What Happened?
The question, in fact, is what did not happen. Several things. First, the International Monetary Fund (IMF) has not yet issued its first staff review of Egypt’s implementation of its new $3 billion loan program (known as an Extended Fund Facility), which was agreed in December 2022. This was expected to be released on, or within three months of, March 15, 2023, but the IMF team has still not indicated when it expects to conclude its review.
Second, the Egyptian government did not raise the $2 billion in foreign currency required to increase Egypt’s net international reserves by $6 billion by the end of June, as agreed with the IMF. Its failure to fulfill this quantitative performance criterion moreover reflects the stalling of the program of public offerings of state-owned companies and facilities announced by Prime Minister Mostafa Madbouly in February, which was the government’s proposed means of generating the needed $2 billion.
Last but not least, Egyptian President Abdel-Fattah al-Sisi and the Central Bank of Egypt have signaled that interest rates will not be raised further, meaning that Cairo might renege on its agreement with the IMF to adopt a fully flexible exchange rate that would allow the Egyptian pound to float freely in currency markets. In response, IMF Managing Director Kristalina Georgieva observed that drawing on foreign exchange reserves to shore up the pound is “like putting water in a bucket that has holes.”
Why Is It Important?
The firmness displayed by the IMF is unusual, and has spurred speculation about what lies ahead for Egypt. The statistics paint a grim picture. In April, the IMF projected that the government’s general gross debt (combined domestic and external) would reach 92.9 percent of Gross Domestic Product (GDP) in 2023, after which it would decline, while Fitch credit rating agency expected it to increase to 96.7 percent of GDP. The latter seems likely, as the latest figures for external debt show a rise from $162.9 billion in December 2022 to $165.4 billion by March 2023, despite government efforts to reduce demand for foreign currency by blocking certain imports and slowing some construction projects. Credit rating agencies Standard & Poor’s, Moody’s Investors Service, and Fitch all lowered their outlook for Egypt’s “debt affordability and debt-sustainability profile” from stable to negative, amid concerns that the country might default on repaying sovereign debt or at least seek to restructure it.
Egypt has not run out of options, but in the immediate future much hinges on the IMF. There is no fixed deadline for its review of Egypt’s implementation of agreed conditions, as the technical memorandum that forms part of its agreement with Egypt does not set one. The catch for Egypt is that the second tranche of the loan, worth $354 million, cannot be released to it before the review. The delay has already been costly for the country, not because of the amount of money involved, but because of the negative signal it sends to global markets, which has a deterring effect on creditors and investors.
To explain the delay, IMF staff could cite technical reasons to the Fund’s Executive Board, which must approve further payments. Alternatively, they could judge Egypt to have progressed enough on program implementation to justify recommending Board approval for the release of funds. The technical memorandum with Egypt does not set binding deadlines or mandate penalties for non-implementation of agreed benchmarks, and so the loan program is not in imminent danger of being terminated.
What Are the Implications for the Future?
There is hope for Egypt in this lack of specificity. On June 8, the IMF reiterated that its review of the loan program will cover four items: implementation of the state’s divestment strategy (issued in 2022), under which the state will terminate or reduce its ownership of companies in select economic sectors; competitive neutrality to promote a level playing field between the public and private sectors, by ensuring that state-owned companies and economic agencies do not benefit from tax and customs exemptions that are denied to private sector competitors; slowing down large national investment projects, which have generated government debt and drag on foreign exchange reserves; and moving toward a flexible exchange rate, which is seen as key to stimulating exports and reducing trade deficits. The IMF has held firm across the board so far, but there is a definite possibility that it will conclude its review if the Egyptian government allows the pound to float freely, which the IMF has so far made a non-negotiable condition.
And this is where further trouble may arise. With annual headline inflation close to a record-high 32.7 percent in May, far above the 18.25 percent deposit interest rate set by the Central Bank of Egypt, both the government and Sisi have pushed back with increasing force against freeing the exchange rate, arguing that the country needs to build up its foreign exchange reserves if it is to manage yet another devaluation of the Egyptian pound, which has already lost 50 percent of its value against the U.S. dollar since 2022.
It is difficult to see what might break this deadlock. Economist Hani Geneina, formerly Deputy Assistant Governor of the central bank, has mooted the possibility of Egypt’s pulling out of the IMF program or suspending its participation in it. Indeed, the government plans to raise some 49 percent of its 2023–2024 budget through borrowing, so it badly needs the IMF stamp of approval. Given that debt servicing takes up 56 percent of the budget, and with the cost of servicing debt now standing at 116 percent of state revenue, this is a classic case of new debt for old. But because, according to a Finance Ministry statement, each 1 percent rise in interest rates—which will accompany any further devaluation—translates into an additional 70 billion Egyptian pounds (approximately $2.65 billion at the official exchange rate) of deficit, meeting this IMF demand would risk plunging Egypt into a vicious circle.
The IMF has so far used its leverage effectively and skilfully, but government delivery on agreed benchmarks has been minimal and confined largely to some online procurement reporting. The government has not delivered important first-phase targets such as publishing a comprehensive annual tax expenditure report providing details and estimates of tax exemptions and tax breaks broken down by classification for all state-owned enterprises.
With growing pushback from both government and public in Egypt against devaluation—and against the use of privatization to generate foreign exchange earnings, which some see as merely substituting state-owned monopolies with equally problematic private ones—there is a plausible argument for the IMF to rethink the sequencing of its priorities. A 50 percent devaluation undertaken by the Egyptian government after the 2016 IMF loan program did not lead to structural reform, nor has the devaluation of the past year, which was of equal magnitude. Indeed, in the midst of a financial crisis driven to a large degree by its upmarket construction projects, new business incentives issued by the government in May 2023 once again privileged the real estate sector.
If there is one thing the IMF would do well to single out as key to effecting transformative change, it is to insist on demanding financial transparency—including for all business and non-commercial activities in the civilian domain by any military agency—as the sine qua non for providing support. The government should also do more to help the most vulnerable people and reduce forms of aid that benefit the rich, as Georgieva herself has suggested. This would almost certainly risk alienating Egypt’s elites, whose support is needed to allow other structural reforms to go through, but it would make a material difference for the country’s poor.
