The International Monetary Fund (IMF) announced on Wednesday that its mission had concluded a visit to Egypt, making substantial progress on policy discussions for the fourth review of its ongoing loan programme. The review is a critical milestone for Egypt, as it could unlock over $1.2 billion in financing, providing much-needed support amid persistent economic challenges.

Background: The IMF Loan Programme

The loan programme, approved in 2022, initially amounted to $3 billion over a 46-month period. However, given Egypt’s worsening economic crisis, the programme was expanded this year to $8 billion. The funds aim to help Egypt address severe economic pressures, including soaring inflation, a shortage of foreign currency reserves, and structural challenges impeding sustainable growth.

This IMF engagement follows Egypt’s history of borrowing from the fund, with agreements reached in 2016 and 2020, aimed at bolstering foreign reserves and implementing economic reforms. However, the current programme comes at a particularly precarious time for the Egyptian economy.

Progress on Reforms

The IMF commended Egypt for implementing key reforms aimed at maintaining macroeconomic stability. Among these reforms, the unification of the exchange rate was particularly highlighted as a major achievement. This policy shift helped ease import bottlenecks and improve access to foreign currency.

The Central Bank of Egypt (CBE) reiterated its commitment to a flexible exchange rate regime, signaling a departure from past practices of tightly managing the Egyptian pound’s value. Such flexibility is critical to enhancing investor confidence and meeting IMF loan requirements.

However, experts caution that exchange rate flexibility alone may not be enough to address Egypt’s broader challenges. A sustained focus on fiscal discipline, export diversification, and investment in productive sectors is crucial for long-term stability.

Challenges Facing the Egyptian Economy

Egypt is grappling with severe economic difficulties that underscore the importance of completing the IMF review. Key challenges include:

1. High Inflation

Egypt has been experiencing record inflation levels, with the annual inflation rate exceeding 40% in recent months. Rising food and energy prices have particularly impacted the lower-income population, increasing the cost of living dramatically.

2. Foreign Currency Shortages

Persistent shortages of foreign currency have hindered imports of essential goods, disrupted industrial activity, and reduced investor confidence. Despite measures like the unification of the exchange rate, the crisis has yet to be fully resolved.

3. External Debt

Egypt’s external debt has ballooned, exceeding $165 billion as of mid-2024. Servicing this debt has placed significant strain on the country’s foreign reserves, further exacerbating the economic crisis.

4. Unemployment and Social Pressure

High unemployment rates, especially among youth, coupled with declining real incomes, have fueled social discontent. This has put additional pressure on the government to balance economic reforms with measures that mitigate social hardship.

Government Requests for Programme Modifications

Prime Minister Mostafa Madbouly revealed on Wednesday that Egypt has requested modifications to the IMF programme’s targets. While specifics were not disclosed, analysts suggest that the adjustments could include extending timelines for fiscal consolidation or revising growth and deficit targets to reflect current realities.

Egypt’s appeal for flexibility reflects the difficulty of meeting IMF requirements amid such severe economic strains. For instance, fiscal tightening—necessary to control the budget deficit—risks slowing economic growth and exacerbating unemployment.

Remaining Steps in the Fourth Review

The IMF stated that discussions with Egyptian authorities would continue in the coming days to finalize agreements on outstanding reforms. Key areas of focus for the review include:

• Structural Reforms: Improving governance, reducing red tape, and fostering private sector growth.
• Fiscal Policies: Balancing deficit reduction with measures to protect vulnerable populations.
• Monetary Policies: Ensuring the central bank maintains its commitment to exchange rate flexibility and inflation control.

Broader Implications of IMF Support

Securing the next tranche of IMF funding is vital for Egypt’s short-term economic stability. Beyond immediate financial relief, a successful review would:

• Boost Investor Confidence: IMF endorsement signals to international investors and creditors that Egypt is committed to reform and stability.
• Unlock Additional Funding: Completion of the review may encourage other multilateral and bilateral donors to extend financial support to Egypt.
• Stabilize Domestic Markets: Additional funding could help alleviate foreign currency shortages and reduce inflationary pressures.

Criticism and Concerns

While the IMF loan programme provides critical support, critics argue that the associated reform measures disproportionately impact low-income populations. For example:

• Subsidy Reductions: The gradual removal of energy and food subsidies has increased the financial burden on vulnerable households.
• Currency Devaluation: While necessary for export competitiveness, devaluation has significantly raised the cost of imports, further straining household budgets.

Activists and opposition groups have called for more inclusive policies, emphasizing the need for social safety nets to protect the most affected communities.

Regional Context

Egypt’s economic challenges are not unique; several countries in the region face similar difficulties. The Middle East and North Africa (MENA) region has been particularly vulnerable to external shocks, such as:

• The economic fallout from the COVID-19 pandemic.
• Disruptions in global supply chains.
• The impact of the Russia-Ukraine conflict on food and energy markets.

However, Egypt’s strategic importance—due to its population size, geographic location, and role as a trade hub—makes its stability a regional priority.

Looking Ahead

The coming weeks will be critical as Egypt works to finalize the fourth review of its IMF loan programme. Success will depend on the government’s ability to strike a balance between implementing reforms and addressing the urgent needs of its population.

As part of its broader economic strategy, Egypt must focus on:

1. Diversifying Exports: Expanding beyond traditional sectors like tourism and agriculture.
2. Attracting Foreign Direct Investment (FDI): Creating a more business-friendly environment to lure investors.
3. Strengthening Social Safety Nets: Ensuring that reform measures do not disproportionately harm vulnerable groups.

While challenges remain daunting, effective implementation of the IMF programme and complementary domestic policies could pave the way for a more resilient and inclusive Egyptian economy.

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photo source: Google

By: Montel Kamau

Serrari Financial Analyst

21st November, 2024