New IMF review points to Egypt's progress—with some caveats

There are positives within the latest review of Cairo’s progress toward a further $1.3bn financial lifeline, but they come amid deepening economic problems at home, where the cost of living is rising

Reuters

Egyptian Prime Minister Mostafa Madbouly and Director of the International Monetary Fund, Kristalina Georgieva, during a joint press conference, in the New Administrative Capital, east of Cairo, November 3, 2024.

New IMF review points to Egypt's progress—with some caveats

Marcelle Nasr

last update on 29 Nov 2024

The International Monetary Fund has concluded its fourth review of Egypt’s economic reform programme. The review outlined the remaining policies and reforms required for the release of the fourth tranche of $1.3bn from an agreed-upon $8bn loan.

Egypt’s government and people have faced a more difficult set of geopolitical circumstances since the terms of the package agreed with the IMF were first discussed. Tensions in the wider Middle East region have slashed revenue from the Suez Canal, a vital source of foreign currency revenue, by 70%.

Despite some progress being made, the IMF has not backed all of Egypt's calls for help. Popular discontent at the rising cost of living has made people uneasy about the potential impact of reform, and there has been speculation that the government statements issued around the IMF’s latest scrutiny amounted to a signal that it could look to the Arab world for more alternative sources of financing with a more understanding attitude toward Egypt's situation.

In the meantime, the international lender once again urged Egypt to expedite plans to sell state-controlled assets and called for its government to: “Revive reforms to balance the market, reduce the state’s role in the economy, cut spending on public projects, enhance competition, and open up more space for the private sector.”

But importantly, there was a shift in tone over one key issue. The latest IMF review stopped short of repeating calls for the full floatation of the Egyptian pound. Instead, it recommended continuing with the policy of exchange rate flexibility.

Shutterstock — The IMF agreed to a $3bn bailout in December 2022, yet politicians worry that its loan conditions may cause a public outcry

Rate expectations

The IMF opened more leeway over the exchange rate, which continues to fluctuate without breaching the threshold of 50 pounds to the dollar. Nonetheless, economists predict another rise in the dollar’s value into the fifth review, which is due in March 2025. That could intensify the impact of exchange rates on the standard of living, stoking popular discontent over price hikes at home.

The IMF praised the Central Bank of Egypt’s commitment to maintaining a flexible exchange rate regime “to shield the economy from external shocks” and the impact of structural reforms designed to bring about macroeconomic stability.

On the fiscal side, the IMF called for scaling back certain tax exemptions—particularly on VAT—to boost revenues. It also underscored the need to strengthen Egypt’s social safety net while gradually reducing subsidies on fuel and energy, transitioning from in-kind support to cash-based aid.

Cairo was also granted greater flexibility regarding asset sales, having addressed many of the requirements and implemented most of the demands in the third review, which was seen as the most challenging, especially regarding state ownership.

Significant progress

The IMF’s mission chief, Ivanna Vladkova Hollar, called the progress “significant”. The statement touched on the multifaceted geopolitical tensions in the region and their adverse impact on Egypt’s economy—particularly the Israeli war on Gaza and the tensions it has stoked in the Red Sea— and the drop in Suez Canal revenues.

It also acknowledged Egypt's financial pressures due to the rising number of refugees, which are straining public services, especially healthcare and education.

AFP — Refugees from Sudan line up to enter Egypt at the Ergin crossing.

The IMF lauded Egypt’s reform efforts to confront these external challenges, with both sides agreeing on the importance of intensifying efforts to mobilise domestic revenues, mitigate financial risks—especially in the energy sector—and expand the social safety net.

Experts pointed out that the latest IMF statement focused on the medium term in its outlook on the further reform needed while acknowledging the difficult geopolitical and economic circumstances across the Middle East.

The key themes of the IMF’s demands remain. They include accelerating a privatisation programme to reduce the state’s role in the Egyptian economy, scaling back or eliminating most tax exemptions, and a broader tax base to boost revenue. The document also calls for cuts to subsidies on fuel and food, which would inevitably place further burdens on citizens.

Experts weigh in

Al Majalla spoke to experts who noted that the IMF's lack of new demands this time reflected the rigorous requirements laid out by the previous review, including lifting energy prices and reordering monetary policy. There were also warnings of inflationary pressure, with the Central Bank tightening monetary policy at the same time as the government’s fiscal strategy of budget control and energy price hikes.

Experts advised the government to continue reducing external and domestic public debt while bolstering the social safety net. They also predicted the announcement of a new social support package in early 2025, including conditional cash transfers to replace in-kind subsidies, reflecting a broader restructuring of the state’s economic role.

The minimum wage is $120 per month, yet many employees earn less than this, forcing them to seek additional jobs to support their families. Some economists expressed concern over the potential adverse effects of reform, citing other nations’ experiences complying with conditions set by the IMF, which were unpopular enough to lead to social instability.

They also criticised the IMF’s political influence and its reputation as a tool by the US and European governments to inflict Western-style economic policies on politically non-aligned nations.

The latest IMF review stopped short of repeating calls for the full floatation of the Egyptian pound

Widening wealth gap

Egyptians have yet to see tangible improvements in their living standards as a result of the country's economic reforms. Meanwhile, the gap widens between the wealthy—who are perceived as exploitative—and low-wage workers struggling to make ends meet.

The national minimum wage stands at 6,000 Egyptian pounds per month ($120), below the international poverty line of $160. Many employees earn less than this, resorting to secondary jobs to support their families amid rising costs for goods, transportation, and energy.

Public frustration is further fuelled by relentless price hikes, which have become part of daily life and often outpace sporadic salary increases. Fees for services like mobile and internet have doubled within a year. For their part, retailers frequently price goods based on unofficial exchange rates, which are more onerous than those in formal banking channels.

Citizens hope that the incoming president of the United States, Donald Trump, will help ease the geopolitical tensions in the Middle East, which could, in turn, reduce some of the pressure on Egypt's finances.

Nonetheless, since Cairo first turned to the IMF for help in November 2016, economists say most Egyptians have yet to see any improvement in their living conditions. With each IMF review, more pressure seems to follow.

AFP / Mohamed el-Shahed — An Egyptian elderly man poses for a picture in the village of al-Nehaya, one of the poorest in the country, in the province of Assiut in central Egypt.

In response to these challenges, the government has sought alternative borrowing sources and restricted imports of luxury goods, colloquially known "provocative" items, which draw attention to high levels of inequality. They include goods like premium cars and select cheeses.

Nonetheless, the IMF's demands often exacerbate tension between the government and the Egyptian people. There has been outrage over increases in service charges for mobile phones and internet access that have gone up twice in one year, with people taking to social media to complain. The hikes relate to IMF demands that prices reflect market rates; even as typical incomes fall short, the cost of living keeps rising, making it more difficult to meet basic needs.

To ease social tensions, the government has used social programmes such as affordable housing schemes to reach people in low- and middle-income brackets. Such measures aim to address public grievances over deteriorating living conditions. But they often primarily benefit the lowest-income brackets, neglecting the shrinking middle class, which is increasingly sliding into poverty.

Experts warn that the IMF's fourth review could worsen living standards. While the Central Bank strives to uphold exchange rate flexibility, implementing such policies remains challenging, not least as the problems in the Suez Canal choke off national revenue.

Any full liberalisation of the exchange rate under open market dynamics risks an unprecedented collapse in the value of the pound relative to the dollar, which would increase the cost of living.

The IMF underscored the need to strengthen Egypt's social safety net while gradually reducing subsidies on fuel and energy

Then, there is the question of widening the tax base or extending government levies to the informal economy that is currently out of reach. More taxes are seen as likely to worsen the problems already in place with the cost of living and deepen public anger at inequality.

Ahead of the mission's latest visit, the government signalled its intention to review its agreement with the IMF, vowing not to impose additional financial burdens on citizens, aware that taxes make up 85% of government revenue. This announcement temporarily reassured the public that decision-makers were aware of their concerns.

Alternative lenders

Some observers say the government is signalling that it is looking for alternative lenders to the IMF, such as partnerships with Arab investment funds. The Kingdom of Saudi Arabia and the United Arab Emirates are seen as the most likely financial allies.

But others view the government statements as no more than efforts to placate public anger and prevent unrest, especially after controversial court rulings like the old rent law amendments, which are perceived as prioritising state revenue over citizen welfare.

And as Egypt faces a wave of inward migration as well as the run of reform, there are fears over job losses and rising unemployment. Recently, the government declared that no new agreements with the IMF would be signed without presidential approval, aiming for greater transparency. Yet, this approach requires meticulous implementation to balance the demands of lenders with Egypt's economic interests.

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