Egypt versus the IMF: Is Cairo down and out?
In November 2022, the world turned its eyes to Sharm al-Sheikh (Egypt) which hosted the 2022 United Nations Climate Change Conference (COP27). While the government of President al-Sisi sought to promote Egypt as an attractive tourist and investment destination, its critics accused it of greenwashing the country and covering up its poor human rights record. In an attempt to nip such criticism in the bud, al-Sisi lifted the state of emergency, initiated a national dialogue with the opposition and released hundreds of political prisoners. These initiatives notwithstanding, it escaped no one that thousands of political prisoners continue to linger in prison and Egyptian NGOs have been facing unprecedented harassment by the state. The lack of substantial changes called the real intentions of the Egyptian government into question.
Against this background, al-Sisi faces a need to make further concessions to the international community to obtain new tranches of funding from the International Monetary Fund (IMF) after the recent deal. Cairo has few alternatives to such a course of action if it wishes to maintain macroeconomic stability since IMF support is needed to address the plummeting exchange rate of the pound, avert a mounting debt crisis and repair its public finances that took hits from the Covid-19 pandemic and the war in Ukraine. This commentary explores how the financial clout of the IMF in the context of Egypt’s fiscal needs might generate a narrow pathway for bringing incremental reforms about that improve governance and remain feasible within the country’s authoritarian parameters of rule.
At the heart of the matter lies the extent to which the IMF is willing to adopt greater conditionality by demanding stricter anti-corruption measures and limiting the dominant role of the army in the economy. The most recent deal between Cairo and the Fund – the details of which were published on 10 January 2023 - showed that such asks are feasible, at least on paper. But the challenge will be to see them through. Admittedly, this is a long shot since the IMF tends to be more relaxed about implementation than about the text of its paperwork. Nevertheless, reducing corruption and limiting military clout in the economy are essential to avoid wasting international taxpayer money and reduce the long-term external dependency of the Egyptian economy.
Egypt’s economic problems and its addiction to foreign finance
Egypt’s economy is in choppy waters and faces serious economic problems just over the horizon. In September, the Central Bank of Egypt recorded an inflation rate of 15%. One dollar was worth 15.7 Egyptian pounds in January 2022 and a whopping 29.8 at the end of January 2023. Egypt’s annual budget deficit recently reached 6.1%. Its external debt (about a third of the total debt in 2021) grew from c. USD 39.62 billion in 2014 to USD 160 billion today, and is expected to reach USD 260 billion in 2024. Markets are not very confident that Egypt will repay its debts and have charged it with the world’s highest interest rate of late. Egypt’s external debt is serviced through a mix of bond sales on the international financial markets, loans from the IMF (it is the second-biggest client after Argentina), and loans plus investments from the Gulf states (promising USD 22 billion for the coming years). The total financial picture is such that new loans will likely serve to repay existing debts and their interest.
Loans, conditions, and prior efforts
International Financial Institutions (IFIs) such as the IMF serve to secure global financial stability and foster global monetary cooperation. In some cases, the need for IMF loans in places like Egypt can incentivize domestic economic reforms that also improve governance. Overall, research suggests that the financial leverage of IFIs gives them a ‘modest ability’ to push for political reforms in authoritarian states if a government needs foreign funds to survive. The Congolese ruler Sassou Nguesso offers an example of how this can work – and the limits. He curtailed human rights abuses and permitted audits of his oil state company in 2006-2010 to qualify for debt relief from the IMF and the World Bank. Yet, some of these measures were reversed once the financial crisis was over. Either way, when foreign loans become indispensable to a recipient government, foreign investors and donors can demand reform measures beyond the macro-economic domain, for example, to improve accountability and reduce corruption.
Nevertheless, the first IMF loans to al-Sisi’s government, in 2016 and 2020, only featured typical demands such as liberalizing the exchange rate and reducing government expenditure. This arrangement contributed to mixed results with regards to economic performance. On the one hand, it helped realize a steady GDP growth after 2016. On the other hand, Egypt’s economic performance worsened on many other indicators, such as its labor force participation rate. Overall, the deeper challenges that lie at the root of Egypt’s economic travails were not addressed. Issues such as corruption and the dominant role of the army in the economy continued to hamper Egypt’s economic performance and limit the effectiveness of IMF loans. On 27 October 2022, the IMF and Cairo reached agreement on a fourth loan package via the Extended Fund Facility (EFF). It granted the Egyptian government a loan of USD 3 billion. The initially requested amount of USD 12 billion was drastically reduced as both parties could not agree on several conditions. These included the IMF’s demand that the government and army reduce their footprint in the economy. However, a more detailed report on the October 2022 deal saw Egypt commit to measures that intend to reduce the army’s economic footprint, such as reducing business advantages for state-owned enterprises (SOEs) that are affiliated with the army.
Opportunities for IMF negotiators in 2023
The IMF agreement also anticipates an additional loan of USD 6 billion via multiple donors in 2023, in addition to its initial USD 3 billion installments. This offers an opportunity to push the governance and corruption reforms as loan conditions a step further, in a bid to get to the roots of Egypt’s economic problems. The circumstances are favorably aligned for the pursuit of such a strategy because the recent IMF agreement will likely not be sufficient. The Egyptian pound is expected to continue devaluating and prices remain on the rise, which creates a balance of payments problem for Egypt’s import-dependent economy, among other issues. Consequently, Fitch Rating recently revised Egypt’s outlook from stable to negative, the IMF deal notwithstanding.
Western governments that wield significant decision-making power in the IMF through its quota-based system could demand several reforms with this in mind. The first order of business is to tighten anti-corruption measures and demand more transparency to increase the impact of public spending. Precedents already exists. In 2020, the IMF compelled Cairo to publish all its COVID-19-related spending, procurement plans, and contracts it awarded. Also, as part of the most recent deal with the IMF, Egypt promised to include its army-affiliated SOEs in its list of state entities that publish annual expenditure reports. During the next round, the IMF could take this further and demand complete transparency on how its dollars are spent, and demand accountability mechanisms as well as oversight bodies to ensure efficient spending. In practice, this could mean establishing a public online register that tracks expenditures from the moment of transfer to the point at which deliverables are produced. This would also be a useful tool in countering military or political resistance to the implementation of IMF reforms.
The second order of business is to demand reforms that somewhat loosen the Egyptian army’s tight grip on the national economy. This is a legitimate intervention from the IMF’s point of view since the extensive economic involvement of the Egyptian army arguably undermines the feasibility and effectiveness of IMF reform programs. Whereas the IMF used to ignore the army’s privileged position within the Egyptian economy, its July 2021 loan review implied that SOEs affiliated with the army should be included in public sector reforms. Recently, the Egyptian government agreed to bring army-affiliated SOEs within the scope of the IMF reforms. On top of that, it abolished exemptions for army-affiliated enterprises from taxes, financial regulations and inspections. Such changes can begin to restore a balance between the private and the public sector. As these issues will likely be resisted by the military establishment, donor insistence with the IMF to stand firm is essential, and so is tight monitoring of implementation.
These two points are only choices from a range of options that are compatible with the mandate of the IMF and feasible in the context of Egypt’s military-dominated political economy. The IMF and donor countries should leverage Cairo’s precarious financial situation and its dependence on foreign loans to make such conditions a reality and push for more structural reform within the broad parameters of Egypt’s authoritarian political settlement. During the next round of negotiations, the IMF should therefore persist with the more assertive strategy that it pursued during the recent negotiations. At the right moment, a bit of pressure might go a long way.