The International Monetary Fund (IMF) reached a preliminary agreement with Egypt on Aug. 11 to create a three-year, $12 billion extended fund facility to help bolster and reform the Egyptian economy. According to the IMF's mission head, Chris Jarvis, Egypt will continue to implement structural reforms, including boosting fiscal stability to reduce its budget deficit, rationalizing energy subsidies, increasing exchange rate flexibility, spurring competition and improving the labor market. The IMF mission, which has been in Egypt since June 30, will now prepare a report to be approved by the IMF's executive board.
The deal is an important part of a much broader program in Egypt, worth some $21 billion, aimed at improving the country's fiscal situation. Egypt's two previous attempts to negotiate with the IMF failed because Cairo was unwilling to make the unpopular reforms needed to seal the deal. But Egypt's financial position has been tenuous over the past five years. Today, the country's budget deficit makes up an estimated 10-13 percent of its gross domestic product, and its government debt-to-GDP ratio is around 98 percent — though the IMF plan is intended to reduce the latter figure to 88 percent by 2019. As of now, Egypt's $15.5 billion in foreign reserves can cover only three months of imports, and roughly 30 percent of the government's budget is set aside for debt servicing.
The challenge for the IMF plan moving forward will be implementation, which ordinary Egyptians will find difficult to stomach. The government will almost certainly be forced to devalue the Egyptian pound, which officially sits at 8.78 to the U.S. dollar (the black market rate is closer to 12.7 to the dollar). This will drive up import costs for the private sector. Moreover, the plan also includes reforms to social transfers and subsidies, including for bread, wheat, fuel and electricity.
Egyptian President Abdel Fattah al-Sisi has called on the public to accept the need to make these reforms, despite the pain they will bring. For now, the president is not facing any major political challengers. The last time he was in such a strong position — in 2014, immediately after winning a presidential election — he was able to push through other controversial reforms.
After its earlier attempts to reach a deal with the IMF failed, Egypt was forced to drain its foreign reserves and negotiate with regional allies, particularly Gulf partners such as the United Arab Emirates and Saudi Arabia, to receive central bank cash injections and cheap energy imports. This support sometimes came with conditions attached, possibly including a controversial deal ceding control over a Red Sea island to Saudi Arabia. A sustainable financial package from an outside lender such as the IMF would give Egypt a better position to negotiate from with its regional allies.