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MENA Watch: Will Egypt’s IMF bailout be enough?

Egypt's Ministry of Finance cut its budget for utility subsidies to meet IMF demands

The cost of goods is driving Egyptians crazy, from street vendors to TikTok, as inflation outpaces even small pay increases.

It is anticipated that the Abdel Fattah el-Sisi government will soon declare an IMF bailout of up to USD 6 billion, but will the millions of Egyptians living in terror of their finances be affected by this new debt arrangement?

Following the escalation of its economic crisis brought on by the Gaza conflict and a burdensome debt repayment schedule that consumes more than half of the state budget through 2024, Egypt is nearing the completion of obtaining the multibillion-dollar IMF (International Monetary Fund) loan.

Leading global banks estimate that Egypt’s friends will contribute an additional USD 6 billion to the overall USD 6 billion loan.

Egyptians continue to be astounded by monthly inflation rates of up to 30% as the regime gets closer to introducing a new currency. Egypt’s Ministry of Finance cut its budget for utility subsidies to meet IMF demands. As a result, since 2024 began, internet and energy costs have increased by roughly 33% and 15%, respectively, placing an additional financial burden on the country’s residents.

“Will we be able to buy meat even if they give us a higher monthly salary? Gas? or even milk?” a barista from Egypt asked The New Arab.

President Abdel Fattah el-Sisi recently declared that, as part of an EGP 180 billion welfare packages intended to address the issue of rising living expenses, his administration will raise the minimum salary in the private sector by 50%, to 6,000 EGP per month (USD 195). As an example, the price of a litre of milk used to be EGP 20, but it is currently between EGP 45 and 50.

Egyptians have been living in hardship on the streets as their nation has risen to the second rank among IMF debtor nations, behind only Argentina. Egypt has a terrible history of managing its long-term debt and has historically relied on the fund as well as affluent allies like the GCC (Gulf Cooperation Council) to support its economy.

Anthony Symond, investment director of emerging market debt at Aberdeen, told The New Arab that “usually countries need to do some prior action before they receive IMF funds, but I suspect if the IMF wants to get the FX markets moving, they’re going to have to give between [USD] 3 billion to 5 billion upfront to try and provide that initial liquidity to the EGP market.”

And given that there are plenty of dollars in the nation that are just waiting to be exchanged, things might work out if Egypt can accomplish a minor devaluation and obtain some additional liquidity.

What Will Egypt Do With The IMF Proceeds?

It is anticipated that Egypt will increase its foreign asset reserves, restore revenue lost since the start of the Gaza issue, and support a mild devaluation with the proceeds of the first tranche of the IMF loan.

“A significant portion of the funding will be used, at least initially, to support foreign exchange reserves and finance Egypt’s expected revenue from tourism and the Suez Canal,” Symond stated.

It is anticipated that Egypt will carry out a little devaluation of its currency. They might not go all the way to the black market, but they might go part of the way to get more IMF funding.

According to the official rate, Egypt’s currency is currently trading at about 30.9 EGP to the US dollar. The Egyptian pound hit highs of 70 EGP to the US dollar at the start of the month on the black market, but it later stabilised at about 50 EGP to the US dollar.

An IMF analyst told The New Arab, “Egypt needs to devalue the currency to eliminate the black market. The currency might initially overshoot, but it should stabilise in the early to mid-40s.”

An Egyptian hotelier speculated that the underground market might be about to bust. Its recent departure from the official market rate effectively turned into a pyramid scheme, as has happened many times before, luring in even low-wage Egyptians who have attempted to hoard hard currency.

Short-term inflation will result from any form of devaluation since importing products will practically cost more. This could increase the cost of imports like wheat and sugar when combined with the Suez Canal problem.

Will The Additional Funding Help?

In the past, Egypt’s government has imposed several austerity measures that have harmed the most vulnerable members of society whenever it has reached a deal with the IMF in exchange for additional funding.

The Washington, DC-based fund usually helps countries deal with short-term balance of payments challenges rather than solving longer-term economic problems. In exchange for new money, debtor countries are frequently forced to embrace stringent austerity measures and introduce higher taxes.

An Oxfam study found that a short-term focus frequently results in longer-term inequality levels.

Egypt’s poverty rate has increased since the USD 12 billion IMF bailout in 2016, which coincided with today’s events by causing the EGP to lose half of its value and inflation to rise sharply.

60% of Egyptians were projected by the World Bank to be living at or below the poverty level in 2019. The actual number is probably higher today.

The barista remarked, “Life in Egypt is getting more and more expensive, and there are fewer opportunities to find work that covers monthly expenses.”

Can The Egypt Economy Benefit In Long Run?

Egypt’s external debt service is expected to total USD 29.23 billion in the fiscal year 2024. In the first quarter of the 2024 fiscal year, Egypt’s total spending was 60.3% of its debt service.

Egypt is anticipated to easily meet the 2024 repayments with funding from the IMF and anticipated assistance from financial friends, enabling the country to avoid a full-blown default.

“Considering consumer confidence and inflation rates, the economy will continue to face challenges, but Egypt won’t have trouble repaying its debt—at least not in the near future,” Symond told TNA.

The ability to pay back future obligations does not guarantee that Egypt’s difficulties will be resolved; rather, it just means that the country’s current problems will be postponed.

The likelihood of improving Egypt’s long-term economic prospects is decreasing as the country’s USD 164.73 billion external debt load rises due to the inflow of new debt.

Even while the massive bailout makes headlines, the lives of Egyptians will probably not be affected because the fresh money will be utilised to pay off looming debt deadlines and disappear into the devaluation scheme.

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