Posted on January 18, 2023.

The IMF announced an ambitious reform programme for Egypt’s economy, but analysts cast doubt on its effectiveness.

The national currency has lost nearly half its value in less than a year, reaching a historic low of 32 Egyptian pounds to the dollar last week, before bouncing back slightly.

Annual inflation has soared to more than 20 percent and grocery stores are visibly becoming more empty.

Many imported products are not available any more, and basic foods, such as eggs and cooking oil, have doubled in price.

No wonder the pound’s collapse and rising prices are the talk of the day in Egypt.

“The country is in free fall,” said a customer at a popular street café in Cairo. In private, many Egyptians point fingers at President Abdel Fattah el-Sisi as responsible for the crisis.

Efforts to mitigate the situation have exacerbated, at least temporarily, the problem.

Egypt’s government last week agreed to move to a flexible exchange rate, privatise state-owned enterprises, and slow down public investment in national projects, the International Monetary Fund (IMF) announced.

The float of the pound, in particular, is an important condition for the $3bn loan deal Egypt agreed with the IMF last month in order to solve an economic crisis and foreign currency shortage.

President el-Sisi has put the blame for the economy’s difficulties on the Ukraine war.

In the weeks after the war broke out, foreign investors sold off Egyptian treasury bills, resulting in an estimated $20bn flowing out of the country.

In order to keep dollars in, Egypt imposed import restrictions, which in turn harmed the heavily import-reliant local industry.

Banks also put official restrictions on foreign currency withdrawals and payments.

But analysts argue that the Ukraine war only exposed pre-existing structural problems in the Egyptian economy and showed that the economic model was unsustainable.

Berlin-based analyst and writer Mahmoud Salem believes the Central Bank of Egypt (CBE) pegging the exchange rate, keeping the value of the pound artificially high, has been at the root of the problem.

“They cooked the numbers way too long,” Salem told Al Jazeera. Even when the CBE allowed the pound to be devalued, they were “controlled devaluations”, Salem said. “None of them [the devaluations since March 2022] were real.”

Even if the currency does move to a free float, Egypt’s economic woes are not over.

The IMF stipulation that Egypt slow down public investments and privatise state assets comes as the state pours billions of dollars into massive construction projects, such as the New Administrative Capital and New Alamein city, and weapon purchases from countries like Germany and Italy. Meanwhile, Egypt’s external debt has quadrupled in the past decade.

“White elephants,” is how economist Wael Gamal from the Egyptian Initiative for Personal Rights described the national projects. They “eat money”, but do not have real value. “They make you look glorious, but ruin you.”

According to Gamal, there is no proper due diligence done on the national projects. “They have a very weak economic rationality and do not create sustainable jobs.”

Salem agrees. “There is no return on investment of the megaprojects,” he said.

But whether the government will truly halt such projects remains doubtful.

At an economic conference in October, convened to address the economic crisis, el-Sisi pledged that national projects would continue and that the military would remain active in them.

His statements directly contradict the IMF report released on January 10, which stated Egypt had agreed to slow down public investments and limit the role of the military.

While the government maintains that the megaprojects are vital for Egypt’s development, el-Sisi has expressed his dislike of feasibility studies on several occasions in the past few years, as they would hamper the speed of the projects.

Earlier this month, he acknowledged that Egypt was going through a difficult period, but warned Egyptians to only listen to the government with regard to the economy, and not to believe the “nonsense” that state money had been wasted.

“[The national projects] are a vehicle for distributing patronage to the regime,” said Timothy Kaldas, policy fellow at the Washington-based Tahrir Institute for Middle East Policy.

Next to major Egyptian and foreign companies, military-owned entities are frequently awarded contracts in construction and infrastructure projects, which ties the military to el-Sisi’s leadership.

The projects are also a vehicle for GDP growth. “Thanks to them, the debt to GDP ratio remained somewhat in check,” Kaldas said.

On top of that, the megaprojects are key to the “New Republic” that el-Sisi proclaimed in 2021.

A large part of his legitimacy stems from the “wow factor” of the megaprojects, as economist Robert Springborg described it in an article last year, that would convince the population that el-Sisi is building a new, prosperous and mighty Egypt.

Near Tahrir Square in Cairo, numerous signs with el-Sisi’s portrait have been placed along the road, proclaiming: “Eight years of achievements,” referring to the years the president has been in power. The achievements: new bridges, roads, railways and cities.

So what would happen if Egypt does not pursue the IMF-prescribed reforms and, for instance, keeps pouring money into megaprojects while military companies keep expanding?

Salem believes the IMF conditions are good in theory, but not realistic in practice, as they cannot be enforced. “How can you ensure the military moves out of the economy? In which reality does the IMF have that power?” he said.

Kaldas on the other hand believes the IMF does have leverage. “Egypt depends on external financing from the Gulf and the IMF,” he said. “The IMF really needs to insist.”

The big question remains: Will the IMF hold Egypt accountable – by not releasing the next tranche of the loan – if conditions are not met?

“I’m not sure,” Kaldas said. If anything, the fact that the IMF continued to praise Egypt’s economic policy as a success story throughout the past years, while it became clear the pound was pegged and billions were borrowed for national projects, does not bode well for the future.

Gamal has little faith in the IMF reform plan.

In 2016, Egypt received a $12bn loan from the IMF, attached to austerity measures and pledges to stimulate the private sector.

“If anything, it made the situation worse,” Gamal said.

He believes that instead of privatisation, investing public money is the way forward.

However, for Gamal, that would not be in the form of the current megaprojects, but in the form of social assistance and “real projects”, that boost production and open new markets.

Selling state assets, as the IMF likes to see, is merely “buying time”, he said. “There is a risk this eats you out until there are no more stakes to sell. These kinds of policies can lead to default.”

Original post: https://www.aljazeera.com/news/2023/1/18/as-economic-crisis-deepens-will-egypt-slow-megaprojects-down