Egypt is experimenting with the IMF's ideal reforms

During an interview on Al-Jazeera, the managing director of the International Monetary Fund, Christine Lagarde, has expressed her optimism about the Egyptian economy. “The measures that the Egyptian authorities and Egyptian population are considering to improve the economy are the right ones,” she claimed.

The IMF is in its final stages of negotiations with the Egyptian authorities over its $12 billion lending programme for the next three years. The loan will serve as a mechanism to reduce the budget deficit and foreign reserves. However, the agreement is not free of conditions. The IMF’s approval depends on Egyptian politicians’ willingness to implement severe economic reforms. The new government policies should include currency depreciation, a cut in fuel subsidies and the introduction of the Value-Added-Tax (VAT) bill.

The reforms have the potential to boost exports and attract foreign investors who have stepped away from Egypt due to the political instability and poor security situation. Furthermore, they are said to bridge the currency shortage and alleviate the gap between the official and black market exchange rate. The VAT will increase government revenues, something which Egypt needs urgently.

Will the reforms live up to the expectations of the IMF and Egyptian authorities? The overall unemployment rate has reached 12 per cent; the figure is 40 per cent for the youth. Public debt has reached 30 per cent of public spending according to Egyptian Prime Minister Sherif Ismail. Also, a recent study shows that only 15.7 per cent earn more than $470 per month, which is considered upper middle-income class. The rest of the Egyptian population is seen officially as poor.

The military has expanded its influence on the economy ever since President Abdel Fattah Al-Sisi came to power in 2014. As a traditional, very powerful, player in the Egyptian economy, the military has started to take over ever more contracts in recent years. Recently, for example, the military took the initiative to resolve the infant milk crisis. The army played a role in importing the products and selling them at a reduced price. Thus, how would the new IMF reforms attract private investors when the military is a potential competitor?

Corruption in Egypt is a deterrent factor as far as investors are concerned. In addition, bureaucracy, bribery, nepotism and favouritism dominate the economic environment. Recent reports present “high corruption risk for businesses” in the country’s administration, public procurement and legislation.

The unpopular reforms may also complicate the economic conditions. They will facilitate domestic disdain because they are likely to hit poorest Egyptians the most. The prices of electricity and food supplies have soared in the past couple of month. Any cuts to subsidies, therefore, have the potential to promote runaway inflation. The new situation will increase political unrest and invite more public protests and strikes.

Furthermore, the loans will increase foreign debt, which is currently at $53 billion, because it will require repayment in hard currency. According to economic researcher Amr Adly, “The loan will go into the general budget to help [the country] cope with the deficit and the dollar crisis. These are things that don’t generate any returns and won’t help to repay the loans and their interest.”

Turning to the IMF in the light of further economic worsening is not an assured solution. Sisi’s attempt to revive the economy with the expansion of the Suez Canal took a dramatic wrong turn. The project cost $8.2 billion but generated negative revenues due to the decrease in international trade. On the other hand, the project did serve to improve his image among Egyptians.

Last month, Egypt and China agreed a $4 billion loan going towards renewable energy. Earlier this year both parties signed 21 economic agreements which include loans as well as energy transportation and banking cooperation worth up to $15 billion. Other loans are set to be signed with the World Bank and the African Development Bank worth $9 billion.

Foreign reserves have decreased significantly from $35 billion in 2011 to $16 billion to supply food and fuel imports. After 2013 and under Sisi’s rule, the regime’s approach to deal with the economy has proved to be inadequate. Despite the apparent economic crisis and fiscal constraints, the government adopted fiscally unfavourable policies such as an increase in wages, pensions and benefits of army officers, the police and judges.

So, with the Egyptian regime’s black history in dealing with the economy, will it be able to do a better job under the IMF’s surveillance? It is hard to say, as Sisi seeks more loans to cover up Egypt’s sinking ship.

The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.