The International Monetary Fund set its demands from the Egyptian government accompanying its agreement to lend it $3 billion on the 16th of this month, a loan that will be made in 8 installments linked to ensuring the implementation of those demands through visits to missions from the fund every 6 months, and the fund strengthened that by linking its approval to The Egyptian request to borrow from its Resilience and Sustainability Fund is based on the results of those upcoming periodic reviews to implement its demands.

Those demands were:

  • The permanent transition to a flexible exchange rate regime and the rebuilding of foreign exchange reserves.

  • Implementing a monetary policy aimed at gradually reducing inflation rates, and canceling support for lending programs.

  • Fiscal control, ensuring a decrease in the public debt-to-GDP ratio, and an increase in social spending.

  • Undertake broad structural reforms to reduce the state's footprint, ensure fair competition among all economic entities, facilitate private sector-led growth, and enhance governance and transparency in the public sector.

  • The question remains, can the Egyptian government implement these demands?

    Most of which were previously mentioned in Egypt’s agreement with the Fund in 2016, but most of those demands were included in the statements issued after the annual consultations with Egypt during the past ten years.

    Flexible exchange rate regime

    The fund was keen to express the permanent transformation of the flexible exchange rate system in light of the Central Bank of Egypt’s over the past years making a significant decrease in the exchange rate of the Egyptian pound against the dollar, then letting the pound decline for a few months in a limited manner, and then doing something like fixing the exchange rate by administratively defining it, regardless On the international and local events affecting the relationship between the Egyptian pound and the dollar, so that the exchange rate remained almost constant when the hot money left Egypt during the first months of this year, as if it was offering them a reward.

    After the Central Bank made a 16% cut on last March 21, it greatly reduced the rate of reduction later, bringing the rate of reduction to 8% until it made the second tangible cut on October 27 last by 16%, and repeated the matter with a limited reduction in the price of Exchange the pound for a few days, then return to what looks like fixation by decreasing it by a few millimeters per day, despite the large difference between the official rate and the price in the parallel market. The new governor’s method is similar to the previous governor’s, despite the current governor’s announcement of his commitment to the flexible exchange rate less than two months ago.

    Some may give the governor a justification for his retreat from the flexible rate, a few days after announcing its implementation, due to the existence of a dollar deficit in the Central Bank that amounted to 9 billion dollars, and a deficit in other banks operating in the country that amounted to 13.8 billion dollars at the end of last October, and therefore he does not have sufficient funds to defend the exchange rate. Official or intervention to release the goods seized at the ports because there are no dollars in the banks to release them since last February.

    His hand is also tied to the use of foreign currency reserves amounting to about $33 billion, whether by the International Monetary Fund, which asked to keep it or because it was keen not to be exposed internationally, especially since this reserve is not owned by the Central Bank and is from external borrowing, especially from deposits of countries. The Arab Gulf, whose external debt balances to Egypt, long and short term, in the middle of this year amounted to 35.5 billion dollars, more than the reserves.

    Hence, there is no way to follow a flexible exchange rate policy before bridging the foreign currency gap in the banking system, addressing the problem of stockpiling goods in ports, and responding to requests for financing deferred imports, which takes several months until the funds that the fund revealed a few days ago amount to $14 billion from international and regional partners. Until the end of the current fiscal year, which ends at the end of next June.

    Even when the flexible exchange rate policy is followed, it will be partial, not complete, similar to the managed exchange rate, as Egypt cannot follow the policy of full floating of the currency due to its lack of reserves and the large value of external debt amounting to $156 billion until the middle of this year, and the chronic deficit in the trade balance that reached 43 billion dollars, and the deficit that has been going on for years in the current account balance, which amounted to 16.6 billion dollars in the last fiscal year 2021/2022.

    Monetary policy lowers inflation

    Among the Fund’s literature is its advice to countries to raise the interest rate to counter inflation based on the perception that the high interest rate on the national currency will attract money from the hands of the public to deposit in banks, which reduces liquidity in the hands of the public, so demand rates for goods and services decrease, so prices calm down, but the current central bank governor took office Last August, in the context of the continued increase in US interest rates, and many central banks keeping pace with it.

    The governor continued for some time to fix the interest rate, justifying this by the fact that Egyptian inflation is caused by supply shocks and not a result of demand, meaning that its causes are due to imported inflation due to the rise in international prices for energy and food, while the Egyptian markets suffer from continuous stagnation during the past two years, which significantly reduced demand. But then he acquiesced to the fund's request and raised interest by 2% until the agreement with the fund was announced at the expert level last October.

    It is expected that the governor will respond to the fund’s request during the Monetary Policy Committee meeting at the end of this week, but he may increase the percentage to a limited extent due to the harm caused by raising interest to producers who were recently stopped subsidized lending at the fund’s request, and who suffer from the low cost of financing with competitors. them in international markets.

    In addition to the problems they suffer from, the difficulty of procuring the dollar, raw materials, and production requirements, which reduces the competitiveness of Egyptian exports at a time when the country desperately needs dollar resources to pay installments and interest on foreign debts and finance necessary government imports of fuel and food commodities. In addition, raising interest increases the cost of debt in the budget. The chronically incapacitated government, which is the budget that undertook the treatment of property rights in central banks so that it does not turn negative during the last two fiscal years.

    Financial control of the government budget

    The file of reducing expenditures in the budget is almost the most prominent file that witnessed a response to the fund’s demands for that since 2016, by reducing the wage bill in the budget as a percentage of GDP by stopping appointments in the government, and with the pressures of a shortage of teachers in schools and the trend to appoint 30 thousand teachers annually for a period of 5 years recently and appoint Fewer numbers in the medical sector, this number in education and health is not compared to the average of those who retire annually, which is about 200 thousand people, and the wages of those who retire are usually much higher than the wages of new entrants to work.

    The trend was also to reduce food support through various means by setting a maximum of 4 individuals for the ration card benefiting from food support, and adjusting the prices of food supplies according to the global variables of their prices on the ration card, in a way that reduces the quantities spent from them, as happened with oil, sugar and others, in addition to identifying the beneficiary groups. From subsidizing ration cards to reduce the number of beneficiaries.

    With the public pressure to stick to the price of subsidized bread, the government resorted to indirect means to reduce bread subsidies by reducing the weight of the loaf more than once, then increasing the percentage of mixing wheat flour with flour to reduce the cost, and this was repeated with subsidizing railway tickets by reducing the numbers of beneficiaries, and even with subsidizing exporters 7% of it was deducted on the justification of urgent disbursement of 4-year arrears, with the recent cancellation of the initiative to finance industry, agriculture and contracting at a subsidized interest rate, and the transfer of the rest of the initiatives outside the Central Bank, while raising the interest on loans for tourism.

    As for the increase in social spending, it is taking place slowly and is limited to some social protection programs and not in pursuit of social justice. We do not imagine that what the Fund requested to add 5 million families to the Solidarity and Dignity Program for the elderly who are unable to work and the disabled will be accomplished within a short time, as the rate of increase rotates The program is expected to benefit about 300,000 families annually, despite the steps taken by the Ministry of Finance in the field of increasing revenues by expanding the tax base by imposing the electronic tax bill between companies and is currently entering the stage of imposing electronic receipt between companies and consumers and seeking to add a bracket to income taxes by 27.5%.

    Reducing the role of the state in the economy

    Reducing the role of the state in the economy remains the most difficult file for the Egyptian government in light of the ruler’s reliance on companies affiliated with the military in the so-called national projects, claiming that they are disciplined and committed to deadlines, which has not been proven on a practical level, with army companies sticking to the advantages they enjoy in terms of exemptions. Tax, customs and land allocation, which was the reason for the demand of businessmen during the recent economic conference to achieve competitive justice.

    One of the evidences of this is the delay in issuing the state ownership document, which the prime minister promised to be issued before the end of last May, and which will reduce the role of the state in the economy, and even after its issuance there are no guarantees of adherence to it despite the permit to give the private sector a share of investment at about $10 billion annually. Practical evidence has shown that what is meant is the foreign and Arab private sector by buying shares of profitable Egyptian public companies, while the Prime Minister recently admitted that the Egyptian private sector is struggling to survive.

    Promises have been made to put some companies affiliated with the army on the stock exchange, or put them up for sale to a strategic investor years ago, but the matter has not yet turned into implementation steps, while new companies affiliated with the army continue to be established, such as the Black Sands project, and others affiliated with public agencies, as is the case with the involvement of government agencies in hydrogen projects. Green, and in the transportation sector, including the establishment of a company to manage the frequent bus project on the Ring Road.