On October 27, after months of negotiations, Egypt reached a new agreement with the International Monetary Fund (IMF) to borrow $3 billion over a 46-month period. The Egyptian economy has been struggling over the past couple of years due to the ramifications of the COVID-19 pandemic and fallout from Russia’s war on Ukraine. This new agreement aims to help the Egyptian government to stabilize its economy and strengthen its social safety net, and demands that Egypt implement several economic reforms, including adopting a flexible exchange rate, decreasing public spending, and encouraging growth in the private sector. However, it is doubtful that the new agreement will be able to magically save Egypt’s economy and to solve its chronic problems.
A New Agreement
The new deal between Egypt and the IMF is a staff-level agreement that would give Egypt access to $3 billion and allow it to borrow another $5 billion from multilateral and regional partners. Egypt has also requested an additional $1 billion from the IMF’s newly created Resilience and Sustainability Facility. The deal is contingent upon Egypt’s commitment to implementing a comprehensive economic and social reform program over the next four years. To secure the agreement, Egypt’s Central Bank had to take several steps, including adopting a flexible exchange rate and raising the interest rate by 2 percent, which led the Egyptian pound to lose roughly 14.5 percent of its value, hitting a record low against the dollar. In total, the Egyptian pound has lost around 34 percent of its value since the beginning of 2022, and experts expect that it will become even weaker in the coming months.
To secure the agreement with the IMF, Egypt’s Central Bank had to take several steps which led the Egyptian pound to lose roughly 14.5% of its value.
Challenges posed by the COVID-19 pandemic and adverse economic effects from the Russian war in Ukraine have exacerbated Egypt’s already longstanding woes and created additional uncertainty about the country’s ability to face them. This new agreement with the IMF is meant to help Egypt “maintain economic stability, address macroeconomic imbalances and spillovers from the war in Ukraine, protect livelihoods, and push forward deep structural and governance reforms to promote private sector-led growth and job creation.” However, relying on borrowing from external organizations like the IMF will not solve Egypt’s economic problems or improve the lives of the millions of Egyptians who suffer from acute poverty and a lack of economic opportunities.
Egypt’s Chronic Economic Woes
Egypt’s economic problems are nothing new. They are both deeply rooted and multifaceted, and can be traced back to the economic and development policies and programs adopted by various Egyptian governments over the past seven decades. But the country’s crises were made especially worse under the regimes of former President Hosni Mubarak and current President Abdel Fattah el-Sisi.
In the 1950s and 60s, Egypt under former President Gamal Abdel Nasser adopted a state-directed economic policy wherein the state controlled the entire economy through a centralized strategy across the industrial, agricultural, services, and commercial sectors, with extremely limited room for the private sector. In order to enhance his public image, Abdel Nasser introduced free education and healthcare to Egypt’s middle and lower classes and subsidized several goods and commodities such as bread, gas, electricity, and cooking oil. However, his successor, Anwar al-Sadat, drastically liberalized the economy, dubbing his program one of infitah, or “open door” policy, which aimed to encourage the growth of the private sector and to increase foreign investment in Egypt.
Committing to the infitah meant applying austerity measures and decreasing public spending. However, this policy backfired after Sadat’s government increased the price of government-subsidized bread in January 1977, which lead to popular riots and protests often referred to as the Bread Uprising. The government immediately backtracked and suspended the cuts in bread subsidies. When Sadat’s successor Hosni Mubarak came to power in 1981, he was therefore careful not to repeat Sadat’s mistake, and so adopted a mixed economic policy that combined limited economic liberalization with an increasing role for the state in financing development projects and subsidizing basic goods and public services.
However, facing an oil crisis in the 1980s and a shortage of state funds, Mubarak resorted to agreements with the IMF and other international lenders in order to bail out his economic plans. In return for the loans, Mubarak’s government was forced to implement an IMF-sponsored Structural Adjustment Program, a largely neoliberal program that had a significantly negative impact on Egypt’s middle and lower classes during the 1990s. And in the decade leading up to the 2011 Egyptian uprising, the pace of privatization intensified, further alienating millions of Egyptians and severely impacting their livelihoods, thereby paving the way to Mubarak’s removal from power in February 2011.
In the decade leading up to the 2011 Egyptian uprising, the pace of privatization intensified, further alienating millions of Egyptians and severely impacting their livelihoods, thereby paving the way to Mubarak’s removal from power in February 2011.
These volatile and uneven economic policies have resulted in a distorted version of development in a country already suffering from limited resources and a rapidly growing population, and have created several problems that will have a lasting impact, including poverty, corruption, social and economic inequality, and high unemployment. In addition, the political turmoil that followed the 2011 uprising—which was abruptly ended by the military coup of 2013—further exacerbated these problems and opened a new phase in the long trajectory of Egyptian misery and suffering.
Reform or Further Devastation?
Egypt has a long history of making loan agreements with the IMF and the World Bank. But the country’s experience with both of these institutions has been proven to be counterproductive, and has not led to significant improvements in economic and social conditions. In fact, these agreements have increased Egypt’s economic vulnerability and its socioeconomic problems. This has become especially evident under the Sisi regime. Instead of actually tackling Egypt’s chronic problems, Sisi chose to build a “new republic” by relying on excessive borrowing and useless megaprojects. In order to finance his ambitious projects, he turned to regional allies and international financial institutions such as the IMF and the World Bank. Within just a few years, Sisi received billions of dollars from countries such as Saudi Arabia, Kuwait, and the UAE as a reward for his role in the 2013 coup that removed the Muslim Brotherhood from power. According to some reports, Egypt received around $17.4 billion in long-term deposits from Gulf Arab creditors between 2013 and 2016.
In order to finance his ambitious projects, he turned to regional allies and international financial institutions such as the IMF and the World Bank. Within just a few years, Sisi received billions of dollars from countries such as Saudi Arabia, Kuwait, and the UAE.
In 2016, the Sisi regime reached its first deal with the IMF to receive a $12 billion three-year loan. However, the deal required Egypt to implement major economic reforms, including devaluing its currency, increasing austerity measures, implementing new taxes to reduce the country’s budget deficit, and encouraging private sector growth. The government ultimately implemented the first three steps, but not the fourth one. In November 2016, the government devalued its currency by nearly 50 percent as part of IMF-mandated reforms, causing significant hardship for all but the wealthiest Egyptians. And the Egyptian pound has further declined in value over the past six years, further increasing the suffering of millions of ordinary Egyptians.
The Sisi regime has also implemented harsh austerity measures such as cutting fuel and energy subsidies for the country’s middle and lower classes. According to the Egyptian Initiative for Personal Rights, the government’s cuts “caused cumulative increases in the electricity bills paid by the poor and middle-income segments that reached 218 percent and 271 percent, respectively, from 2011 to 2017–2018.” Austerity measures hit the lower classes especially hard, and increased the total percentage of Egyptians living in poverty to more than one third of the total population.
To mitigate the impact of austerity measures on the poor, Sisi’s government has implemented social protection programs, such as Takaful and Karama (Solidarity and Dignity), which include both conditional and unconditional cash transfers to those in need that are meant to compensate for the regime’s cuts in subsidies. The Takaful and Karama programs, which are run by Egypt’s Ministry of Social Solidarity, were established in 2015 and are supported by a $400 million World Bank program. According to the World Bank, the programs have reached a total of 2.26 million households, amounting to roughly 9.4 million individuals, or about 10 percent of the country’s population. However, the government’s social programs suffer from many technical and policy issues that negatively impact their effectiveness and feasibility. For example, according to one study, the eligibility and criteria for selection are not fair, and exclude certain groups of people, such as those who work in the agricultural sector. In addition, the purchasing power of the cash that people receive from these programs has decreased as a result of the devaluation of the Egyptian pound and the rising cost of basic goods and services.
Although there are no official statistics regarding the Egyptian Armed Forces’ share of the country’s economy, the military is believed to control a vast and diverse economic portfolio, one that has significantly increased since Sisi took office in 2014.
Another key problem Egypt is facing is its military’s extraordinary involvement in the economy. Although there are no official statistics regarding the Egyptian Armed Forces’ share of the country’s economy, the military is believed to control a vast and diverse economic portfolio, one that has significantly increased since Sisi took office in 2014. As scholar Yezid Sayigh has argued, the Egyptian military “manages a significant share of the overall volume of publicly contracted infrastructure and housing. It builds industrial zones and produces capital goods, consumer durables, transport and heavy goods vehicles and parts, and information technology equipment. It undertakes associated retail, owns commercial media companies and hotels, and is rapidly increasing its stake in agriculture, fisheries, and mineral extraction.” The massive involvement of the military in the country’s economy has significantly damaged the private sector and put many private companies out of business since they are unable to compete with the military’s businesses, which are exempted from taxes and use conscripts as free labor.
Sisi’s Gluttonous Borrowing
Sisi’s economic policy can be summarized in two words: massive borrowing. Since he came to power, Sisi has relied heavily on loans in order to finance his development projects. Not surprisingly, Egypt’s foreign debt has tripled since Sisi first took office in 2014, and in June 2022, Egypt’s external debt stood at $155 billion, with total debt predicted to reach $557 billion by 2026. According to the Central Bank of Egypt, of the $52 billion the country owes to multilateral institutions, 44.7 percent is owed to the IMF. Egypt’s other top foreign creditors include the UAE, Saudi Arabia, Kuwait, Japan, Germany, France, the UK, the US, and China.
Sisi’s ill-advised and distorted economic policies have turned Egypt into a black hole that sucks up foreign funds and provides little to no benefit to the vast majority of the country’s population.
The massive sums of Egypt’s foreign debt have made it the MENA region’s largest borrower and have exposed the Egyptian economy to external shocks. Sisi naively believed that his megaprojects would improve the economy to such an extent that they would pay back all of these debts. However, he was clearly wrong. The Egyptian economy became more reliant on external funds and entered a vicious cycle of foreign debt accumulation, which has now brought the country to a critical juncture that might end with it entering bankruptcy, as happened in Lebanon and Sri Lanka. Egypt’s debt-service ratio reached 38.5 percent in March 2022, and is expected to increase further by the end of this year, which would put massive pressure on the country’s budget. In addition, the majority of Egypt’s borrowed funds were sunk into luxurious and unnecessary megaprojects, such as Sisi’s New Administrative Capital, which cost around $58 billion.
The enormous cost of such projects has come at the expense of millions of ordinary Egyptians who are currently unable to cover their basic needs, including food, healthcare, and education. Egypt’s new agreement with the IMF will not solve the country’s economic crisis, but will instead deepen it. Sisi’s ill-advised and distorted economic policies have turned Egypt into a black hole that sucks up foreign funds and provides little to no benefit to the vast majority of the country’s population. As there is no indication that Sisi will abandon this policy in the foreseeable future, it is all but certain that the Egyptian people will continue to suffer while their government persists in ignoring their basic needs.
Featured image credit: Shutterstock/Thomas Wyness