Egypt's dilemma: Back out of IMF reforms or anger its citizens

Despite recent praise by the International Monetary Fund (IMF) for some of the reforms instituted by Egypt since March this year, the Arab country faces a tough path ahead.

The strenuous nature of the reforms Egypt must carry out to obtain the remaining tranches of its $8 billion loan, initially approved by the IMF in December last year and expanded in March this year, will increase the burden on tens of millions of poor Egyptians.

These conditions could create a political and security backlash in a country with a struggling economy and one that is already reeling from regional conflicts at its borders.

Sky high

In a late August report about the Third Revision of the loan programme, which was conducted in late July, the IMF asked Egypt to maintain the shift it made in March this year to a flexible exchange rate regime, which departed from the managed exchange rate regime it had pursued in the past.

The liberalised foreign exchange system followed by the Central Bank of Egypt since March, the IMF said, has curtailed speculation, brought in foreign inflows, and moderated price growth.

This system is necessary to avoid a build-up of external imbalances in the future and demonstrate to all stakeholders that this time is different, the IMF said, referring to the lack of commitment to a flexible foreign exchange rate regime by Egypt in the past.

The liberalisation of the exchange rate of the Egyptian pound may have improved overall economic indicators since March, economists say.

Nevertheless, it has been catastrophic for tens of millions of consumers in a country heavily dependent on imports.

The free flotation of the Egyptian pound, which followed a series of devaluations, has caused Egypt's national currency to lose over 60% of its value against foreign currencies, thus pushing commodity prices dramatically up.

"Repeated depreciation of the national currency has negatively affected the living conditions of poor and Middle-class Egyptians," Alia al-Mahdi, former dean of the College of Economics and Political Science at Cairo University, told The New Arab.

"These depreciations raised the prices of all production requirements sharply and consequently the prices of all commodities," she added.

The same commodity price surge increased inflationary pressures on Egyptians and eroded their purchasing power in a country where almost a third of the population of 106 million is poor.

In the past three years, commodity prices rose almost three-fold, making most commodities, including foodstuffs, out of reach for millions of people.

The stringent reforms attached to the IMF's $8 billion loan compound the toll Covid-19 and the war in Ukraine have had on poor Egyptians and the economy in general.

Left out in the cold

The IMF loan programme makes it necessary for Egypt to mobilise domestic revenues and contain fiscal risks, especially from the energy sector.

The revenues mobilised from the sector will ensure meeting vital spending needs to support Egyptian families, including in health and education.

Nonetheless, in the past two years a series of energy price shakeups, including the price of retail fuel, have increased burdens on Egyptian families by raising commodity prices and forcing people to pay more for their energy consumption.

In late August, the government raised electricity prices by almost 40%.

Retail fuel subsidies have also been on the decline, making it necessary for the public to fill the price gap created by the government's withdrawal of subsidised fuel.

In the last fiscal year, which ended in June, the government subsidised retail fuel with 119.4 billion Egyptian pounds. This fiscal year, which started in August, it earmarked 154.4 billion pounds for fuel subsidies.

On the surface, this appears to be an increase from last year's figure.

However, in 2023, the exchange rate of the Egyptian pound was 30.8 pounds to the dollar. This means that total retail fuel subsidies that year amounted to $3.8 billion compared to $3.1 billion in 2024/2025, as the exchange rate had increased to 49 to the dollar.

Egypt will eliminate retail fuel subsidies by the end of 2025, according to the government, a measure stipulated in the IMF loan programme.

However, the elimination of these subsidies will increase burdens on the public by causing commodity prices to shoot up.

"The total elimination of subsidies, especially of retail fuel, will have very grave consequences for the poor," Abdel Monem Amin, a member of the Committee on Planning and the Budget in the House of Deputies (parliament), told TNA.

"How will the government take such a step, even as it's fully aware of the tough living conditions of the majority of the people?" he asked.

"The total elimination of subsidies, especially of retail fuel, will have very grave consequences for the poor"

Pushback

The IMF also asked Egypt to make greater efforts to implement the State Ownership Policy, a plan by the government to trim its economic activities to level the playing field for the private sector.

The implementation of the policy will help avoid unfair competitive practices by state-owned companies and steer Egypt towards private-sector-led growth that can generate jobs and opportunities for everyone.

In the past two years, the government has taken numerous steps to change these economic activities, including through the sale of state-owned assets to local and foreign investors, especially the sovereign wealth funds of oil-rich Gulf countries.

However, levelling the playing field for the private sector still faces some hurdles, particularly in light of reports citing an alleged pushback among the army's top brass against the sale of companies owned and operated by the military.

The army owns dozens of companies that operate in the civilian market, with many viewing these companies as posing unfair competition to the private sector given the preferential treatment they enjoy.

This backlash against the sale of military-linked companies, despite initial enthusiasm from Egyptian President Abdel Fattah al-Sisi after some were listed on the stock exchange, was reportedly behind the recent resignation of the head of Egypt's Sovereign Wealth Fund.

Backlash fears

Economic reforms have always been unpopular. Memories of the backlash to minimal reforms introduced by late president Anwar Sadat in 1977 are still vivid in the minds of Egyptians over the age of 50.

The pressures sustained by the public as a result of the current reform drive, which started in 2016 and became more rigid after the latest $8 billion IMF loan, are immense.

Egyptian authorities have to move ahead with implementing reforms attached to the loan, but this will increase the burden on Egyptian families, potentially engendering an angry reaction from the public.

This puts Egypt in a dilemma: either back out of reforms stipulated in the loan programme or anger its citizens and face the consequences.

"There are credible fears of an outburst of public anger because of these spiralling economic pressures on people," Samir Ghattas, the head of a local think tank, Middle East Forum for Strategic Studies, told TNA.

"The problem is that Egypt today doesn't have civilian political forces that can campaign to contain this anger or minimise it," he added.

Saleh Salem is an Egyptian journalist