Egypt’s recent deal with the International Monetary Fund (IMF) is not the panacea that many of us hoped for.
After the government engaged in difficult and complex negotiations for more than nine months for an expected $10 to $15 billion loan, the result was far from what had been expected as the loan amounted to just $3 billion, not exceeding a third of what had initially been demanded.
This was not surprising, given the call for flexibility in allowing policy space and more time for a “comfortable” transition. However, we must remember that over the past five years the IMF has also provided more than $18 billion to Egypt, its second-largest borrower after Argentina.
The role of the new programme is to facilitate Egypt’s access to funding sources. While this goal may seem harmless on the face of it, the devil is in the details. The IMF deal should attract new financing mechanisms, whether in the form of equity financing, the sale of shares in state-owned companies to private investors, or through “blended finance”, a new form of financing which brings together development aid and private capital both domestic and foreign.
It cannot be overstated that these mechanisms, which aim to integrate and mix private capital with public investment and concessional finance, require major reforms, transparent incentives, the removal of legal obstacles, the eradication of corruption, and a stable regulatory system. This was essentially the aim of the agreement reached with the IMF when it called for Egypt to be linked to new forms of capital. Investing in confidence-building is essential for both mechanisms to attract private capital.
Egypt needs to reassess the regulatory framework and rules that attract investment and set its priorities in target industries to increase exports. There is much to do, whether in terms of the government’s exit plans or in creating favourable opportunities for the private sector, which in recent years has lost incentives and the motivation to invest or take risks to establish projects that will fulfil the needs of the wider economy.
This article underlines the fact that the different layers of state obligations — social-protection policies, the social contract, and the State Ownership Policy Document — should be sufficiently attractive to new sources of funding.
Egypt requires a concerted effort from all stakeholders, the government, the private sector, and civil society, to ease the burden on its people. Unfortunately, if our negligence continues, we will be the main culprits in passing on the present sufferings to future generations. The deepening of the current crisis makes it all the more urgent to confront the challenges we face in order to bring about the necessary transformation of the economy.
The government must pursue targeted and long-term strategies and avoid improvised and arbitrary policies to deal with emerging situations, and the national private sector should not shy away from becoming the first line of defence for business and industry. This in turn will attract foreign direct investment (FDI) and achieve targeted progress.
As for civil society, given the openness imposed by social media and the Internet, its role has become even more pressing since its responsibility is promoting the interests of citizens and informing them in full transparency about the pros and cons of government policies and the activities of private-sector companies. Accordingly, civil society serves as a tool to challenge the flaws of the system and to raise citizen awareness.
Those who believe that the IMF agreement will remove social protections to address the budget deficit are mistaken. It is true that this was the IMF’s initial policy in the past when it intervened in the domestic affairs of various countries to advance reform programmes across the board. However, since then the IMF has learned its lesson the hard way. Today, it works closely with policy-makers, and it no longer opposes extending the scope of social protections when they target real beneficiaries — those living below the poverty line.
There is a distinction here between social-protection policies, which aim to support the poor, and the social contract. The latter is broader and more demanding in terms of strengthening the national economy, stimulating economic activity, and encouraging investment in sectors that create employment opportunities, particularly for the middle classes on whose shoulders the economy rests.
As for the state, in recent years it has had success stories in terms of road and bridge infrastructure construction. Now is the time for this to be complemented with incentives to attract productive investment, modernise industry, and build trust. To this end, the government intends to withdraw from 79 sectors of the economy over the next three years.
What the recently released State Ownership Policy Document essentially represents is the government’s full willingness to engage seriously and transparently with both the private sector and civil society. If this interplay succeeds in achieving the required harmony, such that each of these three pillars complements and supports each other, then this alone will be sufficient to provide the necessary incentives to attract productive FDI.
The agreement with the IMF has already triggered great interest in the Gulf Cooperation Council countries to invest in Egypt, whether in the form of deposits, loans, or direct investments. This would help to attract a steady source of financing through FDI. But after achieving stability on many macroeconomic indicators, the mother of all problems remains, namely inflation. Monetary policy must confront inflation if we really want FDI to become a stable source of financing to achieve growth and economic transformation in Egypt.
The writer is a former assistant foreign minister for international economic affairs.
*A version of this article appears in print in the 26 January, 2023 edition of Al-Ahram Weekly.