In November 2016, Egypt signed a $12 billion loan agreement with the International Monetary Fund. This three-year agreement included the IMF’s primary conditions, such as floating the exchange rate of the Egyptian pound, controlling the general budget, increasing taxes, and “structural reforms” in the economy. However, this deal multiplied the internal poverty in the country.
Before this agreement, Egypt was suffering from several problems, the most important of which is the shortage of US dollar reserves, which led to a very low value of the Egyptian pound against it. A large budget deficit and a high public debt also represented alarming problems for Egypt’s economy. However, the IMF programme did not show its results in addressing the root problems that Egypt was suffering from. Despite improvements in some indicators such as GDP growth in 2018 and 2019 and a relative improvement in the current account, the poverty rate increased by about five per cent between 2016 and 2019.
Public employees’ wages were also targeted, and subsidies that included food decreased through a “supply” programme that secured support for some commodities such as bread, oil, sugar, and rice and raised subsidies for oil derivatives. Simultaneously, Egypt increased revenues by raising tax rates and introducing new taxes such as the value-added tax, which affects all segments of society, which reached 14 per cent in 2017. Ironically, this matter came after the Egyptian government reduced the tax rate that affected the upper-income segment from 25 per cent to 22.5 per cent in 2015. Foreign debt has more than doubled, from $55 billion in 2015 to $123 billion in the first half of 2020.
Another dimension of the IMF programme, through these reforms, is to attract foreign investment and help small businesses expand. Therefore, it imposed on the state to implement an investment law that reduces the number of procedures and regulations that were imposed to establish new companies, which was in large companies’ interest because it excluded small companies before they were born. However, this law still secures lands for this investment free of charge or at low prices for certain projects, contributing to facilitating the path to corruption and favouritism. The programme also imposed reforms to laws that simplify bankruptcy and liquidation and that were supposed to stimulate foreign investment to enter the country.
IMF believes that its programme in Egypt is running successfully. It also believes that its programme has succeeded in curbing the massive deficit in the current account, which reached $20 billion in 2016 and decreased to about $8 billion and $10 billion in 2018 and 2019. However, many points can be mentioned to conclude that the “success” that the fund talks about is illusory. During the programme period, one of the most prominent issues is that Egypt’s poverty rates increased between 2015 and 2019 from 27.8 per cent to 32.5 per cent, or nearly five per cent. This increase is due to inflation resulting from the devaluation of the currency due to the floating of the exchange rate, that is, due to the measures imposed by the fund, in a country that mainly depends on imports. The value of imports reached $79 billion in 2019, and a deficit in the foreign trade of $50 billion, representing about 16 per cent of GDP.
In practice, the devaluation of the currency leads to the multiplication of imports and raises inflation rates. This happened immediately after the floatation of the pound exchange rate in Egypt, as the inflation rate rose to 29.5 per cent in 2017. This is reflected in the decline in wages’ purchasing power and directly translated into an increase in poverty rates. These results are classic in the framework of programmes with the International Monetary Fund, which does not attach great importance to social problems arising due to its austerity policies. Instead, it is concerned with dealing with structural issues from a financial perspective without social dimensions.
IMF’s advice on social matters is limited to establishing “social safety nets” to protect the poor, meaning that it looks at “helping the poor” rather than removing the causes of their falling into poverty. Also, one of the paradoxes that result from the unbalanced relationship with the International Monetary Fund, if a balanced relationship can be established, is that it imposes a path for dealing with crises that increases dependence on the outside.
Egypt’s foreign debt amounted to $55 billion in 2015 before signing the programme with the fund. The following five years after signing the programme raised this debt to $123 billion in the second quarter of 2020. This matter constitutes a great burden on society as a whole, not only on the state treasury as the debts entail the cost of servicing them in foreign currencies, noting that previous experiences have shown that this trap does not end except by defaulting on the payment of the debt, which will put the country in the cycle of returning to seek assistance from the IMF. In contrast, net foreign direct investment, which was suffering from a deficit of $6.7 billion in 2015, declined. Still, it increased to a shortage of $8.6 billion in 2019, meaning that the IMF’s programme’s goal to attract foreign investments failed.