Chronicle of the Middle East and North Africa

Why Egypt Is Revisiting Its Deal with the IMF

Egypt IMF deal
Egyptian street vendors display wares for sale at the Saturday market in downtown Cairo on October 5, 2024.
Khaled DESOUKI / AFP

Author: Khaled Mahmoud

Edited by: Erik Prins

External Pressures and Internal Challenges

Egyptian President Abdel Fattah el-Sisi is pressing ahead with what he considers a comprehensive economic reform programme, relying on conditional financing from the International Monetary Fund (IMF). Earlier, he partially succeeded in alleviating public discontent over the nation’s dire economic conditions and persistent political uncertainty. This discontent formed a major internal challenge to Sisi.

According to the IMF, the programme seeks to address significant economic imbalances. The Egyptian Ministry of Finance has framed these goals as reforming the macro economy, reducing public debt levels, stabilising prices, curbing inflation, and enhancing opportunities for the private sector.

In a striking moment that symbolised the nation’s internal difficulties and the turbulence of the broader region, Sisi sought advice from the Egyptian army’s military spokesperson, who advised him to “take it easy.”

However, Sisi, who turned 70 last November, unexpectedly and with a touch of Sufi sentiment, tearfully referred to the death of the Prophet Muhammad, drawing on religion and emotion in a highly unconventional manner. This incident underscores his tendency to invoke religious sentiment and appeal to popular emotion to rationalise his governance style.

Observers interpreted these events as a reflection of the nation’s immense challenges. Linking domestic and regional issues, Sisi, in a meeting with military leaders, stressed the necessity of continuing to build comprehensive national strength and drive developmental efforts in light of regional developments.

With ongoing crises along Egypt’s borders—in Gaza, Sudan, Libya, and Lebanon—and adverse impacts on Suez Canal revenues compounded by Houthi threats to navigation in the Red Sea, Sisi’s comments on potentially revisiting the IMF agreement appeared to many as rhetoric. His statements following a meeting with IMF Managing Director Kristalina Georgieva painted a contrasting picture, emphasising a commitment to continued cooperation and building on prior progress.

The Anticipated Shock

As Egyptians brace for the financial burden they are expected to bear again, Sisi has sought to delay the looming economic shock and ease its impact. Meanwhile, the IMF remains steadfast, demanding reforms are implemented in full. Georgieva insists that the required measures are non-negotiable, fuelling speculation about the country’s future trajectory.

While Prime Minister Mostafa Madbouly’s government denied requesting an increase in the fourth tranche of IMF funding—from $1.3 billion to $2 billion—official sources confirmed the request, making it the largest tranche to date.

The slight rise in the dollar’s exchange rate against the Egyptian pound fuelled questions over a potential increase of the loan’s value.

Madbouly’s recent call, during a meeting with the economic ministerial committee, to expedite the offering of shares in around fifteen state-owned sectors was another indication. Madbouly also confirmed the government’s intent to sell several army-affiliated companies.

This aligns with prior affirmations of continued government spending on large-scale projects, including a 100-kilometer monorail costing $5.5 billion and the New Administrative Capital, with an estimated cost exceeding $58 billion.

Despite concerns about consumer price inflation rising from 24.4% to 33.3% in the new fiscal year, the government announced plans to sell controlling stakes in about 40 companies instead of minority shares.

The Dominant Role of Military-Owned Companies

Military-owned companies in Egypt face accusations of lacking independent or civilian oversight, preventing the public from accessing the necessary information to evaluate the costs and beneficiaries of publicly funded projects.

As the military’s involvement in the economy expanded since Sisi’s rise to power, its dominance has reached unprecedented levels in modern Egyptian history. It also contributed to the failure to establish ‘civilian’ democracy in the country.

An academic paper on Rowaq Arabi, affiliated with the Cairo Institute for Human Rights Studies, highlights the strain on the state budget due to increased military spending and reduced public expenditure.

While Sisi estimates military civilian projects constitute 2–3% of the economy, economists place the figure closer to 40%.

While Egypt previously rejected some of the IMF’s demands and disregarded calls to limit military-owned companies‘ privileges, it now appears pressed to implement the state ownership policy issued in late 2022. This policy aims to restrict the state’s role in economic sectors and boost private sector participation in public investments.

Local and international human rights organisations have long called for transparency of military-owned companies’ financial information.

However, the IMF, in its prior reviews of the economic reform programme, has consistently praised the Egyptian authorities for their effective implementation, despite lingering doubts over the opaque economic landscape.

Despite controversies surrounding oversight of military-controlled economic establishments, Sisi has previously vowed to reduce the army’s role in the economy and enact structural reforms to ensure “equal opportunities between the public and private sectors.”

A view of the administrative capital of Egypt, which started to be built in 2015 to solve the population density and traffic congestion in Cairo, one of the most populous cities in the world, on September 11, 2023. The new capital, built on an area of approximately 700 kilometers, and located 60 kilometers to the east of Cairo, includes the presidency, prime ministry, parliament, ministries and other government buildings as well as embassies. In the financial center of the new capital, there are buildings of the Egyptian and world banks, and many skyscrapers such as the Iconic Tower, which is the tallest building in Africa. The project will also include houses, hotels, mosques, churches, parks, universities, research and cultural centers and a new international airport. Fareed Kotb / Anadolu Agency
Fareed Kotb / ANADOLU AGENCY / Anadolu via AFP

Three possible outcomes are foreseen: 1) the military selling off more of its assets; 2) creating workarounds to retain them while partially adhering to privatization demands; 3) or further deterioration of the economic crisis, which could have a direct impact on national security and the ability of citizens to meet their basic needs.

While the military is accused of monopolising state institutions and functioning akin to a political party, it is improbable that the army would relinquish its dominance without significant pressure. Growing public unrest, however, could force concessions.

Some analysts speculate that Egypt’s worsening economic conditions could present an opportunity for the United States to extend aid in exchange for Cairo adopting significant policy shifts. These would include addressing American concerns over Russian and Chinese influence, and Egypt’s policy on human rights and Libya.

Such a move would involve rejecting Moscow and Beijing’s growing regional footprint, tolerating instability in Libya, and showing flexibility toward Western-aligned activists.

Egypt's History with the IMF

Egypt became a member of the IMF in December 1945 with a share of approximately $1.5 billion. It reached its first agreement with the IMF in May 1962 to stabilize the economy. However, the negotiations were ultimately frozen.

Cairo acquired its first loan from the IMF in 1977–1978 during the tenure of the late President Anwar Sadat. The loan, with a value of around $186 million, was intended to address external payment challenges and inflation. The latter had risen to nearly 8.6%, as the economy faced pressures following the October 1973 War.

In the early 1980s, the Egyptian government implemented an economic stabilisation programme with the IMF to address the balance of payments deficit.

The second time Egypt borrowed from the IMF was between 1991 and 1993, during the tenure of the late President Hosni Mubarak, amounting to approximately $375 million to cover the trade deficit.

Between 1996 and 1998, Egypt sought a loan of $434.4 million from the IMF but later cancelled the request. Mubarak anticipated public backlash over the potential consequences of continued collaboration with the IMF, including rising prices and the depreciation of the Egyptian pound.

From 1993 onwards, Egypt did not receive further loans from the IMF, with the IMF’s role restricted to providing consultations and technical assistance. Cooperation ceased in 1993 but resumed in 2014.

Mubarak frequently reiterated his famous statement, “It is not my job to slaughter people,” to justify his refusal of what he described as the IMF’s inflexibility. At the same time, Mubarak was criticised for his policies, which were harsh and detrimental to citizens’ livelihoods.

Sisi’s Loans

During his first term, in 2016, President Sisi introduced a 3-year economic reform programme, following a $12 billion loan from the IMF, distributed in six tranches over three years. The programme aimed to liberalise the Egyptian pound’s exchange rate, encourage investment, reform the subsidy system, and reduce inflation.

In 2021, Egypt received a loan of approximately $5.4 billion, followed by a $3 billion loan in 2022, aimed at addressing the country’s foreign exchange shortage. Over $20 billion in indirect foreign investments had been withdrawn, triggered by the Russian-Ukrainian war and rising global inflation rates.

Initially, Egypt was to receive the loan in nine tranches over four years, each valued at about $347 million. However, the country only received the first tranche. The IMF postponed the release of the remaining tranches until the second and third reviews were completed.

In March 2024, Egypt and the IMF agreed to increase the loan value from $3 billion to $8 billion to implement key economic reforms, including transitioning to a flexible exchange rate system, reducing spending on infrastructure projects, and empowering the private sector.

In his book “Four Months in the Government Cage,” Hazem El-Beblawi, former deputy prime minister and finance minister, recounts how other Arab countries failed to honour their promises of financial support to Egypt following the fall of Mubarak. This brought the sensitive issue of borrowing from the IMF to the forefront.

Meanwhile, the middle class in Egypt is bearing a heavy toll from the government’s harsh economic reform measures, leading many families within this class to reassess their monthly spending priorities.

A State of Denial

Despite discussions suggesting that the Egyptian regime does not deserve a rescue package, researchers have observed that the negative impact of the IMF’s austerity conditions have significantly affected politics in Egypt, threatening societal stability.

As a prerequisite for obtaining the IMF’s approval for financing, Egypt was subjected to unfair conditions that adversely impacted the quality of social and political life.

Although the IMF claims its plan aims to benefit Egypt by taking advantage of the rapidly growing population, modernising the economy, and providing a modern social safety net to protect the vulnerable, a study by the Egyptian Center for Economic and Social Rights concludes that Egypt’s reform measures have merely created vicious cycles.

These policies have primarily benefited debt traders, while millions of citizens have suffered due to the economic liberalisation and the state’s withdrawal from its social responsibilities.However, the obstacles to achieving the economic strategy are largely tied to issues of power, which need to be addressed through a national dialogue that encompasses the country’s conflicting visions.

The military establishment faces a challenging decision regarding its economic involvement, which, if ended, would subject it to accountability by parliament including disclosure of its financial accounts to its committees and members.

Despite the regime’s state of denial, evident in its insistence on portraying large national projects as key to achieving an economic boom, Madbouly’s government remains in power. This despite growing suspicions of its declining popularity and the extensive, albeit muted, criticism it faces domestically. Sisi has continued to support this government, maintaining cooperation with the IMF and ignoring the increasing discontent.

Entering the second year of his third consecutive term, Sisi appears unconcerned with maintaining internal stability, relying on the heroism and understanding of his people to bear the economic reform burden. Meanwhile, the political dimension remains absent from the conversation, despite the underlying risks it poses.

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written by
Kawthar Metwalli
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