The Egyptian government is scheduled to receive the last tranche of the International Monetary Fund's (IMF) loan this July, in conjunction with the completion of the economic reform program as agreed upon between the two parties.
The program was launched at the end of 2016, and has so far extended for almost three years. A series of IMF reports have held it to be successful in stabilizing macroeconomic indicators on the one hand and re-launching economic growth on the other. These reports were further confirmed by improving ratings from leading international credit-rating agencies.
Despite its near end, some parties within the Egyptian government seem to be considering the continuation of a form of commitment to the economic reform program; hence, maintaining the IMF&rsquo;s role in Egyptian economic policymaking without necessarily using its lending facilities. What then might explain the government's desire to set voluntary restrictions on its future fiscal and monetary policies? This commentary seeks to answer this question, while reviewing upcoming trends of Egyptian economic policies and evaluating the "success" of the IMF's program from a political-economy perspective.
<h3 style="text-align: justify;">How to please the IMF?</h3>
In November 2016, the Egyptian government signed an agreement with the International Monetary Fund, committing itself to a number of economic measures aimed at restoring the financial and monetary balance of the economy in return for large credit facilities from the IMF and other international financial and development institutions. As noted earlier, the program is assessed by the IMF as a success story in relation to its set goals, which included the reduction of the government&rsquo;s deficit through successive cycles of austerity measures. Such measures included reducing energy subsidies and raising tax revenues, mainly through indirect rather than direct taxation.&nbsp;
At the monetary level, the Central Bank of Egypt rebuilt its foreign currency reserves. The Egyptian pound depreciated sharply at end of 2016, following the decision to float it, which contributed to the elimination of the black market, the reduction of the balance of payments deficit, and the stabilization of the exchange rate. As a result, the Egyptian economy appears to be growing after years of stagnation due to the political turmoil following the January 2011 revolution and its aftermath.&nbsp;
From a neoclassical economic angle, these measures have indeed stabilized relative price indices, including the exchange, interest, and inflation rates after an initial inflationary shock in 2016 and 2017. This stability would encourage the attraction of foreign capital in the form of investments, contributing to creating jobs, generating growth, and improving the balance of payments situation. Since international financial institutions and their partners within the government embrace this neoclassical economic outlook, they have evaluated Egypt's economic reform program as a success story.
<h3 style="text-align: justify;">The real cost of success</h3>
Nonetheless, others argue that this &lsquo;success&rsquo; story has been based on a major expansion of external borrowing. The Egyptian government's needs to bridge the annual funding gap were estimated at $ 21 billion, of which Egypt provided $ 12 billion by borrowing from the IMF during the last three years (Aboulenein &amp; Lawder, 2016). The government relied on its strict commitment to the IMF's conditions and improved macroeconomic indicators in order to expand borrowing on global financial markets. This was primarily facilitated by selling government bonds that attracted investment funds looking for high return in so-called "emerging markets" such as Egypt.
Indeed, government foreign debt has doubled, during the last three years under the economic reform program, jumping from $ 48 billion to more than $ 92 billion by the end of 2018 (Central Bank of Egypt, 2018). These debts facilitated the reconstruction of foreign reserves, and resulted in the seeming stabilization of the foreign exchange system.&nbsp;
Along similar lines, this commentary argues that the regeneration of economic growth in Egypt was based on the large expansion of foreign borrowing rather than on the attraction of foreign direct investments (FDIs). It also considers economic recovery as reflected in some figures and macro indicators to fall under the description of debt-driven recovery, and that the continuation of such form of recovery is contingent upon the Egyptian government's continued access to more debt raised on international financial markets at relatively low costs.
This in turn requires maintaining the IMF as a guarantor of the Egyptian government's economic policies, especially in the monetary and fiscal fields, ensuring the attraction of specific types of investors in Egypt&rsquo;s foreign debt.
<h3 style="text-align: justify;">Recovery through leveraging</h3>
Egypt's external debt has been growing steadily ever since the IMF agreement was signed in November 2016. According to the Central Bank data, total external debt rose from $ 26 billion in 2001 to $ 48 billion in July 2015 (Central Bank of Egypt, 2018), and jumped to $ 81 billion by July 2017, an increase of 66% in just two years, reaching 92.6 billion in the third quarter of 2018 (Yaqoub, 2018).
Moreover, internal and external public debt, as a share of GDP, continued to rise from 85% in 2015 to 92% in 2017, until it recently peaked at 101.3% in 2018 (Trading Economics, 2018). The increase was not limited to external debt stock, however. It also included an increase in debt service, which is usually measured as a share of total merchandize and service exports, as an indicator of a given country's economic ability to meet its foreign obligations. We find that this percentage has increased from a mere 6% in 2010 to 19% in 2016, the highest rate since the early nineties.
Increased external borrowing was a direct way out of the complex crises faced by the Egyptian economy after 2011, due to the erosion of the foreign exchange reserves and the inability of the Central Bank of Egypt (CBE) to defend the national currency. Theoretically, external borrowing was targeted to support the stability of macroeconomic indicators, starting with the exchange rate, in order to gain the confidence of foreign investors and encourage them to invest in the Egyptian economy without fearing the risks usually associated with investing in emerging economies. This perception prevailed especially after the Egyptian government's relative success in controlling inflation rates following the depreciation of the pound by the end of 2016, which rose to 35% in the first year (Awdalla, 2017).
The CBE had already used a large part of the external debt to rebuild its foreign reserves, managing to raise it from $ 17 billion in 2015 to about $ 45 billion by the end of 2018 (Trading Economics, 2018). This coincided with a relative stabilization of the exchange ratio of the pound against the dollar under a system closer to an informal management - rather than free-floatation. The price range is determined by a joint management system between the CBE and the major commercial banks preserving the bulk of foreign exchange resources in the banking system. Moreover, the CBE removed restrictions on foreign currency transactions to give more guarantees to foreign investors, while maintaining other restrictions to avoid capital flight out of the Egyptian economy.
The main justification for the expansion of external borrowing was the rehabilitation of the macroeconomic environment in order to re-attract foreign capital in the form of investments. Eventually, this would trigger growth and increase employment while bridging the financing gap and addressing the medium- and long-term balance of payments deficits. However, official data illustrate that external debt growth rates have been much higher than FDI growth since 2016, which has not seen significant growth in the last decade.&nbsp;
Conversely, Egypt's external debt has risen in an unprecedented way compared with its pre-2011 levels, especially during the last 20 years of Mubarak's rule which were characterized by strong conservatism in external borrowing fearing another external debt crisis, like that of the late 1980s.
The expansion of external borrowing means that the IMF program and its monetary and fiscal policy components may have an impact on redefining Egypt's position in the global economy. Nonetheless, based on the program&rsquo;s terms, that would be primarily achieved by reintegrating the Egyptian economy through external borrowing rather than attracting foreign investment. This contrasts with the economic policies advocated during the last decade of Mubarak's rule, especially under the government of Ahmed Nazif (2004-2011), which achieved a breakthrough in attracting foreign direct investments while maintaining a small foreign debt stock.
Figure 1:&nbsp;Egypt&rsquo;s net foreign direct investment and foreign debt (2006-2017).
<img src="https://lh7-us.googleusercontent.com/Yq0AX8YmH_KJW15Rke3kIp0urJC-x3OeCjl7YxaQNGhdZ8HMwBS1apflLxBf4jbWmrknsfWP39S482ddEQNsqPwx9deC_ND-gc9c7yDiRl7UcpXU2LIIEO1T6zSe-n9RoqprYxq5-PirkbjVbGsm" width="624" height="283"> &nbsp;Source: The Central Bank of Egypt
It is therefore clear that the direct impact of the IMF agreement so far has been to facilitate access to more foreign loans, following the country's strict adherence to the fund's conditionality; hence, giving lenders greater confidence in the Egyptian government. This primarily means that as long as borrowing to repay dollar-denominated liabilities (including the existing debt service) persists, the risk of bankruptcy is not present. Yet, the risk of falling into a &lsquo;debt trap&rsquo; - known here as debt repayment &ndash; would have long-term adverse effects on development.
<hr>
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