Egypt’s deal with the IMF comes with dramatic consequences for the economy

Government-mandated reforms to comply with IMF loan has led to a dramatic fluctuation of the Egyptian pound

Daily life in Egypt has been strained by a wave of price rises driven by Egyptian pound slumps, leaving the country at the mercy of the dollar.
Jamie Wignall
Daily life in Egypt has been strained by a wave of price rises driven by Egyptian pound slumps, leaving the country at the mercy of the dollar.

Egypt’s deal with the IMF comes with dramatic consequences for the economy

Cairo: Dizzying price rises have added strain to Egyptian lives across the country following a move to let internal financial markets set the value of the Egyptian pound without limits.

The full floatation of the currency was agreed as part of reforms required under the terms of a multi-billion-dollar loan from the International Monetary Fund (IMF). It came at a difficult time, alongside increasing economic turmoil in the global economy at the beginning of the new year.

Many Egyptians are struggling to swallow the hard pill of wider economic reforms mandated by IMF. The topic seems to be the only thing Egyptians talk about lately.

Egyptian people stand at Attaba market in Cairo, Egypt, 10 January 2023.

The drowning currency’s gasp for air is all that can be heard.

The slump in the country’s currency took the price of a dollar as high as 32 Egyptian pounds on 11 January. The next day, the pound rebounded to about 30 pounds to the dollar. Economic pressure and tension were palpable in the markets as prices increased from one hour and the next.

Dwindling purchasing power

The vast majority of Egyptians have lost more than one third of their purchasing power in the past few months. The pound continues to weaken, prices continue to rise, both at home and worldwide, Russia's war on Ukraine is still raging, and foreign investors are still reluctant to enter the Egyptian market.

Meanwhile, it remains unclear if the private sector can rescue the economy at all, and if it can, to what extent it can be saved.

“How long will we have to submit to the IMF’s whims?” asks Hassan Gomaa, owner of a small bakery.

“Whenever the government strikes a deal with the IMF, citizens bear the brunt. Our pockets are emptied, and our peaceful lives are disturbed.”

Since Cairo resorted to the IMF in November 2016, Egyptians have felt the impact of government mandated economic reforms which include: fuel and natural gas price jumps, subsidy cutbacks, pricier tags for goods and services, and higher fees and taxes.

Along with support from friendly Arab countries, Cairo relied heavily on the three-year $12 billion loan it took out from the IMF in several instalments under an agreement concluded in November 2016.

However, the government failed to carry out the required reforms that would have improved the investment case for the country. Instead, investors complain of difficult procedures, increased fees, and competition from the state.

As markets grappled with an unworkable official exchange rate, the Central Bank of Egypt (CBE) began floating the pound as of 2016. The Egyptian currency’s value weakened sharply.

A security guard stands in front of a currency exchange bureau advertisement showing an image of the US dollar in Cairo, Egypt, January 18, 2023.

Where once 8 pounds were required to buy a dollar, soon it was 20. The pound stabalised at around 16 to the dollar in November 2016. This exchange rate impact was one of the prices paid by the country to fill the deficit in the state budget with the IMF loan.

Economy faces headwinds

In addition to staggering public expenditures, Egypt has also been affected by several developments that transcend its borders: the repercussions of the Covid-19 pandemic, rising geopolitical tensions around the world, especially as the Russia-Ukraine war continues to rage, and moves by central banks across the world to increase interest rates, led by the US Federal Reserve.

So, when the dollar peg to Egypt’s pound was altered on the official market, the parallel currency market was immediately shaken — particularly as the gap between the official and unofficial market rates tightened.

Since March 2022, the CBE has gone to great lengths to control the exchange rate. Its long list of measures included a significant three-phased devaluation of the Egyptian currency relative to the dollar. Thus, the price of a dollar surged from 15.75 pounds in March to 30.60 pounds following the third floating in December 2022.

The price hike was felt clearly in the food market. It struck oils, fats, vegetables, and fruits. But it had an even bigger impact on the prices of fish, meat, poultry, and cheese. What were once basic items suddenly became luxuries to many citizens as the pound fell to its lowest ever level against the dollar.

How big are Egypt’s debts?

According to a report released by the CBE last September, Egypt’s external public debt stands at about $157.8 billion, compared to $34.4 billion at the end of 2012 — a near fivefold increase in a decade.

Egypt's external public debt stands at about $157.8 billion, compared to $34.4 billion at the end of 2012 — a near fivefold increase in a decade. 

CBE report

According to Prime Minister Mostafa Madbouly, the government's public debt is currently estimated at 86% of GDP.  

Figures from the Ministry of Finance indicate that debt interest allocations in the state's general budget during the current fiscal year amounted to about 690.2 billion Egyptian pounds, increasing by more than 19% compared to the previous fiscal year, when it stood at 579.6 billion pounds.   

Debt interest allocations make up nearly 33.3% of total budget expenditures, more than five times higher than the health sector's allocations, estimated at 128.1 billion pounds.  

The $9 billion loan Cairo received last October brings Egypt's total external debt to approximately $166 billion.  

Intended to finance Egypt's budget for the 2022/2023 financial year, the loan includes $3 billion from the IMF, $1 billion from its Resilience and Sustainability Trust, and $5 billion from development partners.  

The loan was yet another step on the debt path the Egyptian government chose in recent years to try and heal the fissures in the economy. 

Are Egypt's debts sustainable? 

Dr. Fakhri al-Faqi, a former IMF advisor, said in a press statement that Egypt is still within safe boundaries in terms of debt repayment and has never once failed to honour its financial obligations.

The expert applauded what he called the efficiency of the public debt policy, central to which is the diversification of borrowing sources, noting that 90% of loans are medium-to-long-term with repayment periods of up to 40 years. 

Others, including an expert speaking on condition of anonymity, believe the large rise in debts could undercut the state's ability to repay, especially considering the slow pace of the rebound in foreign investment and tourism. 

 A view of old houses with hotels and the Great Pyramids during sunset with fog from air pollution over the Egypt's capital of Cairo, Egypt February 5, 2023.

Egypt has been suffering from a shortage of foreign exchange reserves since early last year.  

The pound, it is expected to continue to decline against foreign currencies despite Egypt obtaining a new loan from the IMF, which stipulated that Egypt establish a permanent and flexible mechanism to determine the pound's exchange rate against foreign currencies. 

The annual inflation rate rose from 21.5% in November to a record 24.4% in December according to the CBE, which, in early 2021, imposed restrictions on finance imports at a time when the country was under significant financial pressure.

Consequently, large volumes of goods were left to accumulate at ports. Scraping these restrictions was one the IMF's key requirements recently.  

The CBE requires gold exporters to deposit their proceeds in dollars in banks within 10 days, at the risk of blacklisting should they cross that deadline. Many decisions establishing controls for the use of credit cards for withdrawals and purchases outside Egypt have also been issued. 

Another expert, who also asked not to be named, said the market is likely to stabilise in the coming period, especially after government-affiliated banks launched investment certificates of deposit at a 25% interest rate return and narrowed the gap between exchange rates in the official and parallel markets.  

The market is likely to stabilise in the coming period, especially after government-affiliated banks launched investment certificates of deposit at a 25% interest rate return and narrowed the gap between exchange rates in the official and parallel markets. 

Banking expert

The expert said the move was aimed at halting "dollarisation" — when people hold dollars rather than local currency as a store of value — and would draw cash liquidity out of the domestic market to curb demand, in light of the limited supply of products and goods. 

In March, the banks had launched similar savings certificates just in time for the CBE's approval of the first significant increase in the exchange rate. That came during an extraordinary meeting held following the second floating with the aim of withdrawing dollars from the market.  

Those certificates managed to attract deposits worth 750 billion pounds at the time, and both the CBE and other banks are eyeing the same result from the latest issuance of certificates.  

The recent floating has entailed certain and inevitable costs and high prices in order to secure benefits and advantages that may not be guaranteed if not supported by government policies and programmes aimed at increasing private investment, exports, and tourism. 

High-rising towers on the Nile River in Cairo, Egypt, 19 January 2023.

The $3 billion IMF deal 

A statement signed by Managing Director Kristalina Georgieva confirmed that the IMF approved a 46-month agreement with Egypt under the Extended Fund Facility in an amount equivalent to around $3 billion. 

Most citizens were left puzzled by the jargon that came with the money.  

Phrases like "meet the balance of payments need and provide support to the budget," and "divestment of state-owned assets" are difficult to understand.  

Terms like "sustainable growth," "shift to a flexible exchange rate regime", "policy package to preserve macroeconomic stability and restore buffers," "gradually reducing inflation," and "enhancing social safety nets to protect the vulnerable" don't really help.  

But the IMF experts' latest report essentially says that Egypt pledged currency flexibility, a greater role for the private sector, and a package of monetary and fiscal reforms when it secured the $3 billion fiscal support agreement with the IMF.  

Among the government's pledges to the IMF is to slow the pace of investment in public projects, including national projects, in order to curb inflation and preserve foreign currency, but which projects will be subject to these measures has yet to be determined.  

These actions will spark a rise in the prices of most fuel products in alignment with the country's fuel index mechanism in order to offset the slowdown in these increases during the last fiscal year. 

The government's generous spending on infrastructure over the past few years hovers around $100 billion (over 1.7 trillion Egyptian pounds), Planning Minister Hala El-Said said in an interview.  

This includes the construction of an extensive network of roads, bridges, and new cities, not least of which is the New Administrative Capital. Projects for a high-speed rail network and a nuclear power plant, each costing tens of billions of dollars, are also underway. 

In an official statement published in the Official Gazette, the Egyptian government recently decided to rationalise domestic spending and launch a package of belt-tightening measures until the end of the 2022/2023 financial year, to counter the foreign currency shortage.  

2. FILE - People crowd a street a few hours ahead of curfew in Cairo, Egypt,

But it seems the government did not study how this would tip the scales in favour or against social classes, particularly the middle class, which is the main driver of most global economies. 

Suez Canal a red line 

Egyptians are becoming wary that the aim of a new bill could be to sell the Suez Canal, or divest some of its assets, which would be a controversial move for the populace.  

Reports of the House of Representatives' preliminary approval of a new bill on the Suez Canal Authority sparked concern. The bill submitted by the government stipulates the amendment of some provisions of Law No. 30 of 1975 regulating the Suez Canal Authority (SCA) to enable it to establish its very own investment fund.  

The heated debate prompted Speaker Hanafi Gebaly to clarify the matter in a televised address.  

He said: "The SCA bill provides that the fund to be established would be entitled to sell, buy, lease, or use its fixed or movable assets. This is only natural and consistent with the nature of funds as a means of financing and investment. It does not impact the Suez Canal itself in any direct or indirect way."  

He underlined that "the word 'assets' does not in any way indicate the Canal itself," which is "a public state property and can never be relinquished." 

Statements made by Mohab Mamish, Advisor to the President for Suez Canal projects, to the Al-Masri Al-Yawm newspaper, only exacerbated the fears of the Egyptian people.  

Mamish warned against the approval of the bill saying it paves the way for something we have not seen in decades: foreigners at the helm of the SCA. That would come at a time when the canal is generating record revenues and profits for many years. 

The press raced to publish Mamish's 'new' statements, most of which were clarifications of previous statements. 

He assured that: "President Abdel Fattah El-Sisi's stance is loud and clear as always: there will be no compromise on the Suez Canal."  

Rest assured. The Suez Canal is in good hands, and we have a strong president who defends the nation's rights and will not accept to compromise on any grain of sand in the Suez Canal.

Mohab Mamish, Advisor to the President for Suez Canal projects

"Rest assured. The Suez Canal is in good hands, and we have a strong president who defends the nation's rights and will not accept to compromise on any grain of sand in the Suez Canal," he said. 

This picture on July 7, 2021 shows a view of the Panama-flagged MV 'Ever Given' container ship sailing along Egypt's Suez Canal near the canal's central city of Ismailia.

The Suez Canal is close to Egyptians' hearts, for it was first built with the blood of their ancestors who began digging the canal in 1859, and later with their own money under El-Sisi's auspices.  

Egypt relies on revenues generated by the canal, which represent about 1.5% of the total economic output, to support the state treasury and bring in foreign currency. This dependence was especially remarkable in recent years, with revenues hitting a record USD 8 billion last year. 

Despite the price jumps, the pound's devaluation against the dollar, the rise in the cost of living, and the IMF's conditions, Egyptians are trying to overcome their economic crisis through self-depreciating humour in a bid to put a positive spin on their bitter reality. 

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