IMF Bailouts Won’t Fix Egypt’s State-Controlled Economy

Written by
Author Nathan McQuarrie
Nathan McQuarrie
Dec. 11, 2023

by Nathan McQuarrie, '25 for Annotations Blog

In October, for the fourth time in seven years, Egypt approached the International Monetary Fund (IMF) seeking billions of dollars in emergency relief. At $12 billion, Egypt’s IMF debt is the second largest after Argentina’s. Egypt’s request, made in response to the spillover effects of the Israel-Gaza war, would add $2 billion to that amount. However, Egypt should not be granted additional IMF funding until it makes vital economic reforms. 

In particular, Egypt must reduce state involvement in its economy. If Egypt’s request is granted despite failing to meet its IMF commitment to divest from the economy, then Egypt will continue with poor policies that protect regime power, not its people. Egypt’s constricted economy will continue to sputter along, requiring endless IMF funding.

Why Egypt Keeps Getting IMF Loans

Countries like Egypt that are strategically important to donors like the U.S. tend to receive IMF loans more often and with fewer conditions attached. Egypt is viewed by the U.S. as vital to regional stability due to three key factors: Egypt maintains peace between Israel and its neighbors, opposes Islamist extremism, and is the largest Arab state. As such, Egypt’s collapse would severely destabilize the region, making it “too big to fail” in the eyes of many U.S. policymakers.

As a result, the U.S.—and the international community—continue to support Egypt economically despite mounting human rights abuses under President Abdel Fattah el-Sisi’s brutal regime. Additionally, Egypt’s strategic importance enables it to obtain IMF loans despite failing to meet loan commitments, especially the commitment to divest from state-owned enterprises (SOEs).

Hassan Abdalla speaks at the IMF

Hassan Abdalla, the head of Egypt's Central Bank, speaks at the IMF’s annual meetings in October 2022. Egypt is the IMF’s second-largest debtor after Argentina. From the World Bank Photo Collection.

Egypt’s Economic Crisis

Due to economic pressure from the Israel-Gaza war, Egypt is seeking to expand the $3 billion IMF loan it received in December 2022 to $5 billion. Egypt sought last year’s funding due to the disruption caused by Russia’s invasion of Ukraine. As the world’s largest wheat importer, Egypt was hit especially hard; the Egyptian pound lost half its value against the dollar and inflation hit 36% in mid-2023. Egypt’s current loan is conditioned on flexible exchange rates, lowering inflation, fiscal consolidation, and divestment of SOEs. While Egypt has met some of these conditions in past programs, it has repeatedly dragged its feet on divesting from the economy.

Although Egypt’s current economic crisis is not entirely of its own making, its vise grip on the economy continues to throttle private enterprise, inhibiting recovery and growth. Egypt has certainly come a long way since the heydays of central planning under President Gamal Abdel Nasser. However, the state continues to have a massive footprint in the economy and has only expanded its reach under Sisi. Because SOEs extend to every corner of the economy, they suppress private enterprise, necessitating IMF funding to buttress a sclerotic economy. This self-defeating pattern is likely to continue, and there is little reason to believe that anything would change if Egypt is granted additional IMF funding.

Why Egypt Fails to Divest

There are three reasons Egypt is unlikely to meaningfully divest from the economy under its current loan or under future loans.

First, the Sisi regime depends on military control of the economy. Under Sisi, a special kind of SOE, military-owned companies, have become ubiquitous. They are involved in everything from food and pharmaceuticals to infrastructure and housing—enterprises difficult to rationalize as serving “defense.” Even private companies often depend on subcontracts and joint ventures with military-owned companies. Military-owned companies also provide compensation to Sisi loyalists. Even with unprofitable companies, the military personnel running them are reluctant to relinquish sources of bribes and benefits. While the regime may be willing to divest from certain civilian-run SOEs, it is less willing to divest from military-owned companies that crowd-out alternative power centers and that ensure a loyal military.

Lloyd Austin walks with the Egyptian Minister of Defense

U.S. Secretary of Defense Lloyd Austin reviews troops with Egyptian Minister of Defense Mohamed Zaki in March 2023. The U.S. continues to support Egypt despite its military’s tight control of the economy. Photo by US Secretary of Defense.

Another reason to be skeptical of Egypt’s commitment to divest is its dismal track record. Under Sisi, Egypt has resisted structural reforms to divest and instead empowered military-owned companies by allowing them to receive state tenders. When the 2016 IMF program called for structural reform of state energy companies, Egypt failed to act. When Prime Minister Madbouly announced in July that Egypt had sold $1.9 billion in state assets, it fell short of the $2.5 billion IMF divestment target for mid-2023. Gulf countries are unconvinced that these efforts are sincere and are taking a “wait-and-see” approach before investing in these now ostensibly “private” companies.

Finally, even if Egypt ultimately meets the official divestment conditions in its IMF loan, such efforts are unlikely to sufficiently reform the economy anyway. So far, it appears that Egypt has only sold minority shares of SOEs as part of its divestment efforts. Equally concerning, the military has yet to divest, and may even be expanding in areas that the state committed to exit. In other countries, IMF divestment conditions might result in public opposition from groups who would bear the highest distributional costs. The fact that state employees—who would bear the highest costs of divestment—have not mobilized against the IMF loan may be the clearest indication that Egypt’s apparent divestment efforts are only meant to be superficial.

To pressure Egypt to make needed structural changes, the IMF should resist Egypt’s most recent request for more funding. Billions of dollars in IMF loans over the last seven years have done little but subsidize Sisi’s brutal regime and given him breathing room to resist relinquishing state control of the economy. Since Sisi’s regime depends on state control of the economy—and particularly military control—Egypt is unlikely to meaningfully divest, especially if it thinks its strategic importance guarantees more IMF funds. Withholding future funds may be the only way to force Egypt to save itself.

Nathan McQuarrie, author
 Meet the Author: Nathan McQuarrie

Nathan McQuarrie is a first-year MPA student at Princeton University's School of Public and International Affairs (SPIA), where he studies U.S. foreign policy. Before Princeton, Nathan taught second grade for three years in Arizona through the Teach for America program and volunteered for the Phoenix Committee on Foreign Relations. At Princeton, Nathan is particularly interested in U.S.-China competition and the South China Sea, informed by his two years abroad in the Philippines as an LDS missionary. You can reach him at [email protected].