On 27 October 2022, the International Monetary Fund (IMF) and Egypt reached an 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, such as the IMF’s call for the government and the army to reduce their footprint in the economy. However, a more detailed report on the deal that was published on 10 January 2023, confuted the initial impression that the army was once again exempted from IMF reforms. To the surprise of many, Egypt would commit to measures that reduce the army’s economic footprint, such as reducing business advantages to State-owned enterprises (SOEs) that are affiliated with the army.
Next to committing to these measures, the government of President Al-Sisi recently took some steps that may suggest a slight improvement in the Egyptian human rights situation and resumed meetings with the opposition. For instance, the government lifted the state of emergency in October 2021 which was enforced in April 2017. In those four years, the state of emergency served to accelerate human rights violations as it granted far-reaching powers to security forces and banned public gatherings. Al-Sisi also initiated a national dialogue with the opposition whose recommendations will be sent to the President to decide whether to o adopt or reject them. Finally, the authorities released hundreds of political prisoners in the period before the 2022 UN Climate Change Conference (COP27), but thousands of political prisoners remain in detention. In the run-up to the COP27, the releasing of prisoners may have been deployed as a deliberate strategy to mask the extraordinarily high numbers of Egyptian detainees and the new waves of detention. Therefore, critics accused Al-Sisi of greenwashing the country and covering up its poor human rights record. Despite these developments, the lack of substantial improvement calls into question the real intentions of the Egyptian government.
Against this background, the government faces a need to make further concessions to the international community to obtain new tranches of funding from the IMF after the recent deal. Fresh international cash injections seem unavoidable to enable Cairo to address the plummeting exchange rate of its national currency, avert a mounting debt crisis and repair its public finances that took hits from the Covid-19 pandemic and the war in Ukraine. To face these challenges, Egypt recently turned to the IMF once more for a loan under the Extended Fund Facility (EFF) for an amount of about USD 3 billion to maintain its macroeconomic stability.
This commentary explored how the financial clout of the IMF combined with Egypt’s fiscal needs might generate a narrow pathway for bringing about incremental reforms that could improve governance, and remain feasible within the parameters of the country’s authoritarian rule. To finally address the deeper causes of Egypt’s economic misfortunes, the IMF could adopt a stricter conditionality by demanding stringent anti-corruption measures and limiting the dominant role of the army in the economy.
The most recent deal whose details were published on 10 January 2023, showed that such reforms are not unfeasible, but the challenge will be to see them through. Admittedly, this is a long shot since the IMF habitually stays away from overt “political conditions” since they contravene its mandates, but a cloaked and incremental strategy to this effect could – and should – nonetheless be pursued. Also, 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. In September 2022, the Central Bank of Egypt recorded an inflation rate of 15%. Then, the annual core inflation rate increased from 31,2% in January to a staggering 40.3% in February 2023. One US 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 was in 2021 about a third of the total debt, grew from USD 39.62 billion in 2014 to USD 160 billion today (39.6% of Egypt’s GDP in 2022), and is expected to reach USD 260 billion in 2024. On top of that, economic actors and experts are not very confident that Egypt will repay its debts, as it has been charging the world’s highest interest rates. Egypt’s external debt is serviced through a mix of bond sales on the international financial markets, loans from the IMF (Egypt being 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, interests, and surcharges, instead of alleviating budget deficits and supporting social or even public spending.
Loans, conditions, and prior efforts
International Financial Institutions (IFIs) such as the IMF serve to secure macroeconomic stability and fiscal consolidation and foster global financial integration. However, despite not succeeding at alleviating socio-economic turmoil and social inequality, previous IMF programs showed how financial leverage from IFIs can lead to incremental steps that improve governance or have positive political effects, albeit unintendedly in some cases. Overall, research confirms that the financial leverage of IFIs possesses at least a “modest ability” to push for political reforms in authoritarian States if a government needs foreign funds for its survival. The Congolese ruler Sassou Nguesso offers an example of such potential and its limits since he stopped human rights abuses and permitted audits of his oil State company to receive foreign funds, which is an example of the intertwining connection between political and business elites, in 2006-2010. This was aimed at qualifying the Congo 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, such as reforms to improve accountability and reduce corruption and elite capture. As such, this form of conditionality may bring limited improvement to the politico-economic systems of Arab countries when structural political change is only possible in the very long run.
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, without any guidance or imposition on how to spend the money to benefit the economy, or the poor and the vulnerable. This arrangement contributed to mixed results with regard 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 economic inclusion, labor force participation rate, and inequality. Overall, the deeper challenges that lie at the root of Egypt’s economic efforts were not addressed. Issues such as corruption, political capture, power-sharing, and the dominant role of the army in the economy continued to hamper Egypt’s economic performance and limit the effectiveness of IMF packages.
Opportunities for IMF negotiators in 2023
The IMF agreement also foresees an additional loan of USD 6 billion via multiple donors in 2023, in addition to the USD 3 billion IMF 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. Egypt will continue to depend on the IMF, and another IMF loan might well be needed.
Western governments that wield significant decision-making power in the IMF through its quota-based system could demand several reforms on this basis. The first would be to strengthen anti-corruption measures and demand more transparency to improve the efficiency of public spending. Two key steps have already been taken in this regard. In 2020, the IMF compelled Cairo to publish all its COVID-19-related spending, procurement plans, and contracts it awarded. Moreover, as part of the most recent deal, 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 a step further and demand complete transparency on how its funds are allocated 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 moment of the deliverable. This would also be useful in countering any military or political resistance to the implementation of IMF reforms.
The second order of business is to demand limited reforms in Egypt’s military economy structure to loosen the 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. Proceeding on this line, the Egyptian government recently agreed to bring army-affiliated SOEs within the scope of the IMF reforms and abolished exemptions for army-affiliated enterprises from taxes, financial regulations, and inspections. Hopefully, such reforms would not only bring a more equitable balance between the private and the public sector but also slightly mitigate the hegemonic role of the army in Egypt’s economy. As these demands 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. To do so, the IMF could demand the deployment of an ombudsman and impose a condition to ban any blending between monetary (central bank) and fiscal (government) policy amid the current currency crisis to avoid what happened in Lebanon.
These two points are only examples from a range of options that are compatible with the IMF mandate and feasible in the context of Egypt’s military-dominated political economy. Given the precarious financial situation in Egypt and its dependence on foreign loans, the IMF and donor countries should leverage the fact that Egypt needs their financial support more than what is commonly assumed. Therefore, during the next round of negotiations, the IMF should persist with the more assertive strategy that it pursued during the recent negotiations. Egypt’s growing financial vulnerability provides an opportunity to push for more structural reforms within the restrictive authoritarian parameters of Egypt’s political settlement without critically undermining the country’s rule or hampering its sovereignty.
NOTE: An earlier version of this paper was published on Clingendael Institute's website
The views represented in this paper are those of the author(s) and do not necessarily reflect the views of the Arab Reform Initiative, its staff, or its board.
