Economy

Austerity inferno or drown in debt: Egypt’s choices in IMF talks

The Egyptian government faces a bitter choice between enacting more austerity measures, under pressure from the IMF, or facing the specter of failing to repay its debts.
As the global economy has contracted in recent months, Egypt has been engaged in talks with the International Monetary Fund to shore up its rocky financial situation. Conditions of the loan have made state institutions wary, but the extent of the currency crisis may make it inevitable
As the global economy has contracted in recent months, Egypt has been engaged in talks with the International Monetary Fund to shore up its rocky financial situation. Conditions of the loan have made state institutions wary, but the extent of the currency crisis may make it inevitable

Officials have generally been tight-lipped about the conditions for the new round of lending and have tried to project a position of confidence, but President Abdel Fattah al-Sisi broke ranks on this approach in a joint press conference with German Chancellor Olaf Scholz in Berlin in mid-July. 

Sisi used the public forum to call on Egypt’s “friends in Europe” to pressure the IMF and the World Bank to relax their tough demands on the lending conditions, because “the reality is that our country cannot put up with these standards until the crisis is over.”

According to Bloomberg Asharq, Sisi’s appeal was the “first of its kind for an Egyptian official, asking the West to relay Egypt’s challenges to the IMF in order to close a deal without the standards or conditions set by the fund.” It also marks a departure from what the president himself had said earlier this year regarding the IMF having shown an understanding of Egypt’s situation and that it was not enforcing compulsory conditions on the new deal.

However, between Sisi’s comments in January and July, many factors have changed, complicating the crisis facing Egypt. Traditional solutions that Egypt has adopted in the past few years (an expansion in debt from bond markets or turning to traditional Gulf allies) are no longer sufficient to deal with the crisis.

At the same time, Egypt is set to pay tens of billions of dollars this year to repay debts and interest. Egypt did not expect to have to pay a large portion of this debt, as it has had to pay out bonds to investors fleeing to what are perceived to be safer markets in light of Russia’s invasion of Ukraine and the economic crisis.

Because of this crisis, it has become a necessity to resort to international lending institutions — especially the IMF — despite the conditions.

In the beginning, Egypt asked for a loan of over US$10 billion. To get this loan approved would have required strict austerity measures, such as reducing subsidies and letting the value of the Egyptian pound against the US dollar fall, which could increase prices even more than the current increases Egyptians are facing.

These conditions have caused conflict within Egyptian institutions over different assessments of the economic and security fallout that would follow if Egypt abides by these conditions, especially given that some projections internal to the government have it that the value of the pound to one dollar might fall to LE25 if the exchange rate were completely liberalized.

A number of Egyptian government sources and Western diplomats who are familiar with the negotiation terms between Egypt and the IMF spoke with Mada Masr in the past few months. According to these sources, Egypt has had to accept a smaller loan than it initially wanted, but even with this concession, it will have to yield to the IMF’s conditions. With a deepening crisis and the repayment deadlines looming, the space for maneuvering is becoming more and more narrow.

Over the last 10 years, the government has taken on an unprecedented amount of debt. The main source of information on the details of foreign debt is the quarterly report published by the Central Bank of Egypt. But the latest report by the central bank only details the financial situation in the last quarter of 2021 (October–December). Despite the second quarter of 2022 having elapsed, the central bank has not released a report for the first quarter (January–March) so far.

A report released by the World Bank at the beginning of July, however, indicated that Egypt’s foreign debt had reached never before seen levels of nearly $158 billion as of the end of March. Egypt has committed to repaying $33 billion in foreign debt in a one-year period, from March 2022 to March 2023, according to the report (which accounts for almost all of the country’s foreign currency reserves, estimated now at $33.3 billion).

The latest graphs available on debt commitments made by the World Bank and obtained by Mada Masr indicate that Egypt is committed to repaying around $16 billion in the second quarter of 2022 (from early April to the end of June), followed by $12 billion in the third quarter, then $6 billion in the fourth quarter, and finally more than $13 billion in the first quarter of 2023.

According to these calculations, Egypt needs $18 billion through the end of this year to make good on its debt servicing obligations, assuming that it has been able to make the full repayment of its debt commitments during the second quarter, which ended in June.

Six months ago, the Egyptian government did not know it would have to pay this large amount. In December, government estimates on foreign debt servicing for 2022 did not exceed $18 billion.

But this has changed with the Russian invasion of Ukraine and the contractionary monetary policy introduced by the US Federal Reserve since the beginning of the year.

On the one hand, it caused the flight of $20 billion in “hot money” (short-term investments in government debt instruments). Egypt is supposed to repay about $100 billion during the next five years according to estimates by FIM Partners quoted in Reuters.

On the other hand, the tourism sector, one of the most important foreign currency sources in Egypt, has seen a steep downturn, as Russian and Ukrainian tourists formed a significant percentage of visitors coming to Egypt.

In addition, Egypt no longer enjoys the financial support from Gulf countries it had heavily depended on since 2013. Gulf deposits to the Central Bank of Egypt significantly helped to support foreign currency reserves and to stabilize the value of the local currency between 2013 and 2014.

During that period, the Egyptian government received large, exceptional cash flows from the Gulf, with Saudi Arabia, the UAE and Kuwait committing to $24 billion in deposits to Egypt as well as financial and in-kind grants and project aid money.

During the Egypt Economic Development Conference held in March 2015, GCC countries committed to another $12.5 billion. But despite this assistance, Egypt’s foreign currency reserves began to slide at the beginning of the fiscal year 2016/17, because of an increase in debt repayments and the central bank using foreign currency to meet the demand for imports and for more dollars in foreign exchange markets. At the same time, the downing of a Russian commercial jet in November 2015 was a significant blow to tourism and the foreign currency inflows that come with it.

But through the years, Gulf deposits have decreased gradually, to the point that the remaining deposits at the central bank sat at $15 billion at the end of the first quarter of this year. 

Half of the $4 billion in deposits by Kuwaiti should have been paid back in April, with the other half due for repayment in September. Additionally, two $1.5 billion payments on the UAE deposits are due this year. A government source informed on Egypt-Arab relations told Mada Masr that Egypt is negotiating with Kuwait and the UAE separately now to push back the repayment dates of these debts, but so far an agreement has not been reached.

Until now, the central bank has not announced a plan to repay the installments of these debts. It has not announced any updates regarding its foreign debts since the end of 2021. But in May 2022, the central bank announced a $1.6-billion decrease in foreign currency reserves, which it said was caused by the repayment of foreign debt, without mentioning the installments owed to the Gulf countries.

Because of all these pressures, Egypt is facing risk of defaulting on its payments. This led Moody’s, one of the world’s biggest bond credit rating agencies that investors depend on to set their investment priorities in the market, to lower its future projections for Egypt in May from stable to negative, warning that the decrease in foreign reserves might have it downgrade Egypt’s credit rating for the first time since 2013.

Finance Minister Mohamed Maiet said at the beginning of July that Egypt “had learned its lesson” and that it will not depend on hot money again. 

Without hot money, Egypt has little choice but to turn to big international financial institutions. 

Hany Geneina, an economist and lecturer at the American University in Cairo, told Mada Masr that there are many benefits to resorting to the IMF and that the loan will be pivotal for the government’s strategy in the coming period.

The first of these benefits has to do with the value of interest on these debts. The interest on the IMF loan is close to the interest rate on US treasury certificates. According to Geniena, the interest rate for the loan is likely between 3 and 4 percent at present. This figure stands in stark contrast to the 15 percent interest rates on government debt instruments, of which hot money comprises a significant portion.

In addition to this, IMF loans don’t depend on credit rating. In fact, a loan from the fund can be considered a “certificate of trust” for the Egyptian economy that could improve Egypt’s credit rating and encourage foreign investors to invest in debt instruments.

Finally, Geneina says that the IMF loan might quickly contribute to closing a large part of the financing gap in the Egyptian economy, rather than having to wait for a significant period to put out bonds or sell state assets directly to investors or through the stock market.

But Egypt’s ability to reap these benefits depends on the size of the loan. Geneina points out that it’s important for the loan to be in the $15–20 billion range because a smaller loan won’t have many benefits. “Egypt has a financing gap estimated at $45 to $50 billion a year,” says Geneina. “So, getting a small, $5-billion loan over three or four years, for example, means Egypt would be receiving no more than $1.5 billion every year, which will not affect the financing gap.”

However, indications from the visit of IMF officials to Egypt indicate that a bigger loan may be in the works. The head of the IMF mission to Egypt, Celine Alar, said in the beginning of July that IMF experts and the Egyptian government had held over two weeks of continuous productive talks on the economic policies and adjustments to be followed in a new loan deal under the Extended Fund Facility.

This is the same type of funding that Cairo received in 2016, which earmarked $12 billion to the state as part of a structural adjustment program. The benefits of the EEF program are twofold: it will allow Egypt to take in more money and provide for a longer repayment period, which could reach up to 10 years. The money is also not tied to specific projects and goes directly into the state budget. But it also indicates serious medium-term problems in the balance of payments because of structural weaknesses, according to the IMF’s explanation of the EFF program. 

This means that the anticipated loan will inherently stipulate the implementation of structural adjustments. The IMF’s conditions and the size of the prospective loan have created a lot of disagreement over the past few months.

The only official comment so far on the possible size of the loan came from the head of the House Planning and Budget Committee, Fakhry al-Fiqy, in mid-July, when he pegged the figure at $7 billion.

According to different sources who spoke to Mada Masr, it seems negotiations have changed on the size of the loan. In March, an Egyptian source in Washington DC said Egypt requested $10 billion in “emergency funding” from the IMF this year.

But this has changed with time. According to the source, the IMF told Egypt in April that the most they can negotiate for would be $3–5 billion. In May, central bank governor Tarek Amer said that the loan was going to be “limited”because Egypt has already gotten a large loan previously and that he considered Egypt to be requesting the loan to “benefit from structural reforms.”

But with the crisis ongoing and with the lack of any reasonable alternatives in the near future in light of the Russian invasion of Ukraine and the continuing global economic crisis, the IMF showed an understanding of Egypt’s request for a larger loan. Talk of a $11-$12 billion loan was circulating in June, with Egypt potentially getting the first installment this summer, according to another informed Egyptian government source and another diplomatic European source working in Cairo.

However, both sources, who spoke to Mada Masr in June, say that Egypt could not agree to the conditions needed to receive a loan of this size. And therefore, talks went back to a smaller loan.

On Sunday, Maiet phoned into the evening talk show Hadith Al-Qahera to address speculation that Egypt is looking to secure as much as $15 billion from the IMF.

“The figure is surely lower,” Maeit said, adding that Egypt can close its funding gap by attracting further foreign direct investment and capital from international development institutions and bond markets.

If Fiqy’s estimate that the loan will come in at around $7 billion and will be agreed upon by the end of August or September is accurate, the question of what the terms will be remains up in the air. 

What we know so far is that the first of these conditions has to do with the value of the Egyptian pound against the US dollar. While commenting on the negotiations with Egypt in April, IMF Middle East and Central Asia Department director Jihad Azour pointed out that there must be “more flexibility in the exchange rate,” which represents one of the “central tenets” that the IMF is advocating for.

This caused a dispute with the government itself. According to an Egyptian source in Washington who has direct access to the progress of negotiations, the central bank governor refused to completely liberate the exchange rate for fear that such a move could see it plummet drastically to a value that could reach LE25 per dollar. On the other hand, the minister of finance disagrees, reasoning that the loan will bolster trust in the Egyptian government and that the US dollar will remain in the range of LE20.

The IMF also mentioned removing the restrictions that the central bank placed on imports to keep as much foreign currency as possible in Egypt. The fund also requested that the government scale back various subsidies, including bread subsidies. But according to several sources informed on the discussions, security apparatuses warned of the danger of this move, in light of price increases and fear of social and political repercussions. Indeed, the administration has abandoned any plans to lift bread subsidies. Social Solidarity Minister Ali al-Meselhy suggested further reducing the weight of each subsidized loaf while keeping the price at 5 piasters. The IMF and Egypt have yet to reach a solution that is acceptable to both sides on this issue. According to a high-ranking European diplomatic source working in Egypt, the subsidies issue presents an obstacle in the current negotiations.

Facing all these pressures, the Egyptian government has two bitter choices: either to accept the pressures of the IMF and enact more austerity measures to be shouldered by citizens, or to face the specter of failing to repay its debts. Perhaps there is a third option, given Sisi’s public appeal: waiting for “our friends in Europe” to intervene.

Illustration by Namita Sunil. Namita is a New Delhi based illustrator and graphic artist.

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Authors
Aida Salem, Mohamed Ezz and Sara Seif Eddin
Translator
Omar El Adl
Date
28.09.2022

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