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

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.

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.

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).