‘International Misery Fund’: Egypt struggles not to fall into IMF debt hole

Its history with the IMF spans 78 years and dates back to the tail end of 1945 when Egypt first joined the fund. The relationship has evolved over the years through several agreements, some of which failed, and others resulted in a series of loans.

In the 1950s, Egypt attempted to secure its first IMF loan to finance the construction of the High Dam. However, this was unsuccessful. The IMF based its rejection on political and social grounds, as Egypt had close relations with the former Soviet Union during the Cold War.

Egypt returned to the IMF in May 1962 and successfully signed its first loan agreement. Despite this, negotiations were suspended for about 15 years.

Seven agreements in 78 years

Egypt has entered into seven agreements with the IMF, the first of which was concluded during the tenure of the late President Anwar Sadat. The agreements were related to various events the Egyptian economy experienced after the October 1973 war.

Between 1973 and 1977, Egypt concluded the economic stabilisation programme agreement with the IMF. It received a loan of $185.7mn (1977-1978) to address the issue of delayed external payments and the rise in inflation rates.

During that year, most imports totalling about $1.21bn were financed through bank facilities. This marked a significant increase in reliance on this type of debt.

According to international statistics, the trade deficit as a percentage of GDP was 10.2%, and the debt-to-GDP ratio increased to 39.8%, the highest among developing countries that year.

President Sadat adopted a policy of economic openness, which included offering guarantees, incentives, and benefits and creating an attractive investment climate.

The state's economic policy favoured official foreign loans and foreign private investment, allowing foreign and Arab capital to contribute to the Egyptian economy. Dependence on short-term external loans also increased.

Numerous issues played an important role in reshaping Egyptian economic policy. Following its agreement with the IMF, the government made a series of economic decisions that it described as "necessary and crucial" at the time.

These led to a 30-50% increase in the price of basic necessities such as bread, petrol, household gas, sugar, rice, and others. This sparked public outrage and massive protests. 

A state of chaos prevailed in the country; the protests were referred to as the "thieves' uprising" by Sadat, while political forces labelled them the "bread uprising."

Sadat initially resorted to imposing a curfew and ordering the military to take to the streets to control the demonstrations. However, the government quickly walked back their stance to avoid further tensions and social unrest in the country.

Ridding itself of burdens

Following a deterioration of economic indicators and the country's need for stability, the government of then-President Hosni Mubarak accepted IMF loans totalling $375.2mn in 1991 and 1993 to cover the trade deficit.

This was known as the Economic Reform Programme, which included stabilisation and structural adjustment. The government focused, in particular, on liberalising the exchange rate and paving the way for private-sector participation.

The agreement was successful, although some argued it was not enough.

At the time, Mubarak's decision to participate in the Gulf War opened the door to financial support. It led to the cancellation of 50% of Egypt's debts to Paris Club member countries, reducing the heavy burdens on the Egyptian economy.

Once again, Mubarak turned to the IMF between 1996 and 1998 to secure a loan of $432.4mn. However, the agreement didn't go through as the IMF had unreasonable demands. These included a 90% price increase, which would have increased the suffering of Egyptian citizens.

Egypt again sought a loan from the IMF during the rule of the Supreme Council of the Armed Forces following Mubarak's ousting in February 2011, but no agreement was reached.

During the presidency of the late Mohamed Morsi, Egypt requested loans from the IMF twice, initially for approximately $3.2bn, and then $4.7bn. However, the IMF suspended lending to Egypt due to the country's political crises during the rule of the Muslim Brotherhood.

In 2016, between hopes for genuine economic reform and fears of deteriorating conditions and economic indicators, Egypt – under the leadership of President Abdel Fattah el-Sisi – signed an agreement with the IMF for a loan of $12bn over three years.

This polarising move sparked significant opposition and widespread debate among economists and politicians, who held either positive or critical viewpoints.

For the first time in its history, the IMF had to issue a statement addressing concerns and reassuring the Egyptian public, which rejected the IMF's terms.

Key provisions of the agreement included floating the Egyptian pound, a reduction in subsidies, privatisations, and the introduction of a value-added tax (VAT).

While the government argued that the loan was necessary to restore the confidence of international institutions and implement economic reforms, opponents warned of growing debt and rising prices.

Since then, Egyptians have colloquially referred to the IMF as the International Misery Fund.

Citzen bear the brunt

Egyptian citizens have struggled due to what they perceive as unfair terms and increasing pressure on the country's economy.

From one loan to the next, structural reform programmes failed to achieve their desired results.

Egyptians bore the consequences of the decision to float the Egyptian pound and the decrease in its value. The inflation rate continued to rise, fluctuating between 36 and 41%, which further burdened the people.

Nevertheless, Egyptians tried to adapt to their new reality and live frugally, forgoing luxuries. Over the past seven years, they have shown extraordinary patience and resilience in the face of mounting pressures, hoping to escape their economic nightmare and reduce Egypt's debt burden.

The situation, however, is more complex.

While the IMF's support to any given country is aimed at implementing structural reforms so that it can produce and repay loans, the reality is different.

These funds are often used to pay off other debts or invest in projects that do not generate the anticipated dollar returns.

In Egypt, this has contributed to a surge in debt and has consumed a significant portion of the country's revenue in repaying it.

Since 2014, the Egyptian government has made efforts to develop infrastructure, expand the Suez Canal, and build a new administrative capital, contributing significantly to economic growth and attracting foreign investment and tourism.

Read more: The Suez Canal: A lifeline to Egypt and crucial gateway for global trade

However, economists have expressed concerns about the increased debt levels and their burden on the country's limited sovereign resources.

Heavy reliance on the IMF

In the Arab world, Egypt is the top IMF borrower, with a total debt of around $20.2bn. Egypt also has a total external debt of more than $165bn, which must be repaid within the next five years.

The nation signed its latest loan agreement with the IMF worth $3bn under the Extended Fund Facility in October 2022.

Egypt has, so far, only received the first tranche, as the remaining tranches are pending approval from the IMF.

The review process has been marred by uncertainty, due to Egypt's failure to meet certain conditions. Specifically, Egypt was expected to explore alternative financing options to the IMF, considering the lack of significant progress in overcoming the foreign currency crisis. However, the country's credit rating was downgraded soon after the IMF agreement.

Egypt is currently facing a tough situation.

The country's foreign exchange reserves have declined, while external obligations such as import financing and debt repayment are rising. In June, President el-Sisi hinted that further devaluing the Egyptian pound would be considered a national security issue.

This could lead to increased pressure from the IMF, which insists that Egypt follow a more flexible exchange rate to ensure further cooperation.

$20bn in six years

The Executive Board of the IMF approved the disbursement of Egypt's final tranche of the Stand-By Arrangement loan in June 2021, totalling approximately $1.7bn, out of roughly $5.4bn.

With this, Egypt's total borrowing from the IMF over the past six years amounts to about $20.2bn, spread across three different loans:

• $12bn as part of the Extended Fund Facility loan, which was disbursed in six tranches over three years and coincided with the economic reform programme Egypt began implementing in 2016.
• $2.77bn in emergency assistance under the Rapid Financing Instrument initiative, to help address the fallout from the COVID-19 pandemic.
• $5.4bn under the Stand-By Arrangement programme, spanning one year and spread out over three tranches.

Finally, Egypt requested a $3bn loan, with each $347mn tranche to be disbursed over four years, in addition to financing worth $1.3bn with a 10-year grace period.

This is under the IMF's Resilience and Sustainability Programme, launched to support the economies of 70 countries facing a shortage of foreign exchange liquidity.

The programme has several conditions, most notably that the prices of petroleum products reflect international prices, the halting of all tax exemptions, the equal treatment of all companies in terms of electricity and water prices, a slowdown in the implementation of public projects, and the implementation of new policies to increase tax revenues without exceeding established debt thresholds.

Unprecedented crisis

Egypt is currently facing a severe and unprecedented economic crisis, accompanied by a significant decline in the living standards of its citizens and a sharp increase in the prices of goods and services.

This is largely attributed to the devaluation of the national currency due to the introduction of a more flexible exchange rate system by the Egyptian Central Bank, in line with the instructions of the IMF.

The Egyptian pound has lost 57% of its value against the US dollar since 2016, in a country where a third of its population (around 105 million) lives below the poverty line and another third are at risk of falling into poverty, according to World Bank estimates.

The credit rating agency S&P Global Ratings recently downgraded Egypt's ability to repay its debts from "stable" to "negative," citing the country's substantial need for new external financing.

Egypt is burdened with a high national debt level, equivalent to 95% of its gross domestic product.

Mustafa Abu Zeid, the director of the Egyptian Centre for Economic and Strategic Studies, believes that the extended borrowing agreements with the IMF mainly aim to cover the budget deficit and maintain the support system for petroleum products and food.

Successful reform

However, in 2016, the Egyptian government implemented an economic reform programme that led to significant changes in fiscal and monetary policies.

These changes included modifications to tax policies, an increased focus on expanding the tax base, improvements in customs policy, exchange rate liberalisation, and a greater emphasis on using credit to fund productive projects that add value to the Egyptian economy.

The positive impact of these policy changes was evident in Egypt's overall economic indicators for the 2018/2019 fiscal year, when it achieved a growth rate of 5.6%, and the budget deficit fell to 90.5% of GDP.

Egypt recorded, for the first time, a primary surplus of 1.8% in the budget, and its foreign exchange reserves exceeded $40bn.

However, the consequences of the COVID-19 pandemic, disruptions in supply chains, the war between Russia and Ukraine, and rising inflation and interest rates have presented the Egyptian economy with major challenges – particularly in the form of a shortage of foreign currency liquidity.

According to the latest report from the Central Bank of Egypt, this contributed to a decline in foreign exchange reserves to $34.8bn.

The Egyptian government managed to repay around $25.5bn in principal and interest on its outstanding debts in the first half of this year.

According to the Egyptian Central Bank, the state also paid off outstanding debts totalling $52bn in the 2021/2022 and 2022/2023 financial years.