Egypt unlikely to abandon well-rehearsed playbook in response to latest economic crisis

A study has cast doubt on Egypt's ability to implement the reforms necessary for it to change course on decades of economic struggles.

The policy brief, published by the Washington-based Peterson Institute for International Economics on Tuesday, says Cairo is unlikely to deviate from its “well-rehearsed playbook” of returning to fixed exchange rates, relying on geopolitical rents and permitting its military to be deeply entrenched in the economy.

“Countries reform one day after and that means especially the elites of that country feel that their political survival depends on changing course,” Adnan Mazarei, one of brief's co-authors, told The National.

“At the moment … the leads in the army in Egypt think they can handle the political consequences of the current difficulties."

Egypt's economy has faced numerous challenges in recent years, including high debt levels, inflation and foreign exchange shortages.

Effects from wars in Ukraine and Gaza, as well as the Covid-19 pandemic, have only added to these woes.

To help boost Egypt's economy, the International Monetary Fund in March approved an $8 billion loan package, adding $5 billion to a $3 billion agreement signed in 2022.

The injection helped Egypt to avoid a full-blown crisis, which the authors say could be attributed to its “long-standing insistence on maintaining an overvalued currency through fixed exchange rates”.

“In this as in previous instances, international assistance has been provided at least in part because of Egypt’s critical importance for stability in the Middle East,” said the brief, titled Egypt's 2023-24 Economic Crisis: Will this Time be Different?

As part of the agreement, Egypt raised its interest rates and began floating its currency against the US dollar.

While the policy brief acknowledges action Cairo has taken, it questions if the government is committed to implementing deeper reforms.

It offered two potential scenarios for Egypt.

In the first, it calls on Cairo to implement sustained reforms that include reducing the military's economic dominance, allowing for private sector growth and fair competition, as well as reconsidering the reliance on geopolitical rents.

It also calls on Egypt to abandon the fixed exchange rate.

"Of course, the transition won’t be easy. Inflationary pressures, especially on food prices, are a significant concern," the brief says.

"But with targeted social safety nets, the government can protect the most vulnerable while allowing the economy to breathe."

The other, more likely scenario is one where Egypt returns to fixed exchange rates and other measures it has used in the past.

Elites' interests in the status quo, among other factors, mean it is unlikely that sustained consequential changes are pushed through.

“We are pessimistic,” Mr Mazarei said.

He said it was unclear if the programme could break this cycle.

"Trouble comes, they reach an agreement with the IMF, often involving ... some monetary tightening and some exchange rate depreciation, or sometimes even actual floating at the exchange rate," Mr Mazarei said.

"But then when things stabilise, they go back to their own ways in terms of policies, but they also do not do the deep reforms that are needed."

At the conclusion of its third review of the extended loan programme with Egypt last week, the IMF said some of Cairo's efforts to restore price stability have brought positive results.

But there was still need for more reforms, the IMF said.

It said Egypt must accelerate its divestment programme, pursue reforms to set up new firms, expedite trade facilitation practices and create a “level playing field” that would avoid unfair competitive practices by state-owned firms.

The IMF also repeated the importance of the flexible exchange rate regime.