The International Monetary Fund offered its support for Egypt on Wednesday, lauding its latest policies to spur economic inclusive growth, create jobs and restore stability. This is an important step forward for the country’s economy, which is still recovering from four years of instability that started during the protests against and ouster of Hosni Mubarak in 2011.
“This is a very significant development,” Hafez Ghanem, a senior fellow at the Brookings Institution’s Global Economy and Development program, said. “This is the first IMF consultation with Egypt since the Arab Spring, and therefore, it implies that Egypt is normalizing its relations with the [IMF] and hence with the international financial system.”
The instability of the past four years left many sectors, including Egypt’s vital tourism industry, at a fraction of what they once were. Foreign investors have lost interest, and low oil prices are hurting its biggest lenders in the Gulf. Plus, an aggressive subsidy program on everything from food to oil has been incredibly expensive for the government.
Egyptian lawmakers have been taking steps to move forward. For one thing, they have planned a substantial reform of the country’s extensive subsidy program along with a tax increase and a series of cash transfer systems. They’ve pledged to make investments easier by cutting down on red tape and improving transparency.They are also planning a high-level conference next month at the Sharm el-Sheikh resort on the Red Sea, meant to attract more badly needed foreign investment.
All these strategies are good, but, as the IMF noted in its statement, “the starting point is difficult.” For one thing, the unemployment rate hit 13.4 percent last year.
“Egypt is vulnerable to many external risks, from lower growth in its main trading partners to a fold-off in remittances or external support due to lower oil prices,” Christopher Jarvis, IMF mission chief for Egypt, told reporters on a conference call. “But the biggest risk is that the government falters in its resolve to tackle economic problems.”
According to Ghanem, the Egyptian government faces two major challenges as it goes forward with drastic reforms meant to solve its problems.
“The first challenge has to do with the quality of public institutions and the level of corruption,” Ghanem said. “Changing business regulations will not have an impact if civil servants do not implement the new simplified rules.”
The second challenge, Ghanem said, is a political one.
“So far, the government has been benefiting from a political honeymoon immediately following the presidential elections and was therefore able to implement difficult reforms without public protests,” Ghanem said. “It is not clear how long this honeymoon is going to last.”
Raising taxes and reducing subsidies is far from a popular move and will require a series of social projects such as cash transfers to the poor to make the changes easier to swallow for people on the ground.
Another important factor is low global oil prices, which is a double-edged sword. On the one hand, Egypt has been heavily subsidizing its fuel for some time, and cheaper prices could save the government money. However, the country has been receiving vast amounts of aid money from Gulf economies, which, as exporters, are taking a hit on the record-low prices.
Though there has been some discussion of an IMF loan to help boost Egypt’s economy, no party has confirmed anything.
“We don't have a request for a program at the moment, so I don't want to speculate about what the contents might be of a program that hasn't been requested,” Jarvis said, noting that the lender is ready to support Egypt if asked.