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The IMF loan and Egypt's dwindling economy

By Anas Iqtait - posted Friday, 26 August 2016

Egypt may have, yet again, dodged a bullet with the newly approved $ 12 billion International Monetary Fund's (IMF) loan with the objective of mending its ailing economy after years of unrest. However, Egypt might be running out of financial backers as traditional financial supporters at the Gulf have turned elsewhere for political support in a tremulous region. All of this while the economy dwindles into higher inflation and running perilously low on foreign reserves.

Recent financial pledges include the high profile 2015 Egypt Economic Development Conference where plans for a new Egyptian capital were revealed, over $ 12.5 billion pledged by the Gulf Cooperation Council nations, and several business investment ventures were announced with international conglomerates. In fact, the IMF loan would be the last in a long series of grants Abdel Fattah el-Sisi's regime has been publicly awarded. Saudi Arabia, UAE, and Kuwait have collectively injected more than $ 25 billion since el-Sisi manoeuvred the ousting of Mohamad Morsi, the first democratically elected president in Egypt.

In the meantime, economic conditions for ordinary Egyptians have been deteriorating under el-Sisi's governments. The Egyptian pound has been in free fall; its valuation has halved in three years. Moreover, the government's attempt of a 13 percent devaluation of the pound has failed to attract foreign investors. Implications of the lower pound have been felt the hardest by ordinary Egyptians who bear the heat of 14 percent inflation. Egypt imports half its staple food and is the world's largest wheat market. As foreign reserves continue to slide, halved since 2011 to about $15 billion enough for less than three months of imports, importers are increasing prices to match the devaluation of the pounds purchasing power internationally.


The country is also suffering from high unemployment rates and lack of economic opportunity. Young people are not being equipped with the necessary skills to benefit the economy and as a result more than 40 percent of them are unemployed. Egypt ranks as one of the worst countries in the world in the quality of primary education. And it ranks 131st in the World Bank's ease of doing business index. Making it extremely difficult for youth to undertake entrepreneurial adventure.

Recent negotiations with IMF and the fact that Egypt is seeking to finance a proposed economic program through funds from the World Bank, the bond market and bilateral accords reflect an end of an era of cheap foreign revenue streams from the Gulf nations. As a result, Egypt no longer can afford to avoid making hard choices when it comes to tiding its budget deficit and its bloated, highly corrupt, subsidy regime. Proposed financial reforms will target a further devaluation of the pound and over the board cutting of subsidies, mainly for fuel and wheat. An introduction of new valued-added tax (VAT) law and a transition to a flexible foreign exchange system will also be implemented. However, in a country where more than 26 percent of the population lives well below the poverty rate, such reforms will send economic shockwaves among the poorest and inflict harsher realities for them.

El-Sisi has been able to avoid fundamental reform due to generous gifts from the wealthy Gulf States. But recent disagreements on the Saudi led war in Yemen and the Syrian civil war coupled with a lack of faith in el-Sisi's corrupt regime, mean these cheap flows of capital have dried out. Alternatively, el-Sisi is only left with international organizations who in return will demand strict economic structure reforms that will upset a frustrated middle class and has the potential to escalate populous unrest similar to those that ousted Mubarak in 2011.

The failure to bring about economic reform and improve living conditions of ordinary Egyptians will put the Egyptian government in need of further bailouts. After wealthy Gulf nations and international organizations who will el-Sisi turn to next?

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About the Author

Anas Iqtait is a research scholar at the Centre for Arab and Islamic Studies (the Middle East and Central Asia) at the Australian National University.

Creative Commons LicenseThis work is licensed under a Creative Commons License.

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