Egypt’s $8bn rescue package brings new challenges

Reuters

Egypt has finally secured a hefty International Monetary Fund loan of $8 billion designed to support reforms and tackle the country’s struggling economy. 

In accordance with the terms of the new deal, the beleaguered Arab state announced it would lift support for its currency and allow the market to determine the exchange rate. The local pound rapidly plunged.

IMF negotiations have been protracted – to say the least. Egypt’s government has been uncomfortable with the terms relating to its policies on supporting its currency, while the IMF believes that a currency value governed by market forces will encourage long term stability. 

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The government, however, is concerned that such a sharp impact will cause social unrest as Egypt’s cost of living soars.

Ministers have been heckled by ordinary Egyptians protesting socio-economic conditions, and the war in Gaza has agitated a population overwhelmingly sympathetic to the Palestinians and frustrated at the government’s response. 

Moreover, Egypt is struggling with the burden of its borrowing spree that it used to build large infrastructure projects, including a $58 billion new capital. 

Foreign debt has soared, and this impact has been exacerbated by rising interest rates and the weakening currency. In 2022, interest payments alone amounted to 45 percent of the state’s revenue.

Many analysts saw the early elections in Egypt as a reflection of those concerns and an attempt to settle a new mandate before introducing unpopular reforms.

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Furthermore, where Egypt has enjoyed almost unconditional support from its Gulf allies over the past decade, these same supporters have expressed increasing frustration at the manner in which the government has managed their monetary support.

Gulf allies have ploughed billions into Egypt over the past decade in the form of investments and deposits to help shore up its economy. 

However, Gulf attitudes hardened as they imposed tougher conditions on investments and sought greater returns.

In January 2023, Saudi Arabia’s finance minister announced at the World Economic Forum that “grants and deposits without strings attached” would no longer be handed out.

The statement provoked an exchange of accusations and criticism between Saudi and Egyptian commentators that led to Egypt’s president personally intervening in a bid to ease tensions. 

The $35bn investment deal signed with the UAE’s ADQ to develop Ras El Hekma suggests that Egypt can still draw investment from its allies

Egypt’s Gulf allies remain uncomfortable with the army’s dominance in the economic sectors that they seek to invest in. As such, they have sought to pressure the government into opening up these sectors to foreign investment. 

As part of an earlier reform package, the IMF also indicated that some privileges afforded to powerful state-owned enterprises need to be removed.

Egypt’s President Abdel-Fattah el Sisi, however, has been wary of reforming the army’s role in the economy in order not to disrupt traditional power structures on which the current government depends.

Despite these tensions, the $35 billion investment deal signed with the UAE’s ADQ for developing the famous Ras El Hekma peninsula suggests that Egypt can still draw investment from its allies. The deal proved essential in reassuring IMF negotiators that Egypt would have sufficient liquidity. 

However, the agreement itself has been seen as controversial by some who view it as an undermining of Egyptian sovereignty and territorial integrity as a result of its weakened bargaining power to secure liquidity.

There are even suggestions that other areas near Sharm el-Sheikh could also be forfeited to Gulf allies in exchange for further, urgently needed liquidity.

Although Egypt has secured the financial aid it has sought for some time, it remains unclear whether it will commit to the promised reforms. 

The war in Gaza has affected revenues from the Suez Canal, which have dropped by 50 percent.

The brunt of the reforms will be felt by a population struggling with inflation, where 30 percent are officially considered to be close to the poverty line.

The government will be particularly sensitive to any social unrest, and may well set aside promised reforms in favour of more populist measures aimed at appeasement.

Sami Hamdi is managing director of global risk and intelligence company The International Interest