Egypt in the whirlwind of foreign debt / Cairo seeks economic reform

According to IRNA’s Middle East Eye report on Friday morning, Egypt’s economy, which was already heavily indebted, has suffered more due to the war in Ukraine and the increase in the price of the US dollar. This year, this country has witnessed the outflow of about 20 billion dollars of foreign investment. The war has also hit wheat imports and tourist arrivals from Russia and Ukraine, both of which Egypt relied on.

Egypt’s initial agreement with the International Monetary Fund to access a $3 billion fund could help restore investor confidence in the North African country, but real progress will depend on Cairo’s willingness to continue reforms, analysts say.

“If the agreement is approved, there will be more investment from regional investors, which will help Egypt pay its foreign debts,” Hamish Kinnear, an analyst at risk consultancy Vrisk, told Middle East Eye.

Mirt Mabrouk, the founding director of the Middle East Institute’s Egypt program in Egypt, says: “There have been discussions about this loan since the beginning of March. Russia’s attack on Ukraine gave a lot of impetus to the negotiations. “As far as IMF contracts go, this is a very good deal.”

The Egyptian pound, which has lost about 21 percent against the dollar this year, fell another 15 percent on Thursday, hitting an all-time low against the U.S. currency.

Shortly before the agreement with the International Monetary Fund, the Central Bank of Egypt had announced a two percent increase in interest rates and a shift towards a “more flexible exchange rate”.

Analysts believe Egypt used its foreign reserves to shore up the currency, a move denied by the African country’s central bank. According to the report of the Central Bank, Egypt’s foreign exchange reserves decreased from about 41 billion dollars in February to about 33 billion dollars in August.

“The decision to devalue the currency and switch to what the International Monetary Fund calls a ‘durable flexible exchange rate regime’ is promising,” Oxford Economics economist Callie Davies told Middle East Eye.

While allowing the exchange rate to be determined by market forces could help Egypt attract more foreign investment, analysts say it is also likely to put pressure on inflation, which rose in September due to higher food prices and spending. Fuel reached the highest figure of the last four years, i.e. 15%.

“The currency devaluation is part of the reforms that the International Monetary Fund expects from Egypt, but the short-term cost is more pressure on Egyptian consumers,” said Kinnear, an analyst at Verisk Risk Consulting. Because the weak pound reduces their purchasing power.

Egyptian President Abdel Fattah al-Sisi has always been wary of public anger over rising food prices. Experts say that the Egyptian government sought to limit the reduction of social programs in its negotiations with the International Monetary Fund.

Egypt’s previous governments have maintained an extensive state subsidy system, including one that allows more than 60 million people, about two-thirds of the population, to receive five loaves of bread a day for 50 cents a month. Since Egypt’s bread riots began in the 1970s, no government has attempted to tamper with the program.

Recently, the government has opened military grocery stores with products at prices below the market price and has forced local wheat producers to sell part of their produce to the government; Because the Egyptian government is having major problems to pay for imports.

As part of the IMF deal, Egypt agreed to ease a series of import restrictions it imposed in March to protect its foreign reserves. Also, the law that requires companies to receive letters of credit for foreign purchases is supposed to expire in March. Egypt has recently faced a shortage of imported goods.

In addition, the North African country has taken measures to reduce skyrocketing prices. On Wednesday, the government announced an increase in the minimum wage for civil servants from £2,700 ($137) to £3,000 (about $152).

How low can the pound go?

Analysts say the success of the deal depends on Cairo’s willingness to make reforms. Egypt has borrowed about 18 billion dollars from the International Monetary Fund, which is the second largest debtor of this fund after Argentina. The new loan is Egypt’s fourth loan since 2016.

Their international partners have also pledged $5 billion to help Egypt’s foreign budget gap – estimated at $40 billion this year and next, Egyptian officials said at a news conference on Thursday. The IMF has also pledged to provide another $1 billion through a new stability fund.

Davies, an economist at Oxford Economics, says a key measure of Egypt’s willingness to reform is whether the reforms will allow the pound to depreciate further.

This is not the first time that Egypt floats its currency on the eve of an agreement with the International Monetary Fund.

He added: “We doubt that the Central Bank of Egypt will fully commit to the liberalization of the Egyptian pound this time.”

But the most populous country in the Middle East may have no other choice. Nearly a third of Egyptians live in poverty, and millions more are on the brink of it. Egypt’s foreign debt has increased from 37 billion dollars in 2010 to 155 billion dollars (until June this year).

Meanwhile, the Egyptian president insists on increasing Kurdish spending on infrastructure projects such as the luxurious new capital. Cairo has also pledged to strengthen the private sector.

Energy-rich Gulf states from Qatar to Saudi Arabia are looking to invest in Egypt, but the commitment to privatize companies has coincided with the military’s intrusion into nearly every aspect of economic life.

According to Middle East Eye, a key measure of the sincerity of Egypt’s willingness to reform its economy may be whether its military president steps back from the military’s dominant role in the economy.