News of Egypt’s discussions with the International Monetary Fund (IMF) have sparked mixed feelings between relief, skepticism, and concern among the Egyptian public. Egypt’s economic predicament, most dominantly characterized by the dollar shortage that has been staggering a variety of economic activity, is intended to be resolved by the loan. Since March, Egypt has been in talks with the IMF in an effort to seek financial support following the economic shocks brought on by the Covid pandemic, Russian military conflict in Ukraine, rising interest rates in advanced economies, a decline in global-risk financial markets as well as the global supply chain crisis. At least five countries, including Lebanon, Sri Lanka, Russia, Suriname and Zambia have defaulted as a result of the effects of these worldwide shocks, with more expected to follow.
Why is the loan needed, and under what terms and conditions?
Egypt pursues the new loan in order to deal with the consequences of the Russian conflict-induced inflation that has severely wounded people’s economic well-being in Egypt and the world. However, the IMF is always linked to a set of austerity requirements that more often than not cause a severe impact on the country’s most vulnerable citizens, which is what raises concerns as there is more awareness- based on the 2016 experience- of what the negotiations with the IMF usually entail.
It still remains that right now, borrowing from the IMF is the only option available. There is a budget deficit that warrants an immediate resolution. The IMF loan plays a crucial role in signaling creditability and stability to investors, hopefully drawing their interest in the Egyptian economy.
The $3 billion loan provided under the IMF’s Extended Fund Facility, as was the 2016 one, will be for 46 months, and is expected to pave the way for securing additional loans worth of $6 billion from other multilateral and regional partners.
What are the announced plans for using the loan?
The agreement with the IMF revolves around a comprehensive structural reform plan which aims to gradually increase the economy’s competitiveness, lessen the involvement of the government in the economy, level the playing field for the private sector, boost the business climate, and promote the shift to a greener economy. Previously Egypt has used IMF loans to address monetary and fiscal issues, while disregarding the structural challenges that have been hindering the Egyptian economy from meeting its full potential.
“The government action in the recent months to curb imports has negatively affected business activity, because of imported material,” Mohamed Youssef, economist and chair of D Code for Financial and Economic Consulting said in a talk held by the AUC School of Business department of economics just before the October currency devaluation. “Structural reform is essential and with the anticipated IMF loan, the government must figure out how to incite the private sector.”
In order to escape the vicious cycle of debt and devaluation, Egypt must adopt and implement the required structural reforms. In an interview conducted with Amal Mowafy, adjunct professor of economics at the American University in Cairo School of Business and chief of party of the USAID Scholars Activity, she stated that; “Structural Reforms are of upmost importance in the current situation. We must work on making labor markets more adaptable and responsive; liberalize and privatize sectors and ease regulations to improve the overall business environment.”
Mowafy, who is also an international development professional with more than 20 years of experience adds, “These reforms will not only help attract Foreign Direct Investments (FDI), but also pave the way and establish the foundation needed for Egypt to become an export-oriented economy and capitalize on the recent devaluation of the Egyptian pound, which will increase the competitiveness of our exports.”
Making the most of the IMF loan to Egypt depends on a number of factors, including developing a local economic plan that takes the nation’s specificities into account, addressing potential social consequences by protecting the most vulnerable population groups, having the political will to implement the plan, having sufficient external funding, being transparent in communications with all parties involved, and working cooperatively with all parties.
A new layer of complexity to be considered is that that securing external funds in the current economic climate is much more challenging than it was in 2016, due to numerous problems that advanced economics are currently facing, such as the extraordinary hike in energy prices.
EGP Devaluation in 2022
The initial 15.9 percent devaluation in March and the gradual decline Egypt’s central bank has been allowing since then have combined to cause the EGP to lose 24.8 percent of its value against the USD prior to the second round of devaluation. The following round of devaluation tied to the agreement with the IMF, further depreciated the value of the pound by 22.4 percent since the Central Bank of Egypt (CBE)’s decision to adopt a floating exchange rate regime.
This year marked a massive downturn for the Egyptian pound, losing 53.3 percent of its value since the first devaluation in March 2022. Numerous economists, including Amal Mowafy and Mohamed Youssef whom we spoke to for this article, anticipate that overshooting will occur at the early stages of the devaluation and the dollar may even cross the 25 EGP hallmark. However, stabilization is likely to occur shortly after and the EGP is expected to reside at around 22–23 to the USD.
This chart “FX Expected Trend in the Short-Term” developed by D Code helps us recall the 2016 floatation and provides a future projection of the currency value. More on https://bit.ly/3T5jfXr
However, there seems to be uncertainty over whether this would happen gradually or all at once. In all cases liberalizing the exchange rate could potentially work as a catalyst for the revival of economic activity over the upcoming years. A flexible exchange rate will safeguard Egypt’s economy coming from external shocks, particularly during this time where worldwide financial circumstances are tightening and becoming more volatile.
What can be the mitigation measures to avoid any pressures on lower-income population groups?
Protecting the most vulnerable is likely to be a tricky policy challenge; to manage expectations to further cut out fuel and food subsidy bills while enforcing alternative social protection mechanisms.
Expansion in the country’s major cash transfer program, Takafol and Karama, is an important positive development. The program’s coverage has recently increased from 4.1 million to 5 million families. But this still leaves a sizable portion of the populace exposed to the crisis and the additional possibility of new IMF-mandated policies that drive up the cost of basic goods.
Final Thoughts
While the IMF loan could be a cure for the current state of the Egyptian economy, it could be a curse if the loan is not utilized optimally. To reap the benefits, the loan must be used to address key structural problems within the economy while concurrently providing safety measures to protect the most vulnerable groups, especially given the inflationary risks coming during this difficult time of global uncertainty.
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Mohamed Sabry Hamza is a graduate student in the Economics in International Development MA program of the AUC School of Business. He expects to graduate in December 2022.
