To understand the current state of Egypt’s negotiations with the IMF, it is important to note that the Egyptian government had previously secured approval for a $3 billion loan program.
Originally, this amount was intended to be disbursed over 46 months in quarterly installments. The agreement stipulated that the Egyptian government must fulfill a series of corrective measures outlined by the Fund before each quarterly payment is released.
However, since the approval in late 2022, Egypt has only received one tranche of financing, amounting to $347 million. Since that time, the IMF has consistently postponed reviews and evaluations, which were expected to result in additional payments, due to the Egyptian government’s delay in implementing the agreed-upon reforms.
Nevertheless, the delay in implementing the Fund’s terms by the Egyptian government can be politically understood. Following the agreement, Egypt was on the verge of conducting presidential elections in December 2023.
Consequently, President Abdel Fattah Sisi opted to defer the potentially unpopular measures, such as adjusting the exchange rate of the pound or streamlining government spending. The Egyptian government was expected to resume addressing the Fund’s financing matters in 2024 following the presidential elections.
Indeed, negotiations between the Egyptian government and the IMF mission intensified in December 2024. However, a noteworthy development is the inclination of both parties to increase the amount of funding to range between $8 billion and $12 billion.
This represents a substantial increase, varying between 2.7 and 4 times the current funding. In essence, the discussions have shifted from completing the initial loan to contemplating a significantly larger, new loan.
It is uncommon for the IMF to exhibit such extraordinary flexibility, entailing a substantial increase in the value of a specific financing program within a brief negotiation period.
Justifications for Increased Funding: Geopolitical Tensions
The prevailing subject of discussion centers around the profound impact of geopolitical tensions on Egypt. This serves as the primary rationale behind Egypt’s earnest plea to augment its funding from the IMF. Indeed, the Egyptian government’s concern is well-founded.
To illustrate, the naval confrontations near the Bab al-Mandab Strait resulted in a notable 46 per cent decline in Suez Canal revenues in January 2024 compared to the same period last year. This downturn occurred as ship movements from the Red Sea to the canal decreased.
The gravity of this development cannot be overstated, considering that the Suez Canal contributes 8 per cent to the Egyptian government’s revenues and serves as a vital source of hard currency amid the country’s monetary pressures.
Furthermore, the tourism sector, a crucial generator of foreign currency inflows, witnessed a substantial 40 per cent decline in late 2023. This dip was fueled by a missile incident in the touristic city of Taba, raising concerns among foreign tourists about potential reoccurrences, particularly in the Sinai Peninsula. The war on the Gaza Strip also had its repercussions, with the killing of two Israeli tourists and their Egyptian guide in a shooting incident in Alexandria.
In addition to these challenges, the hard currency crisis reached its pinnacle within the Egyptian financial system in January 2024. This crisis manifested in the restrictions imposed by Egyptian banks on individual withdrawals and transfers in foreign currencies, reminiscent of the early stages of the Lebanese economic crisis.
By early February 2024, the crisis compelled Egyptian banks to refrain from selling the dollar at the official rate to importers, excluding those dealing in food and medicine. Consequently, importers were forced to turn to the parallel market, where the dollar exchange rate at times surged to level of 70 Egyptian pounds, in stark contrast to the official rate of 34 pounds to the dollar.
This drastic difference in exchange rates signifies the severity of the ongoing monetary crisis, underscoring the central bank’s struggle to meet the escalating demand for the dollar in the market.
Political Reasons for the IMF’s Flexibility
While geopolitical tensions exacerbated Egypt’s economic crisis, political factors influenced the IMF to soften its stance, leading to significantly increasing financial assistance to Egypt.
The IMF determines funding based on financial assessments and a country’s repayment capacity. However, it also considers the positions of major influencing countries, particularly the United States, which has the largest stake in the Fund, and to a lesser extent other major Western countries.
Currently, Egypt wields significant influence over developments in the war in the Gaza Strip, particularly in controlling the sole crossing connecting the Strip to a country other than Israel. This control augments Egyptian intelligence’s effectiveness in communicating with Palestinian factions, including the ideologically different Hamas movement.
Notably, the Egyptian government, in collaboration with Qatar, continues to play a crucial role in the Israel-Hamas prisoner and hostage exchange deal.
In addition to this role, which at this stage compels the West to appease the Egyptian government, Cairo holds significant influence over regional security matters in the Red Sea region. The nation is vested in managing tensions in the area, recognizing their impact on the revenues and operations of the Suez Canal. Egypt’s strategic role is poised to become increasingly pivotal, potentially reshaping navigation security in this crucial region.
Crucially, Egypt and Saudi Arabia currently stand as essential pillars of Arab influence, capable of providing the necessary political backing for any potential resolution to the ongoing conflict in the Gaza Strip.
While countries like Qatar and the United Arab Emirates have aimed to broaden their political roles, achieving lasting solutions in the future appears challenging without the active participation of Egypt and Saudi Arabia. Their historical influence in the region, particularly in critical and sensitive matters, makes their involvement indispensable for reaching conclusive outcomes.
At the same time, Sisi strengthened channels of cooperation with Russian President Vladimir Putin, particularly in wheat importation and nuclear energy production. This prompted Western nations, especially the United States, to reinforce their support structures for the Egyptian regime, aiming to prevent the country from leaning too heavily toward the “eastern” option.
The recent inclusion of Egypt in the BRICS bloc from the start of 2024 is expected to further drive this trend. Consequently, it is only natural for the IMF and its influential member countries to seek to enhance financial and monetary cooperation with Egypt.
This preemptive action aims to ensure that Egypt does not increasingly deepen its financial and monetary ties with BRICS institutions, which present themselves as international competitors to the traditional Western-dominated financial organizations such as the International Monetary Fund and the World Bank.
Harsh Conditions are Expected
In return for the increased financing flexibility, it is anticipated, in line with the usual practice, that the IMF will link the funding to more stringent corrective conditions. Predominantly, the IMF is likely to focus on conditions pertaining to the pound’s exchange rate and monetary policy.
The IMF typically disapproves of monetary policies rooted in a rigid defense of a specific exchange rate, favoring instead those based on a flexible exchange rate. The existence of multiple exchange rates in Egypt or the dual nature of official and black-market rates is deemed by the Fund as indicative of a crisis requiring immediate attention, not normalization.
In essence, the Fund contends that central banks should strive for maximum exchange rate flexibility, adopting a gradual and pragmatic approach in line with prevailing circumstances, avoiding haste. Conversely, the Fund emphasizes that unifying the exchange rate is an unavoidable and pressing obligation that cannot be overlooked.
For this reason, during the earlier stages, the IMF emphasized the need to adjust the pound’s exchange rate, advocating for a reduction to align more closely with the parallel market price. The goal was to unify exchange rates and subsequently transition to a flexible exchange rate in later phases. However, the Egyptian government hesitated to implement this correction prior to the presidential elections, fearing its adverse effects on the prices of imported goods.
However, with the anticipated increase in financing value, there is an expectation that the Fund will become more insistent on this measure, particularly as the gap widens between the official pound exchange rate and the parallel market price. There are even indications that the Fund might propose establishing a timeframe for achieving a free-floating exchange rate, determined by daily demand and supply, while maintaining a limited margin for central bank intervention.
This would mark a significant departure from the current practice of periodically updating a fixed exchange rate. Such a demand represents a considerable shift from previous conditions.
Regarding other stipulations that the Fund is likely to require for expedited implementation, they pertain to the state’s disengagement from economic sectors, involving the sale of its shares and the military’s shares in commercial and productive institutions.
Hastening this process, which is already underway, presents an opportunity for several Gulf countries, including the UAE, Saudi Arabia and Qatar, vying to secure their interests in crucial Egyptian sectors. This acceleration also serves as an opportunity for the influential local financial elite with close ties to the ruling regime, seeking to capitalize on privatization initiatives.
Consequently, Egypt finds itself on the brink of a challenging period characterized by harsh measures needed to address the crisis and the demanding conditions imposed by the IMF on social and living standards.
Among the most stringent conditions are those aiming to curtail public spending, potentially limiting the state’s capacity to maintain essential social protection networks. What sets Egypt’s economic crisis apart is its vast demographic mass, amplifying the potential suffering resulting from economic mismanagement, a distinction not seen in the crises that affected Lebanon and Tunisia before it.