Economics is political: the IMF’s programme in Egypt can’t succeed without reforming both

3 July 2024 | Guest comment

Anti IMF Loan Protest in Down Town, Cairo. Credit: Gigi Ibrahim/Flickr

The IMF has augmented its loan to Egypt – the Fund’s second largest borrower after Argentina – from $3 billion to $8 billion. When the newest programme is over, the IMF will be back again. Since Egypt’s President Abdel Fattah El Sisi came to power in 2014, Egypt’s external debt has ballooned from $46.1 billion to $168 billion as of December 2023.

In Egypt, eight years of economic reforms in coordination with the IMF have failed to deliver macroeconomic stability and inclusive growth. IMF figures show that since Egypt started reforms in 2016, GDP in current US dollars has actually shrunk, going from $351.44 billion in 2016 to a projected $347.59 billion in 2024. In that time, the country has suffered repeated liquidity crises requiring regular financial support. The official exchange rate collapsed repeatedly in 2016, 2022 and 2024. Egyptians have endured punishing levels of inflation over the past decade, with core inflation last year exceeding 40 per cent while inflation on food and beverages surpassed 70 per cent. Since 2016, labour force participation has declined. For women, it has collapsed, dropping to the 7th lowest level globally according to the World Bank. Millions of Egyptians have fallen into poverty, with the government refusing to publish up-to-date figures for several years now.

The IMF in Egypt: financing elite capture

So, what did all this borrowing and nearly a decade of reform buy Egypt? During this period, Egypt has been one of the world’s top importers of arms. The government is building a massive $58 billion new capital, a project overseen by a company owned by Egypt’s military. The new capital is home to Africa’s tallest tower, the world’s longest monorail, as well as a new presidential palace that President Sisi has commissioned.

The new IMF programme is unlikely to meaningfully rescue Egypt on either front. More debt without tackling the political sources of Egypt’s economic problems means a deepening of the crisis.

Since coming to power, leveraging the Egyptian state with a heavy dependence on external borrowing, with the IMF’s support, has been central to financing President Sisi’s strategy of consolidating power. In 2023, Bloomberg estimated that Egypt was the second most likely country to default. However, in their latest report, Fund staff made generous claims classifying that Egypt’s debt is sustainable “but not with high probability” (see Observer Autumn 2022, Autumn 2020).

To make the math work, the new IMF programme envisions significant austerity, with measures that include a cap on public investments to facilitate debt payments, lowering the debt-to-GDP ratio. The cap on investments is the IMF’s understandable attempt to rein in the reckless and self-enriching spending by Egypt’s leaders on vanity projects that has helped nearly bankrupt the state. The trouble is that growth rates envisioned in the new programme appear untenable. GDP growth is projected to rise from 4.4 per cent in 2024-25 to 5.6 per cent in 2028-29, but this is while the IMF predicts anemic investment rates that range from 9.9 to 11.4 per cent. The Fund appears to be hoping for significant private investments, which seem unlikely given that the private sector has been in a persistent state of contraction, the cost of domestic borrowing is prohibitive, and the purchasing power of the consumer base has been devastated by a decade of inflation and a collapsing currency. Moreover, the political conditions that deter investment remain unaddressed, such as a lack of access to reliable information due to repression of the press and a heavily co-opted judiciary, undermining the rule of law.

At the core of Egypt’s problems is a leadership that has leveraged the state for their narrow interests and stubbornly refused necessary reforms to rescue the country’s economy not to mention investing in the wellbeing of its inhabitants. This is a political crisis with economic consequences. The new IMF programme is unlikely to meaningfully rescue Egypt on either front. More debt without tackling the political sources of Egypt’s economic problems means a deepening of the crisis.

More IMF Loans: same approach, same result

The IMF, among other financial backers of Egypt, has played a central role in facilitating this persistent crisis. Large loans to Egypt were attached to reform programs that not only failed to address the political context, but actually added to the deterioration of many of the areas they wanted to see improve, all while enriching and empowering Egypt’s rulers.

The IMF’s programme design is insufficient to sustainably stabilise Egypt’s finances and encourage significant private sector-led growth, never mind reduce poverty, inequality or meaningfully improve social protection. The IMF isn’t responsible alone for Egypt’s woes, but it has undeniably helped enable the leadership’s economic malpractice, that brought Egypt to this harrowing moment. This new programme is an attempt to find a way out, but too many structural problems remain unaddressed while others are on track to worsen.

When this programme is over, Egypt’s debt levels will likely remain higher than projected, inflation will have been higher than projected, and Egypt’s need for yet another injection of financing is all but certain. But given that the latest bailout of Egypt from the UAE, IMF, World Bank and European Commission is estimated to be worth $57 billion, over 15 per cent of GDP, it remains to be seen if Egypt will continue to be viewed as too big to fail or become, in the words of former World Bank Economist Ishac Diwan “too big to bail.”