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Will Egypt's IMF bailout dispel domestic money fears?

Will Egypt's IMF bailout dispel domestic money fears?
6 min read
13 February, 2024
Analysis: The huge IMF bailout could ease Egypt's upcoming external debt burden but risks new austerity measures that will hurt the poorest in society.

All over Egypt from street kiosks to TikTok, Egyptians are in despair at the price of groceries as inflation rapidly outpaces modest wage hikes.

The government is expected to imminently announce an International Monetary Fund (IMF) bailout upwards of $6 billion, but will that new debt deal make a difference to the millions of Egyptians living in financial fear? 

Egypt is in the final stages of securing the multi-billion dollar IMF loan after its economic crisis worsened due to the Gaza war and a crippling 2024 debt repayment schedule, which drains over half of the state budget.

Major international banks predict the $6 billion loan will be boosted by a further $6 billion of funds from Egypt’s allies.

As Egypt’s regime inches closer to fresh dollars, Egyptians continue to be shocked by monthly inflation in the range of 30%. To satisfy the IMF’s demands, Egypt’s Ministry of Finance has slashed its utility subsidy budget and since the start of the year, internet prices have risen by around 33% and electricity by around 15%, pushing further financial strain on its citizens. 

“Even if they pay us more money each month, will we be able to afford to buy meat? Gas? Or even milk?” an Egyptian barista expressed to The New Arab.

Last week, President Abdel Fattah el-Sisi announced his government will lift the private sector minimum wage by 50% to 6,000 EGP a month ($195) as part of an EGP 180 billion welfare package aimed at tackling the cost of living crisis. As an example, milk now costs around EGP 45-50 for a litre, compared to EGP 20 less than six months ago.

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On the streets Egyptians have been struggling while the country has become the IMF’s second largest debtor, only trailing Argentina. Egypt has historically relied on both the fund and wealthy allies such as the GCC to prop up its economy, despite a poor track record in long-term debt management.

“Usually countries need to do some prior action before they receive IMF funds, but I suspect if the IMF want to get the FX markets moving, they’re going to have to give between [USD] 3 billion to 5 billion upfront to try and provide that initial liquidity to the EGP market,” Anthony Symond, investment director of emerging market debt at Abrdn, told The New Arab.

“And if that happens, and Egypt managed to kind of do a small devaluation and get a little bit more liquidity, it could work out, because there's a lot of dollars sitting in the country just waiting to be converted.”

Egyptians are in despair at the price of groceries as inflation rapidly outpaces modest wage hikes. [Getty]

What will Egypt use proceeds from the IMF loan for?

It is expected Egypt will use proceeds from the first tranche of the IMF loan to support a modest devaluation, boost foreign asset reserves and replace revenue lost since the outbreak of the Gaza crisis.

“At least at the beginning a large part of financing will be used to support FX reserves and finance the income that Egypt would get usually from tourism or from the Suez Canal,” Symond said.

“The expectation is that Egypt will do a small depreciation of the currency. They won’t go to the black market levels, but perhaps they will go halfway to unlock further IMF financing.”

Egypt’s currency continues to trade at around 30.9 EGP to the dollar at the official rate. In the black market, the Egyptian pound swung to highs of 70 to the dollar at the beginning of the month, before recovering to current rates of around 50 EGP to the dollar. 

“Egypt needs to devalue the currency to eliminate the black market,” an IMF economist told The New Arab. “The currency may overshoot at first but will hopefully stabilise in the early to mid-40s.”

One hotel owner in Egypt suggested the black market might be about to collapse. As has happened many times in the past, its deviation from the official market rate effectively became a pyramid scheme in recent weeks, drawing in even low-wage Egyptians who have tried to buy up hard currency.

Any kind of devaluation will lead to short-term inflation, as importing goods will effectively become more expensive. Combined with the Suez Canal crisis this may make imports like wheat and sugar even more costly. 

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How will the new funds help everyday Egyptians?

Historically, when Egypt has made an agreement with the IMF in return for new funds, the government has embarked on a series of austerity measures hurting the poorest in society.

The Washington DC-based fund typically forces debtor countries to adopt strict austerity measures and introduce higher taxes in exchange for fresh financing, helping countries deal with short-term balance of payments issues rather than tackling longer-term economic problems.

The short-term focus often leads to longer-term inequality levels, according to an Oxfam study.

Poverty levels have risen in Egypt since the $12 billion IMF bailout in 2016, which caused the EGP to lose half of its value and inflation to spiral upwards rapidly, echoing the events of today.

In 2019, the World Bank estimated that 60% of Egyptians lived near or below the poverty line, with the real number expected to be higher today.

“Life in Egypt keeps becoming more and more expensive, with less opportunity to find work that covers monthly expenses,” the barista said.

Historically, when Egypt has made an agreement with the IMF in return for new funds, the government has embarked on a series of austerity measures. [Getty]

Can the IMF loan help the economy?

In the 2024 fiscal year, Egypt must repay $29.23 billion in external debt service. Debt service amounted to 60.3 percent of Egypt’s total expenditure during the first quarter of the 2024 fiscal year. 

With funds from the IMF coupled with expected help from financial allies, Egypt is expected to easily make the 2024 repayments, allowing the nation to avoid a full-blown default.

“The economy will continue to be under pressure given inflation levels and consumer sentiment, but this doesn’t mean Egypt will struggle to pay back debt, at least in the short term,” Symond told TNA.

The ability to repay upcoming burdens does not mean that Egypt’s problems will be solved, but rather immediate issues will be kicked along the road.

The chance to turn around Egypt’s long-term economic prospects further shrinks as Egypt’s $164.73 billion external debt burden grows as new debt floods in.

The huge bailout may make the headlines, but it will most likely not make a difference to Egyptians' lives as the new funds will be used to repay upcoming debt maturities and disappear into the devaluation program.

Lara Gibson is a Cairo-based journalist closely following Egypt's economic and political developments. 

Follow her on Twitter: @lar_gibson