From Loans to Letdowns: Why the IMF’s Egypt Strategy is Coming Up Short
After more than a year and a half of implementing the IMF program, the Egyptian economy continues to grapple with instability, weak financial health, and rising debt. Economic growth has decelerated significantly, with projections for the 2023-2024 fiscal year initially set at 5.3% but later revised downward to just 3%. Austerity measures along with increased public service prices threaten to push millions more Egyptians into poverty. In March 2024, the IMF amended the program to increase the loan amount from three to eight billion dollars, alongside other sources of funding.
The IMF’s recent press release, and its follow up staff report published on August 26, 2024, state that the Egyptian authorities’ efforts have started to yield positive results, with inflation coming down and foreign exchange shortages being eliminated. However, the reality can not be any more different. The regional environment remains challenging, and domestic policy issues require decisive implementation of reforms. Moreover, the IMF and Egyptian authorities need to address critical concerns, such as progressive tax policy, proper debt management strategy, adequate social protection measures to foster a socially responsible program.
The IMF’s focus on exchange rate flexibility has led to multiple devaluations of the Egyptian pound, significantly impacting the purchasing power of most Egyptians and contributing to unbearable inflationary pressures, particularly on food and energy prices. The privatization measures, while intended to enhance competition, often disregard the complex dynamics between military-owned and public sector companies, leading to selective and opaque asset sales, and consequently driving up capital accumulation amongst elites. Lastly, the debt management strategies have been undermined by high interest payments and a rising debt-to-GDP ratio, despite achieving primary surpluses through austerity measures that cut essential public spending. The IMF’s surcharges, applied when borrowing exceeds 187.5% of a country’s quota, add up to additional 2 percent annually to Egypt’s loan expenses. This significantly increases Egypt’s debt burden.
Addressing these issues is vital for creating a more equitable and sustainable economic future for Egypt.
Exchange Rate Flexibility and Currency Devaluation – A failed policy lever
Since the IMF’s approval of Egypt’s Extended Fund Facility (EFF) arrangement in December 2022, the focus on exchange rate flexibility and the devaluation of the Egyptian pound has had significant adverse impacts. The government devalued the pound multiple times, aiming to improve export competitiveness and correct balance of payments imbalances. However, this policy led to increased debt servicing costs, as more local currency was needed to meet dollar obligations, straining public finances and diverting resources from essential services and social programs.
Inflation surged dramatically, with rates rising from 21.9% in December 2022 to 34% by early 2024, and food prices inflating over 300% for some items. This severe inflation eroded the purchasing power of ordinary Egyptians, pushing many below the poverty line and worsening living standards. Despite these negative outcomes, the IMF delayed scheduled reviews in 2023, further destabilizing the economy.
Additionally, Egypt’s dollar revenues declined sharply in 2023, with export earnings dropping significantly and remittances falling by $10 billion. This decline weakened the government’s ability to manage the devaluation’s aftermath, increasing economic instability. The IMF’s projections failed to account for these declines and the persistent financing gaps, undermining the intended macroeconomic benefits of the devaluation.
The IMF’s failed strategy aimed at macroeconomic correction has been detrimental for Egypt. The increased debt servicing costs, severe inflation, and heightened economic instability highlight the need for a more context-sensitive and socially aware economic approach.
The IMF’s misguided privatization policy
The IMF promotes privatization as a means to improve economic competition, but this approach often undermines public sector companies, which should be overseen by regulatory bodies like the Central Auditing Organization. The IMF fails to distinguish clearly between public sector companies and those owned by the military. This selective privatization creates an uneven playing field largely due to opaque classifications and undermines the credibility of the process.
Moreover, the IMF does not provide specific recommendations on the share of private sector credit facilitated by the banking sector. Rising interest rates have led to cautious lending, creating a recessionary climate. The government’s “State Ownership Policy Document,” intended to implement IMF conditionality, involves selling stakes in public companies to strategic investors or through public offerings on the stock exchange. However, the implementation has been slow and limited.
Selling assets to obtain dollars amidst a declining local currency addresses immediate financial gaps but creates long-term problems. Profits would need to be provided to new owners in dollars, without conditions for reinvestment in the country. This short-sighted approach lacks an industrial strategy or developmental goals, focusing solely on growth and profitability without clear expectations.
The IMF’s privatization conditionality often leads to negative outcomes by undermining public sector companies, delaying the sale of military-owned assets, and failing to ensure sustainable economic benefits. A more development-centric approach is needed, with clear guidelines for private sector credit, transparency in the privatization process.
Egypt’s Debt Drive by way of IMF conditionality
The IMF’s debt management conditionality, which mandates austerity measures and a significant primary surplus, has not effectively reduced Egypt’s public debt. Despite efforts to achieve a primary surplus through cuts in real wages and subsidies, the overall deficit has continued to increase. From June 2020 to June 2023, the debt-to-GDP ratio rose from 80.9% to 95.7%, with the primary surplus consumed by rising interest payments on domestic and foreign debt. Interest payments have escalated dramatically, from 35.8% of total revenues in 2020-2021 to nearly 69% in the current 2024-2025 budget, leaving little room for essential public services and investments.
The economic policies pursued under IMF guidance have made efficient debt management impossible. Rising global interest rates, increased pressure on the pound, and higher domestic interest rates have exacerbated the debt burden, making the goal of a downward debt trajectory increasingly difficult. While the IMF’s approach focuses on immediate fiscal targets, it neglects the broader structural issues that drive Egypt’s economic vulnerabilities.
A more nuanced strategy that prioritizes sustainable debt management and addresses the root causes of fiscal instability is essential for achieving long-term economic stability and growth.
Tax Regressivity and weak implementation
The IMF’s tax policy measures for Egypt, aiming to increase tax revenue by 3% of GDP by 2026-2027, include broadening the VAT base, introducing new income and carbon taxes, and imposing a withholding tax on exports from free zones. Despite these intentions, the implementation has been fraught with delays and inconsistencies. The draft tax policy document was withdrawn and not republished, and the capital gains tax remains unimplemented due to a lack of executive regulations. The transition to an electronic real estate registration system is incomplete, complicating property tax collection. Although VAT amendments and the abolition of some tax exemptions were enacted, exemptions for “national security” projects persist with the absence of a clear definition for this category of projects . These challenges underscore the limitations of the IMF’s tax policy approach, which often overlooks practical and socio-economic complexities in favor of revenue targets.
The IMF’s assertion that the structural benchmark of publishing a comprehensive tax expenditure report has been met is fundamentally undermined by significant omissions in the disclosed data. The benchmark explicitly calls for detailed classifications of tax exemptions and breaks, particularly those provided to free economic zones, state-owned enterprises, military-owned businesses, and joint ventures. However, the report conspicuously lacks these granular insights, which are essential for evaluating the distortive impact of such exemptions on Egypt’s fiscal structure and market efficiency.
From an economic perspective, the exclusion of these details not only obscures the actual tax expenditure but also perpetuates inefficiencies that hinder competition and revenue mobilization. Tax breaks granted to politically connected entities like military-owned enterprises or firms in special economic zones can exacerbate allocative inefficiencies by directing resources toward less growth-inducing sectors, thereby weakening overall economic productivity. Additionally, these exemptions contribute to a regressive tax system, where the burden disproportionately shifts to less privileged segments of society, undermining the IMF’s broader objective of equitable fiscal consolidation.
This issue has broader macroeconomic implications. Tax expenditures, when granted without transparency or clear economic rationale, distort market signals and incentivize capital misallocation. Resources flow towards sectors or entities that thrive not due to competitive advantage but because of preferential treatment, resulting in a crowding out of more dynamic and efficient private sector players. Over time, this entrenches structural weaknesses within the economy, dampening innovation, productivity growth, and ultimately, long-term economic resilience. The lack of transparency in these tax breaks also limits the government’s ability to conduct proper fiscal planning and to optimize its revenue base, especially in an environment where public debt sustainability is a concern.
Moreover, from a public finance perspective, such selective tax benefits create significant revenue leakages. The foregone revenue from exemptions granted to politically powerful sectors is substantial and could otherwise be redirected toward social spending, infrastructure, or reducing the tax burden on more vulnerable groups. The persistent exclusion of military-owned enterprises and similar entities from transparent tax expenditure reporting also signals a dual fiscal policy regime: one that enforces austerity measures on the broader population while insulating privileged actors from contributing their fair share. This not only contradicts the principles of fiscal equity but also deepens socio-economic inequalities, further eroding public trust in both the reform process and government institutions.
By neglecting to include these critical details, the report inadvertently legitimizes a parallel economic system that favors entrenched interests, perpetuates rent-seeking behaviors, and stalls necessary market corrections. The lack of transparency and accountability not only violates the spirit of the structural benchmark but also raises fundamental concerns about the integrity and credibility of the reform agenda itself. The omission effectively shields these powerful actors from fiscal scrutiny, allowing structural imbalances to persist while masking the true opportunity costs borne by the broader economy. These opportunity costs are not just fiscal; they include stunted private sector development, diminished investor confidence, and reduced economic dynamism, all of which hinder Egypt’s prospects for sustainable, inclusive growth.
Frail social protection
The IMF has consistently redirected questions about social protection to the World Bank, which handles the design of social safety net programs. However, this deflection sidesteps the IMF’s own responsibility in addressing the social impacts of its economic policies. In reality, this IMF program and its subsequent reviews have failed to introduce any meaningful initiatives to tackle Egypt’s escalating poverty rates. This approach underscores the Fund’s limited engagement with poverty issues, with little to no effort invested in measuring poverty levels or conducting critical assessments.
The so-called ‘social’ measures under the program appear to be confined to expanding the Takaful and Karama programs—conditional cash transfers initiated with IMF and World Bank backing in January 2023. While the IMF touted a commitment by the Egyptian government to allocate at least 153 billion pounds for social spending, the agreement lacked concrete criteria for targeting these funds effectively. Despite broadening Takaful and Karama’s reach to five million families, the real value of this spending has eroded due to exchange rate volatility, leading to a significant drop in dollar terms in the 2024/2025 budget. This decline points to reduced real social spending on Egypt’s flagship social programs and an overall contraction in both cash and in-kind support compared to the previous fiscal year.
Although the IMF highlights health and education spending as beneficial, these areas were not included in the structural conditions for loan disbursements, leading to a lack of commitment from the Egyptian government in both the current and previous IMF programs. It is unclear how tax revenue collection can be mobilized to enhance social safety net financing. Hence, the Fund’s approach to social protection remains frail under the most recent review.
By Hussein Cheaito