Are Egypt’s IMF-imposed reforms working?

Egypt has devalued its currency and reduced subsidies. Exporters are benefiting, but the country’s citizens have been hit hard by the erosion of their incomes.


Grinding their way through some of the world’s slowest traffic lanes, the unfortunate drivers of Cairo are wearily familiar with their tedious daily commute.

But for the Egyptian government, there can be no better captive audience than this cursing, exhausted throng of motorists. Alongside the city’s highways, authorities have erected dozens of billboards in a bid to persuade Egyptians to back crucial IMF reforms aimed at reversing decades of economic stagnation.

The billboards – daubed with motivational messages urging the country to “shorten the road” of reform – are just one salvo in a PR campaign aiming to mobilise public support for the imminent second tranche of the IMF’s critical $12bn loan.

But as Egypt’s hard-pressed citizens begin to feel the impact of the deal’s stringent austerity measures – including reduced government spending, new taxes and a radical currency revaluation – questions are being asked about whether the government of President Abdel Fattah al-Sisi is committed to the path of reform – and whether the IMF straitjacket is too restrictive for Egypt’s ordinary citizens.  

“Egypt has largely complied with the conditions set out at the start of the programme so far,” says Jason Tuvey, Middle East economist at Capital Economics. “The key ones were floating the currency, undertaking subsidy cuts, introducing VAT and other fiscal consolidation measures. The issue is whether that continues over the rest of the programme.”


Of those measures, the devaluation of the Egyptian pound has proved the most controversial. After decades of strict central bank currency control, policymakers finally caved in last November by announcing a free float.

While that extraordinary shift pleased Egypt’s band of beleaguered foreign investors and boosted portfolio investment inflows, the impact eroded the purchasing power of citizens already reeling from the introduction of VAT. Today, one US dollar buys 18 Egyptian pounds, compared to just nine prior to the free float, a cost that even supporters of the deal concede is being borne by ordinary Egyptians.

“When you have a country where the exchange rates depreciates by more than 50%, it’s a major adjustment,” says Garbis Iradian, chief economist at the Institute of International Finance and a former senior economist at the IMF. “There was no other way out – the problem had been postponed by the Egyptian authorities until it came to a point where reserves were being depleted.

They didn’t have a choice and had to implement such harsh measures. [But] the exchange adjustment is very harsh because it impacts the purchasing power of the population.”

Iradian believes that economic growth for the first half of the year may be as low as 2.7%, some way short of the 3.5% forecast by the Egyptian government. But while consumers may be reeling under inflation of over 30%, the country’s export sector is breathing a sigh of relief after several lean years.

“The fact it’s been floated has made a lot of Egyptian firms more competitive,” says Tuvey. “We’re seeing that in the data – manufacturing production has risen sharply, exporters in particular are benefiting, such as the textile sector. While the consumer sector has been hit hard because of the erosion in incomes, exporters are certainly doing a lot better.”  

The free-floating pound is not the only area of concern for consumers. The IMF’s insistence on reducing the expensive fuel subsidy bill looks set to alienate exactly the same drivers that the government is targeting with its billboard campaign. In March, food subsidy cuts designed to slash state-sponsored bread from 4,000 to 500 loaves per bakery sparked sporadic protests in Egyptian cities.

Reform fatigue

While food subsidies are not a condition of the IMF deal, there is a danger that they could fuel “reform fatigue” by feeding into a citizen-led backlash against the Washington-based lender. Investors believe that a targeted approach clamping down on the most wasteful subsidies while offering protection to the vulnerable is the most equitable way forwards.

“The introduction of VAT and the reduction of energy subsidies will impact large segments of the population in a negative way,” says Mark Mobius, executive chairman at Templeton Emerging Markets Group. “There seems to be too much emphasis on ‘social protection’ such as food subsidies and social programmes.

It is these programs which have weakened the economy since it puts too heavy a weighting on government programmes. It would be better to reduce taxes and regulations so that small businesses could increase earnings and provide sufficient food, housing, medical care and education for their families.”

Yet wholesale cuts to subsidies remain politically sensitive in a country where the pump price of fuel remains particularly low. There are few signs of retrenchment in the government’s 2017–18 subsidy bill of $18.23bn, which includes $8bn of fuel subsidies and around $4.4bn of electricity handouts.

A social spending plan in the budget boosts food subsidies while civil service pensions will be raised. That raises the question of whether the IMF has truly forced lasting culture change or whether an autocratic Egyptian government that remains allergic to social unrest and popular protest will continue to reach for the chequebook.

“Egypt has a history of subsidy cuts and high inflation fuelling unrest – that’s one of the key reasons that people argue was behind the Arab spring,” says Tuvey. “One of the risks we’ve highlighted is that they’ve made progress so far but if the result is signs of unrest then certainly government would slow down on the reform front.”  

Structural reform is needed

The implementation of a new investment law, designed to allow new firms to bypass Egypt’s Byzantine bureaucracy, is partially an attempt to offset the concerns of reformers. But many believe that the authorities should go much further than the IMF deal by actively forcing structural reform to lure back a reluctant private sector and encourage growth.

“The IMF deal alone cannot do it since the amount is rather small in relation to the Egyptian economy and does not emphasise government reform enough,” says Mobius.

“It helps but it must be combined with real reforms… there should be no relaxation of efforts to reform the entire government organisation with a reduction of bureaucratic barriers to investment, particularly in the small and medium enterprise sector. Most important will be the need to privatise government companies, including those owned by the military, so as to enable capital raising by those companies and make them more profitable and efficient.”

Nevertheless, given the political costs of existing methods, analysts remain hopeful that Egypt is serious about reform. “My general assessment is that for the first time Egypt is trying to put its house in order,” says Iradian. “This is a major adjustment – what they need to do is more on the structural side.”

David Thomas

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