Al-Monitor Pro

New IMF loan is no quick fix for Egypt’s financial challenges


Al-Monitor Pro Members


Marc Español 

Freelance journalist covering Egypt and Sudan 


Dec. 19, 2022

Bottom Line:

The economic shocks triggered by the war in Ukraine after two years of strong turbulence quickly exposed the fragility of Egypt’s heavy reliance on debt. The massive capital flight that followed, coupled with a rising import bill, has left the country in a critical position. A $3 billion IMF loan approved on Dec. 16 will unlock much-needed financing and inject some confidence among investors. But it will neither address nor solve its core problems.

Background Facts:
  • From 2016 until shortly before Russia’s invasion of Ukraine, Egypt had been able to attract billions of dollars from foreign investors to its debt market thanks to one of the world’s highest interest rates, a stable currency and robust foreign reserves.
  • The collateral effects of the war on the financial markets, on top of the shocks of the pandemic, revealed the fragility of this bid: in FY2021/2022 Egypt suffered a capital flight of $21 billion; $14.8 billion of which fled between January and March 2022.
  • The mass exodus of hot money has been compounded by a dramatic increase in the country’s import bill, mainly driven by rising food and energy prices. This has further increased the pressure on its foreign reserves, which stand at just $33.5 billion.
  • Egypt’s current account deficit, which in FY2021/2022 reached $16.6 billion, and its short-term debt, which by residual maturity amounted to about $42.2 billion at the end of June 2022, has placed the country in a very vulnerable position.
  • In this context, Cairo has been forced to urgently diversify its financing sources, and on Oct. 27 it reached a staff-level agreement with the IMF for a $3 billion loan. The credit line was approved by the executive board on Dec. 16.
  • The arrangement with the IMF is expected to catalyze a multi-year financing package of about $5 billion in FY2022/23 from other partners, including the World Bank (WB), the African Development Bank and the Asian Development Bank.
  • Egypt has also requested financing under a new IMF lending facility — the Resilience and Sustainability Facility — that could unlock up to another $1 billion.
  • Beyond the up to $9 billion that Egypt could secure through the IMF arrangement, the main purpose of the deal was to act as a certificate of confidence to investors and other financial institutions, and allow Cairo access to other sources of financing.
  • However, there are serious doubts that the deal will be sufficient to achieve even that goal. In 2016, Egypt secured up to $12 billion through the same lending facility.
  • Since the deal’s announcement, Egypt’s foreign reserves have only increased from $33.4 billion to $33.5 billion in November. And while Finance Minister Mohamed Maait has stated that there have been inflows in the debt market, the amount is unclear.
  • Far from building momentum, caution has prevailed among investors, largely due to Egypt’s high debt, difficulties in accessing dollars and less competitive yields.
  • The new IMF loan is also far from sufficient to close Egypt’s funding gap, and it will not be disbursed at once. The country’s current account deficit is contracting sharply as a result of tight import restrictions. But its short-term debt obligations exceeded $30 billion in the FY2022/2023, excluding Gulf deposits in the central bank.
  • Aware of this, the government’s plan to try to wean itself off its dependence on hot money is actually based on three other pillars: boosting exports, expanding the private sector and attracting foreign direct investment (FDI), especially from Saudi Arabia, the UAE and Qatar, which have pledged more than $20 billion this year.
  • While the new roadmap is sound on paper, there are two major hurdles in the way. In the short term, the plan is no fix because the global economic slowdown leaves little room to increase exports now, and FDI requires time to materialize.
  • This is why Cairo, encouraged by the IMF, is rushing to secure other funds to bridge its immediate financing gap in two ways: in the Sukuk, Japanese and Chinese bond markets, and by extending deposits from Gulf states in the CBE.
  • The second major problem is more profound. According to the independent Mada Masr, Egypt initially asked the IMF for a loan similar to that of 2016, but the sides only agreed to one of $3 billion because Cairo rejected two major conditions: lowering subsidies and reducing the role of the state in the economy, including the army’s.
  • The lack of political will or ability on the part of Egypt’s authorities to reduce the military’s clout greatly hinders the development of a strong and healthy economy.
  • There are also no signs suggesting that the IMF arrangement has centered the need to address issues related to the poor management of funds and large spendings on projects that lack transparency and have dubious returns and revenues.
  • Instead, the reform program agreed with the IMF has prioritized a permanent shift to a flexible exchange rate regime; monetary policy aimed at gradually reducing inflation; fiscal consolidation and debt management; and only at the end loosely defined structural reforms to reduce the state footprint in the economy.
Alternative Scenarios:

Scenario 1: The IMF agreement provides enough respite until FDI can materialize

Foreign direct investments (FDI) are the only avenue envisaged by the government that can attract enough funds to Egypt to close its existing financial gap, as there is appetite among investors in the Gulf and the current economic situation is not conducive to a significant increase in domestic spending, public spending or exports in the short term.

However, attracting FDI will require the state to accelerate its privatization plans and its withdrawal from some sectors of the economy, and entails sensitive concessions because Egypt’s allies in the Gulf have their eyes set on strategic sectors, assets and companies.

Scenario 2: Egypt uses the respite from the IMF deal to advance an export-oriented plan

Among some liberal sectors in Egypt, calls are gaining traction to take advantage of the respite that the IMF deal will bring to develop a long-term industrial strategy and start building an export-oriented economy, following the path of countries such as Morocco.

The plan is aligned with the government’s new economic roadmap, and aims to identify and develop a handful of export-oriented industries where Egypt has clear advantages. But the bid needs time and it is not yet clear that a strong political commitment exists.

Scenario 3: The presidency gets to curb the army’s clout in the economy

President Abdel Fattah al-Sisi often portrays himself, in opposition to his predecessors, as a leader willing to take on the difficult reforms that Egypt’s faltering economy needs. And he has pledged in the past to reduce some of the military’s economic activities, a step that is considered key to develop sustainable sources of financing aside from debt.

However, most of these difficult decisions have impacted the general public, not the state or the military, and Sisi is largely dependent on its support. Considering the new deal reached with the IMF, it is still highly unlikely that there will be any change of course in this direction other than cosmetic, if at all. But the country’s external position is getting increasingly unsustainable, and doubts about Egypt’s solvency are growing by the day.

Conclusion - Most Likely Scenario:

The new agreement with the IMF will strengthen Egypt’s external position in the current fiscal year, and should help inject some confidence among investors and allow it to access capital markets. But the deal is no quick fix and it will not close its existing financial gap in the medium or long term. The reform agenda agreed with the IMF is very similar to those put forward since 2016, and progress since then has been limited at best. To build a healthy, robust and sustainable economy, authorities need to adopt far-reaching reforms. Egypt’s woes have ultimately much more to do with governance and the real economy than with finance. Yet the political will — or ability — to tackle these issues is not yet there.

Contributor Background:

Marc Español has been reporting on Egypt since 2017, with a focus on the economy and the human rights situation in the country. He has been a contributor to Al-Monitor since 2018 and his work has appeared in other publications such as El País and the think tanks Fundación Alternativas and the European Institute of the Mediterranean (IEMed). 

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