IMF Loans Egypt $12 Billion

(Originally published on November 20, 2016, as part of LSE’s Political Risk and Investment Society Spotlight Blog)

Background

After taking power in 2013, Sisi promised to revitalize Egypt’s economy. Yet economic vitality has been lackluster: though GDP growth has increased from 2% to 4% since 2011, unemployment has also risen from 9% to 12.5%. Tourism, which accounts for about 10% of Egyptian GDP, fell dramatically after the 2011 Revolution, and has failed to rebound owing to the continued insurgency in the Sinai and Egypt’s perceived inability to provide security for tourists after the downing of a Russian plane in 2015. Tourism revenue has fallen from $12.5 billion in 2011 to $6.1 billion in 2015. Further, anticipated gains from expanding the Suez Canal have failed to materialize though the project cost over $8 billion. On top of all this, foreign investors have been scared away by corruption, ever increasing military involvement in the economy, and overall market instability. The lack of foreign investment led to rapid inflation (about 10% in 2016 over 2015) and food shortages.

To help stabilize the economy, the Sisi administration had been relying on Gulf, primarily Saudi, money, subsidies, and goodwill. Over the past three years, over $30 billion has flowed from the Gulf to Egypt. But an eroding relationship with Saudi Arabia has forced Egypt to look elsewhere for needed cash infusions.

The economic malaise even prompted calls for another revolution, set for November 11. The calls went unheeded, yet the administration considered the threat real enough, as large numbers of riot police and armored vehicles patrolled Tahrir Square.

The Deal

The International Monetary Fund has agreed to loan Egypt $12 billion over three years, with the first $2.75 billion having been sent on November 11. The Egyptian government needed to make key economic reforms to secure the loan, which in the short term will have negative effects. First, it floated the pound freely, resulting in a depreciation of almost 50%. Egypt is heavily reliant on imports, so this will raise prices for consumers already struggling to cope with rising food prices. Second, the government cut fuel subsidies, raising prices of gasoline and diesel by nearly 50%, another hit to cash-strapped consumers. Third, it added a value added tax to many goods, further raising prices.

In theory, these steps coupled with the IMF loan will help correct Egypt’s economy, make it more internationally competitive, and attract foreign investment, in the long term. But the success of the Egyptian economy relies on the short term willingness of ordinary Egyptians to bear the pain, and how responsive Sisi will be to the public if they demand a repeal of the economic adjustments. Given the underwhelming showing of the “Revolution of the Poor” on November 11, the government may feel more secure in its position. Yet higher food and fuel prices and more taxes will strain all segments of Egyptian society. The possibility of another revolt will depend on how quickly short term pain becomes long term growth.

Council on Foreign Relations

New York Times

Reuters

Bloomberg

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