- Since the Arab Spring in 2010, the Egyptian economy has been under pressure from a variety of sociopolitical forces.
- Egypt and the IMF agreed to a 46-month financial reform to improve the economy.
- The deal will help improve the private sector in Egypt and improve the lives of all Egyptians.
The Egyptian economy has struggled for the past 10 years as misfortune and poor decision-making have hurt the economy and, in turn, the well-being of Egyptian citizens. So Egypt and the International Monetary Fund (IMF) recently agreed on a deal to correct the many issues dragging down Egypt’s economy. Here are the details of that deal and the outlook for the future of Egypt.
The state of Egypt’s economy
Egypt’s economy has taken a beating over the last decade. The Arab Spring that started in 2010 caused unrest in the North African country and was followed by political disruption in the form of the military removing President Morsi from office in 2013, the crackdown on the Muslim Brotherhood political party, the introduction of a new constitution in 2014, and multiple small crises that affected the country’s ability to operate in a stable fashion. The conflict in Ukraine has added another layer of complications for Egyptian economic stability.
Tourism used to be the main driver of the Egyptian economy and is responsible for 15% of the country’s GDP. However, political unrest has diminished that aspect of the economy as tourists were targeted by kidnappers and terrorists. The coronavirus pandemic also played a role in Egypt’s faltering economic state. The tourist industry has not yet fully recovered, leaving Egypt to rely on oil and gas production and the Suez Canal as its major sources of revenue.
Because of its economic and political issues, the inflation rate in Egypt continues to climb. In April 2022, it rose above 13% for the first time since 2019 and has been rising ever since. The latest reading in September 2022 saw inflation hit 15%.
In 2016, Egypt sought a $12 billion loan from the IMF and devalued its currency, the Egyptian pound, to obtain the loan. The loan was funded, but authorities put the money towards military and intelligence agencies instead of putting it into the economy. This sent millions of its citizens into an even deeper poverty. Meanwhile, Egyptian officials asked for more money from the IMF – three more times between 2016 and 2022.
Egypt’s deal with IMF
The full details of the deal between the International Monetary Fund and Egypt have yet to be released, but the two parties have have reached an agreement on the terms of the loan. Instead of giving money to Egypt with few performance requirements as they have in the past, the IMF is making the Egyptian government agree to a comprehensive financial reform plan for the next 46 months.
The IMF has created an Extended Fund Facility Arrangement of $3 billion (based on U.S. dollars) in exchange for Egypt engaging in actions that help the country resist external shocks, improve its social safety net, and implement reforms that will enhance private-sector-led growth and job creation. Egypt has already taken steps towards providing social protection, allowing its currency to trade fairly, and phasing out mandatory letters of credit for import finance.
The Extended Fund Facility Arrangement also requires the Egyptian government to anchor its fiscal policy to reduce general government debt and gross financing needs. The government needs to overhaul its tax system, continue strengthening its social protection policies, and take measures to protect the purchasing power of its low-income citizens and pensioners.
Saudi Arabia and the United Arab Emirates are making moves to invest money in Egypt to keep the region stable. While the motives behind these moves are not purely altruistic, there is an enlightened self-interest at play in preventing further unrest in Egypt and other Middle Eastern countries. The IMF recognizes this desire and expects financial assistance from regional and international partners for Egypt.
What is the IMF?
Understanding the nature of the IMF is critical to fully understanding the importance of this deal. The International Monetary Fund is a global organization that consists of 190 member countries. Its financial resources are derived from the capital subscription quotas of countries that are members of the IMF. Member countries can borrow from the funds to cover emergencies and shortfalls when they experience financial troubles.
The purpose of an IMF loan is to stabilize a member country’s finances and currency while enabling them to pay for imports that its citizens need. The loan also helps return the member country to a state of economic growth and fix the problems that led to the need to borrow in the first place. When a member country applies to the IMF for funds, it does so with the knowledge that the IMF will impose terms on the loan in the form of governmental, economic, and social reforms.
The IMF also monitors the international monetary system and global economic developments. The goal is to identify risks to global financial stability and keep track of member countries’ financial and economic policies.
Future outlook for Egypt’s economy
The IMF feels that Egypt has enormous growth potential, provided the government keeps itself on track. The Extended Fund Facility Arrangement will allow the private sector to grow through the reduction of state control over private industries. It also looks to improve access to education for more of the populace. Egypt has also asked for funds from the Resilience and Sustainability Facility, which provides long-term financing for building resilience against climate change.
Provided Egypt’s government takes on the challenges provided by the IMF, the outlook for Egypt’s economy looks bright. The country will have to provide safety for tourists if it wants to recover this industry, but Egypt’s goals for improving living conditions for its population and allowing its currency and private industries to flourish suggest that the country has a solid plan to work toward a more prosperous future. It will take years to see the results of these efforts, but Egypt is taking action now to provide a better future for itself.
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