Egyptian government walks risky economic tightrope to fulfill its loan conditions to IMF

On Jan. 11, the Central Bank of Egypt (CBE) confirmed to the International Monetary Fund (IMF) that it meant business. Namely, the CBE took the daring step of pledging to maintain a “durably flexible exchange rate” for the local currency, the Egyptian pound. Its promise will fulfill one of the key conditions Cairo signed onto late last year in exchange for receiving an IMF loan worth $3 billion over 46 months. On the same day of the CBE’s exchange rate announcement, the pound fell to its lowest rate ever, of 32.5 to the U.S. dollar, at state-owned banks, nearly equal to its price on the so-called “black market” or the outlawed, unofficial parallel exchange market.  

Abandoning efforts to hold up the Egyptian pound

Although the pound has been declining steadily against the dollar since March 2022 — reflecting the immediate effects of the war between Russia and Ukraine, which resulted in the outflow of foreign capital and a sharp increase in the imports bill — it was not until January 2023 that Egyptian authorities abandoned all efforts to prevent its fall. The government’s classic reaction over the past year was to allow a gradual decline of the local currency, coupled with an increase in interest rates, hoping this would contain inflation and prompt foreign investors to return. Yet Egypt is highly indebted, heavily dependent on imports, including basic food commodities and oil products, and reportedly teetering on the brink of possible default when it comes to paying its external debts and the interest on its outstanding loans. So in light of the drastic shortage of much-needed foreign currency reserves, those running the country’s brittle state-controlled economy had little choice but to accept the IMF’s harsh conditions. By the end of August 2022, international reserves had declined to $32.2 billion, made up mostly of deposits by Gulf countries that rushed to help their key ally, but definitely with strings attached.

Besides maintaining a flexible exchange rate, the Egyptian government also vowed to carry out a gradual sale of key non-strategic state-owned assets, including those belonging to the Armed Forces, to regional and international investors to allow for “private-sector-led growth,” and it accepted an unprecedented level of supervision by the IMF over the national budget, state-owned enterprises, and government spending. Speaking in Davos in January, Minister of Planning Hala el-Said said that the government hopes to sell state assets worth $2-2.5 billion by June.

When the Egyptian pound dropped so sharply last month, with market rumors estimating that it might go down as low 40 per dollar, Egyptians panicked. Egypt’s security agencies have banned public protests in recent years, issuing harsh prison sentences to anyone daring to take to the streets; so Egyptians instead turned to social media and circulated bitter jokes and satirical impressions of citizens weighing their pound notes by the kilo, instead of counting them out, to buy basic commodities. Tweets and posts comparing Egypt’s currency to that of the Lebanese lira, which has also become worthless, were abundant.

Digging out from the economic doldrums

The economic situation was already harsh over the past year, with the official inflation rate reaching its highest level ever, at 21.5%, while the prices of nearly all food commodities doubled. Egypt’s poor were not alone in complaining that they could not make ends meet and were forced to change their dietary habits to cope with price increases — middle- and upper-middle-class Egyptians have also been echoing such sentiments. Meanwhile, industry and business came to a near halt as backlogged imports remained stuck in ports for over nine months due to the shortage of U.S. dollars. CBE regulations had made it nearly impossible for businesses to provide the necessary hard currency to move these goods.

After a similar wave of devaluation in November 2016, the dollar skyrocketed to 20 Egyptian pounds, before eventually rebounding to 15.7 pounds and remaining at that level for over three years. Many analysts expect a repeat of the 2016 scenario following the latest IMF loan deal, though with fewer immediate benefits for the Egyptian economy, which is in desperate need of external financing — estimated at $19 billion in 2023 and $22.5 billion in 2024, according to Fitch. CBE directors and government officials considered it an achievement that the Egyptian currency remained around 30 pounds to the dollar as of the end of January, trading between 29.6 and 29.9.

With the CBE issuing 12-month certificates of deposit (CDs) featuring an annual interest rate of 25% as well as new treasury bills, the “hot money” of foreign investors has been trickling back, injecting nearly $1 billion into the Egyptian economy in less than a week in mid-January. Of course, it is worth cautiously pointing out that “hot money” exiting Egypt when Russia re-invaded Ukraine a year ago was one key sign that revealed the deep imbalances in the Egyptian economy. Nevertheless, the CBE and government officials are pulling out all of their old tricks to try to bring in more much-needed hard currency.

Non-transparent national projects

Marking the 12th anniversary of the January 25, 2011, revolution that toppled late President Hosni Mubarak after 30 years in office, the current head of state, Abdel Fattah el-Sisi, blamed “fate” for the “very difficult [economic] circumstances” Egypt has been facing lately. Citing both COVID-19 and the nearly one-year full-scale war between Russia and Ukraine, Sisi reiterated that the economic crisis was “global,” affecting all of the world’s countries, including rich ones such as the United States and those in Europe.

In his remarks in mid-January, he was also unapologetic about the massive, so-called “national projects” that have been a trademark of his rule, denying they were aimed at “showing off” or “bragging.” Instead, he insisted that those projects — which have clearly stressed the Egyptian economy and added to its external debt, estimated at $156 billion — were necessary to prepare the country to attract investments by rebuilding its decaying infrastructure.

“Can we achieve development without a proper electricity network, without roads, ports and airports?” Sisi asked in obvious frustration. Since taking office, Egypt’s president has been on a construction spree, building new cities, ports, airports, highways, and bridges. He also signed hefty deals with Germany’s Siemens to improve the Egyptian power grid, as well as to construct an environmentally friendly electric train. To mend ties with Russia after the terrorist attack that brought down a Russian passenger jet in Sinai in 2015, Cairo signed a lucrative deal with Moscow to build a nuclear station to generate electricity in Dabaa. There were massive investments as well in the Sinai Peninsula itself, where the military has been fighting terrorist organizations such as ISIS and al-Qaeda for nearly 10 years.

Yet most critics of Sisi also point to what they describe as unnecessary, lavish spending on projects such as the New Administrative Capital in the middle of the desert on the outskirts of Cairo or the so-called “summer capital” at al-Alamein on the country’s northern coast, among others. Sisi has repeatedly argued that the sale of land and property in those projects would cover their cost and stated that they posed no burden to the state budget.

With little transparency on the real cost of those projects, which are administered by the army, it has been difficult to evaluate where the money was coming from and how much was being paid by the state. Sisi said recently that building those new cities was necessary to provide hundreds of thousands of jobs and that it was creating value for previously underutilized land in the desert. However, critics note that building new ambitious construction projects like the Administrative Capital, with trademarks such as the tallest skyscraper in Africa, the largest mosque and church in the Middle East and Africa, and the highest flagpole, is very costly and, at the same to time, hard to sell to investors or liquidate in times of economic crisis, such as the current one.

Moreover, the abundant appetite for spending on luxurious projects with the aim of attracting investors seemed to have ignored the “uncertainty and challenging headwinds in […] outlook” at the domestic, regional, and international levels that both the Egyptian government and the IMF admitted were present. Over the past decade and even before, the Middle East region never topped the list of destinations capable of attracting large foreign investments. But the fact that Egypt’s economy had always been dependent on such external sources of income made it particularly vulnerable to “external shocks.” Thus, critics have pointed out the need for real structural reforms that would create an industrial base able to sustain the economy over the long term, including in times of external crises.

Shortly after Egypt signed the deal with the IMF, Prime Minister Mostafa Madbouly announced that the government would halt spending on any “new” national projects, especially if they required hard currency. Any exceptions would necessitate prior approval by the prime minister. However, the Letter of Intent the Egyptian government handed to the IMF and attached to the loan agreement in actuality only pledges to slow down spending on all public investments, including so-called national projects. “To support the objectives of the program,” the letter, signed by the CBE governor and the minister of finance, declares, “the government of Egypt is committed to managing the implementation of public investment projects in a manner to achieve consistency with the macro policy mix in ensuring external sustainability and economic stability. In particular, given external conditions, spending on public projects, including national projects, would be slowed down and adjusted to limit pressures on the foreign exchange market and inflation.”

Conclusion

Independent economists, experts at Fitch, Bloomberg, and other analytical firms, as well as the IMF itself have expressed cautious optimism that Egypt can sustain the current crisis and repay its latest loan, while admitting that risks remain. The government hopes that investments by friendly oil-rich Gulf states, in particular the United Arab Emirates, Saudi Arabia, and Qatar, combined with the return of “hot money,” a rise in tourism revenue, Suez Canal income, oil and natural gas sales, and remittances of expatriate Egyptians, would satisfy its most immediate needs in the coming year. Yet this is like walking a tight rope. Ultimately, even the IMF and many observers do not exclude possible social and political backlash if living expenses for the majority of Egyptians continue to skyrocket.

Khaled Dawoud is the deputy editor-in-chief of Al-Ahram Weekly and former president of the social-liberal Dostour Party.

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