Key points to remember
- Since the Arab Spring of 2010, the Egyptian economy has come under pressure from various socio-political forces.
- Egypt and the IMF agreed on a 46-month financial reform to improve the economy.
- The agreement will help improve the private sector in Egypt and improve the lives of all Egyptians.
The Egyptian economy has struggled over the past 10 years as misfortune and poor decision-making have harmed the economy and, therefore, the well-being of Egyptian citizens. Thus, Egypt and the International Monetary Fund (IMF) recently reached an agreement to correct the many problems that weigh on the Egyptian economy. Here are the details of this agreement and Egypt’s future prospects.
The state of the Egyptian economy
Egypt’s economy has taken a beating over the past decade. The Arab Spring that began in 2010 caused unrest in the North African country and was followed by political disruption in the form of the military’s removal of President Morsi in 2013, the crackdown on the political party of Muslim Brotherhood, the introduction of a new constitution in 2014, and multiple minor crises that have affected the country’s ability to operate in a stable manner. The conflict in Ukraine added another layer of complications for Egyptian economic stability.
Tourism was once the main driver of Egypt’s economy and accounts for 15% of the country’s GDP. However, political unrest has diminished this aspect of the economy, with tourists being targeted by kidnappers and terrorists. The coronavirus pandemic has also played a role in Egypt’s failing economic state. The tourism industry has yet to fully recover, leaving Egypt to depend on oil and gas production and the Suez Canal as main sources of income.
Because of its economic and political stakes, the inflation rate in Egypt continues to climb. In April 2022, it topped 13% for the first time since 2019 and has been rising ever since. The last reading in September 2022 saw inflation hit 15%.
In 2016, Egypt applied for a $12 billion loan from the IMF and devalued its currency, the Egyptian pound, to obtain the loan. The loan was funded, but the authorities invested the money in military and intelligence agencies instead of investing it in the economy. This has sent millions of its citizens into even deeper poverty. Meanwhile, Egyptian officials have asked the IMF for more money – three more times between 2016 and 2022.
Egypt’s agreement with the IMF
Full details of the agreement between the International Monetary Fund and Egypt have not yet been released, but the two parties have reached an agreement on the terms of the loan. Instead of giving money to Egypt with few performance requirements as in the past, the IMF is forcing the Egyptian government to agree to a comprehensive financial reform plan for the next 46 months.
The IMF created an Extended Financing Facility arrangement of $3 billion (based on US dollars) in exchange for Egypt’s commitment to actions that help the country withstand external shocks, improve its social safety net and to implement reforms that will strengthen action by the private sector. growth and job creation. Egypt has already taken steps to provide social protection, allow its currency to trade fairly, and phase out mandatory letters of credit for import financing.
The arrangement under the Extended Financing Facility also requires the Egyptian government to anchor its fiscal policy to reduce general government debt and gross financing needs. The government must review its tax system, continue to strengthen its social protection policies and take steps to protect the purchasing power of its low-income citizens and retirees.
Saudi Arabia and the United Arab Emirates are taking steps to invest money in Egypt to maintain stability in the region. Although the motives behind these moves are not purely altruistic, there is an enlightened self-interest at stake to prevent further unrest in Egypt and other Middle Eastern countries. The IMF recognizes this desire and expects financial assistance from regional and international partners for Egypt.
What is the IMF?
Understanding the nature of the IMF is essential to fully understanding the importance of this agreement. The International Monetary Fund is a global organization made up of 190 member countries. Its financial resources come from the capital subscription quotas of IMF member countries. Member countries can borrow from the funds to cover emergencies and deficits when they are in financial difficulty.
The purpose of an IMF loan is to stabilize a member country’s finances and currency while allowing it to pay for the imports its citizens need. The loan also helps bring the member country back to a state of economic growth and resolve the issues that led to the need to borrow in the first place. When a member country requests funds from the IMF, it does so knowing that the IMF will impose conditions on the loan in the form of government, economic, and social reforms.
The IMF also monitors the international monetary system and developments in the global economy. The objective is to identify risks to global financial stability and to monitor the financial and economic policies of member countries.
Future prospects for the Egyptian economy
The IMF believes that Egypt has enormous growth potential, provided the government stays on track. The expanded financing facility agreement will allow the private sector to grow through the reduction of state control over private industries. It also seeks to improve access to education for a larger part of the population. Egypt has also requested funds from the Resilience and Sustainability Facility, which provides long-term financing to build resilience to climate change.
If the Egyptian government takes up the challenges proposed by the IMF, the outlook for the Egyptian economy looks promising. The country will need to ensure the safety of tourists if it is to reclaim this industry, but Egypt’s goals of improving living conditions for its people and allowing its currency and private industries to thrive suggest that the country has a solid plan to work towards a more prosperous world. coming. It will take years to see the results of these efforts, but Egypt is acting now for a better future.
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