Global Courant
The Egyptian government has been busy selling state assets while pushing for privatization amid an ongoing economic crisis.
It is a move seen as crucial for Egypt to overcome its hard currency shortage, and a key condition attached to the $3 billion International Monetary Fund loan signed in December 2022.
In February, 32 state-owned companies were put up for sale, and despite some criticism about the slow progress, the government announced last week that $1.9 billion worth of state assets had been sold.
The sales include stakes in petrochemical and drilling companies to the Abu Dhabi Development Fund (ADQ); interests in seven luxury hotels sold to a subsidiary of Talaat Mostafa Group; and interests in Al Ezz Dakhalia to its parent company, Ezz Steel. The last two buyers are Egyptian companies.
The IMF welcomed Egypt’s sale of assets and reiterated that “divestment is a critical part” of the loan deal.
In March, an IMF review of the status of Egypt’s economic reforms — due before the release of the second tranche of the loan — was postponed due to a lack of progress by Egypt, including what was perceived as a lack of privatization.
And so, with the loan needed to ease Egypt’s worst economic crisis in decades, the government has moved to cooperate.
“The announced sales will certainly help government talks with the IMF and make the IMF’s job 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 raise further amounts through additional sales.”
According to official statistics, annual inflation in Egypt has hit a record 36.8 percent, with food prices rising twice as fast. Dollars are essentially unavailable in the country except on the black market.
Companies suffer from import restrictions; the national debt has soared; and international rating agencies downgraded Egypt’s credit rating. More than half of the 2023/24 budget is allocated to debt service.
For the IMF review to proceed, more asset sales alone would not be enough, Sayigh noted. The IMF has also demanded that the Egyptian pound be truly traded freely on the foreign exchange markets. Over the past 1.5 years, the Egyptian pound has gone through several rounds of devaluation, losing about half of its value, but since March this year the official exchange rate has been stable, between 30.8 and 30.9 Egyptian pounds against the US dollar.
The new privatization policy is a serious departure for the Egyptian state, which has long maintained a tight grip on many sectors of the economy (File: Amr Nabil/AP Photo)
However, on the black market, a dollar changes hands for about 38 Egyptian pounds. President Abdel Fattah el-Sisi himself has suggested that there will be no further devaluation for the time being, because it puts too much pressure on the Egyptians.
Shift the blame
The government has maintained that the crisis was caused by external shocks – the COVID-19 pandemic and the war in Ukraine – while analysts have argued that the shocks have exposed structural weaknesses in Egypt’s economy.
For example, they pointed to massive government spending on projects that don’t generate returns, with a good example being the new $58 billion administrative capital. Egypt has borrowed aggressively to finance these projects.
Meanwhile, businesses under the umbrella of the military and security services have expanded under el-Sisi’s rule, hurting the private sector, according to observers. Non-oil private sector activity has been contracting for 30 straight months.
The underlying problems facing the economy include low private investment and low export rates, wrote Ishac Diwan, a researcher at the Paris School of Economics, in a analysis piece. Both problems were not solved by a previous loan agreement with the IMF in 2016 and associated economic reforms.
“The disconnect between an increase in borrowing and a stagnant ability to repay is at the heart of the current financial crisis,” Diwan wrote.
The IMF sees a free-floating exchange rate as key to solving these problems. Devaluation would wipe out the parallel market, restore business confidence, improve Egypt’s export position and make the country more attractive to investors.
But when Egypt devalued its currency in 2016, it failed to boost exports and investment, and economist Osama Diab questioned IMF policies.
“Egypt suffers from a structural trade deficit, which means that there is always much more demand for foreign currency than for the EGP (Egyptian pound),” he said. “IMF conditions have failed time and time again to solve these structural problems, and another round of devaluation would always be ‘necessary’.”
In addition, the size of the latest loan was much smaller than Egypt had hoped for. The $3 billion is “negligible relative to the funding gap,” Diab said. Still, the IMF loan “could be useful for the access to international capital markets it provides,” he added.
According to Diwan, the loan leaves Egypt with a hugely underfunded program and unsustainable finances. He believed that – “sooner rather than later” – the terms of the loan should be renegotiated, probably “in the context of a major restructuring of Egypt’s debt”.
Vehicles wait at the military-owned Chillout gas station in Cairo, Egypt (File: AP Photo)
Fear of hyperinflation
As for the IMF loan, the asset sale immediately provided cash for urgent payments, but did not solve Egypt’s underlying debt problem.
“Whatever small announcements are made here or there, the core is a systematic failure of economic policy,” said Hafsa Halawa, a non-resident scientist at the Middle East Institute.
“The root causes that led us here are not changing and there appears to be little to no political will to make real change.”
Another way Egypt has dealt with its growing deficits is by increasing the money supply, which is likely to further fuel inflation and put pressure on the pound. One visible measure was the release of a new £20 note that suddenly flooded the market early this month.
Within the business community, people fear that Egypt is heading for hyperinflation and instability, said an entrepreneur, who spoke on condition of anonymity.
“Nobody wants to invest. (Investors) are waiting to see what happens with the exchange rate of the Egyptian pound, and whether Egypt will get 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.”
The local independent media outlet Mada Masr reported that the debt situation is so precarious that in government circles the option “to voluntarily pay off part of the debt and negotiate a new payment schedule with creditors” is on the table.
The $1.9 billion in asset sales seem to be postponing rather than avoiding this moment at best.
“Messages to date from the IMF and other lenders only serve to reinforce a policy of ‘kicking the can on the road’, which only results in prolonging and increasing the pain Egyptians will experience on the ground,” Halawa said.
