Egypt obtained a $12bn bailout from the International Monetary Fund (IMF) on November 11 in return for pressing on with a demanding economic reform package over the next three years that has the potential to alter the historic social contract between the authorities and the public.

The IMF’s Extended Fund Facility (EFF) brings an initial $2.75bn disbursement in support of fiscal and monetary measures adopted by the Egyptian authorities to date.

On November 3, the central bank in Cairo decided to adopt a flexible exchange rate regime, causing a 46% devaluation of the official exchange rate of the Egyptian pound, which sank further over the following week, moving from EGP8.88 to the US dollar before the flotation to around EGP17 to the US dollar at one point.

The flotation had the desired effect of increasing foreign exchange flows through official channels and contributing to central bank efforts to rebuild Egypt’s net international reserves from $19bn at the end of October to $23bn following the disbursement of the first installments of the IMF loan on November 11.

On the evening of November 3, in the latest of a series of fiscal consolidation measures, the government of Prime Minister Sherif Ismail announced its decision to cut fuel subsidies to motorists, raising fuel prices by between 30% to 45%. That step followed parliamentary approval for a Service Service Law in October regulating the pay of government employees and a 13% Value-Added Tax passed in late August.

“The Egyptian authorities have developed a homegrown economic programme, which will be supported under the IMF’s Extended Fund Facility, to address longstanding challenges in the Egyptian economy,” said an IMF press release quoting managing director Christine Lagarde. Adding that “these (challenges) include: a balance of payments problem manifested in an overvalued exchange rate, and foreign exchange shortages; large budget deficits that led to rising public debt; and low growth with high unemployment. The authorities recognize that resolute implementation of the policy package under the economic programme is essential to restore investor confidence, reduce inflation to single digits, rebuild international reserves, strengthen public finances, and encourage private sector-led growth”.

The main elements of the IMF-supported economic reform program will focus on:

Exchange rate, monetary and financial sector policies. The government is expected to maintain the flexible exchange rate regime, where the exchange rate is determined by market forces, to improve Egypt’s external competitiveness, support exports and tourism and attract foreign investment. In addition, central bank monetary policy will focus on containing inflation and bringing it down to mid-single digits over the medium term. This will be achieved by controlling credit to government and banks as well as by strengthening the central bank’s capacity to forecast and manage liquidity.

Fiscal policy, social protection and public financial management. Fiscal austerity measures are to be anchored on setting public debt on a clearly declining path and restoring debt sustainability. Tax revenues are projected to increase by 2.5% of GDP over the three-year timeline of the programme. Meanwhile, primary expenditures will be reduced by 3.5% owing to subsidy reductions and containment of the public sector wage bill. The planned fiscal consolidation is projected to reduce public debt by almost 10% of GDP by the end of the programme.

A full 1% of achieved GDP savings will be directed to social protection programmes to provide additional food subsides, cash transfers to the elderly and low-income families and other targeted social programmes. The aim is to replace targeted energy subsidies with programmes that directly support poor households.

The programme also forsees:

Structural reforms and inclusive growth. The program has a strong component of facilitating business procedures including streamlining industrial licensing for all business, greater access to finance for SMEs, and new insolvency and bankruptcy procedures. It will also address long-standing challenges of low growth and high unemployment through job intermediation schemes and specialized training programs for youth. 

Despite the economic prudence of the fiscal consolidation programme announced by the Egyptian authorities, programme implementation risk remains relatively high given that 40% of the 92mn population live under or hover just above the poverty line. The push-through inflation caused by de facto devaluation of the Egyptian pound on the parallel market over the summer, even before the recent fuel price hikes and implementation of VAT, had already pushed core inflation rate to 15.71% in October, up from 13.93% in September.

The fall in living standards following the November 3 devaluation and the accompanying price increases – variously estimated to be between 50-70% on most items, with the exception of regulated ones – has turned previous supporters of President Abdel Fatah El Sisi to vocal critics. Hardly a conversation goes by between people in Cairo without mentioning the unbearable burden of the rising cost of living.

The state has reacted by incarcerating opponents of all political stripes extending well beyond Islamists to socialists and liberals.

There is a sense among the populous of the state betraying the old social contract established during former president Gamal Abdel Nasser’s era of the state providing for the basic needs of the citizens in return for the body politic compromising on their political rights to allow the army to continue to rule, as they have done since the abolition of the monarchy in 1952.

Negad El Borai, a prominent human rights lawyer and a long time government critic, even went so far as calling the new social contract being drawn by the current leadership a contract of submission to the ruler’s will.