The Egyptian government is busy selling state assets to promote privatization amid the continuing economic crisis.
This is a move that is considered very important for Egypt to overcome the shortage of hard currency and an important condition tied to the International Monetary Fund’s $3 billion loan signed in December 2022.
In February, 32 state-owned companies were put up for sale, and despite some criticism of slow progress, last week the government announced that State assets worth $1.9 billion sold.
The sale includes shares in petrochemical and drilling companies to the Abu Dhabi Development Fund (ADQ); shares in seven luxury hotels sold to a subsidiary of the Talaat Mostafa Group; and shares in Al Ezz Dakhalia for its parent company, Ezz Steel. The latter two buyers are Egyptian companies.
The IMF welcomed the Egyptian asset sale, reiterating that “divestment is an important component” of the loan agreement.
In March, an IMF review of the state of economic reforms in Egypt – to be conducted before a second loan disbursement – was postponed due to Egypt’s failure to make progress, including in what was seen as a lack of privatization.
And so, with the loan needed to ease Egypt’s troubles The worst economic crisis in decadesThe government has turned to cooperation.
“The announced sale will certainly help the government’s negotiations with the IMF and make the IMF’s mandate easier – at least in the short term,” said Yezid Sayigh, senior fellow at the Malcolm H Kerr Carnegie Middle East Center. However, he added, “Egypt will face an ongoing challenge to continue to raise more funds through additional sales.”
Annual inflation in Egypt has hit a record 36.8%, according to official statistics, with food prices doubling this rate. Dollars are basically not available in the country, except on the black market.
Enterprises are restricted from importing; government debt has increased greatly; and international rating agencies downgraded Egypt’s credit rating. More than half of the 2023/24 budget is allocated for debt repayment.
Sayigh noted that for the IMF to continue its assessment, selling more assets would not be enough. The IMF has also demanded that the Egyptian pound truly float freely on the foreign exchange market. Over the past 1.5 years, the Egyptian pound has experienced several devaluations, losing almost half of its value, but since March this year the official exchange rate has been stable, at between 30.8 and 30.9 Egyptian pounds per US dollar.
On the black market, however, a dollar changes hands at around 38 Egyptian pounds. President Abdel Fattah el-Sisi himself has suggested that there will be no further devaluation for now, as it is putting too much stress on the Egyptians.
The government has asserted that the crisis is caused by external shocks – the COVID-19 pandemic and war in ukraine – while analysts argue that the shocks have exposed structural weaknesses in the Egyptian economy.
For example, they point to large government spending on projects that do not provide a return on investment, with a prime example being the $58 billion New Administrative Capital. Egypt has borrowed heavily to finance these projects.
Meanwhile, companies under the auspices of the military and security services have expanded under el-Sisi’s rule, something observers say to the detriment of the private sector. Non-oil private sector activity has shrunk for 30 straight months.
The fundamental problems facing the economy include low private investment and low export rates, Ishac Diwan, a researcher at the Paris School of Economics, wrote in an article. analysis piece. Neither issue was resolved by a previous loan agreement with the IMF in 2016 and the economic reforms that followed.
Diwan writes: “The disconnect between increased borrowing and stagnant repayment is at the heart of the current financial crisis.
The IMF sees a freely floating exchange rate as the key to solving these problems. A devaluation would remove the parallel market, restore business confidence, improve Egypt’s export position, and make it more attractive to investors.
However, when Egypt devalued its currency in 2016, it failed to boost exports and investment, and economist Osama Diab questioned the IMF’s policy.
“Egypt has a structural trade deficit, which means there is always more demand for foreign currency than the EGP [Egyptian pound]” he say. “The IMF conditions have failed again and again to address these structural issues, and a new round of devaluation will always be ‘necessary’.”
On top of that, the size of the latest loan was much smaller than what Egypt had hoped for. Diab said $3 billion is “insignificant compared to the financial gap.” The IMF loan could even be “helpful for the access to the international capital markets it provides”, he added.
According to Diwan, “the loan left Egypt with a severe program of undercapitalization and an unsustainable financial situation.” He believes – “better sooner than later” – the terms of the loan will have to be renegotiated, likely “in the context of Egypt’s massive debt restructuring”.
Fear of hyperinflation
For the IMF loan, the asset sale provided some immediate cash for emergency payments, but did not solve Egypt’s underlying debt problem.
“No matter what little announcement is made here or there, the core problem is the systemic failure of economic policy,” said Hafsa Halawa, a non-resident scholar at the Middle East Institute.
“The root causes that have led us here have not changed and there appears to be little or no political will to effect real change.”
Another way Egypt has coped with its widening deficit is by expanding the money supply, which is likely to fuel inflation further and increase pressure on the pound. One conspicuous measure was the release of a new £20 note that suddenly flooded the market earlier this month.
In the business community, people are concerned that Egypt is heading towards hyperinflation and instability, said one businessman, who asked not to be named.
“Nobody wants to invest. [Investors] Let’s see what happens to the Egyptian pound’s exchange rate and whether Egypt gets out of this situation in the first place.”
Many members of the community are leaving Egypt, he said. “The best of us are leaving. The whole conversation is now about getting out.
Local independent media agency Mada Masr report The debt situation is so precarious that, in government circles, the option of “voluntarily defaulting on certain debts and negotiating with creditors on a new payment schedule” was on the table.
The $1.9 billion asset sale seems best to delay the moment, rather than avoid it.
“Messages from the IMF and other lenders have so far only served to reinforce the policy of ‘definitively ignore it’, which has only resulted in prolonging and increasing the pain that the Egyptian people on the spot will have to go through,” Halawa said.