On December 16, 2022, the International Monetary Fund (IMF) finally approved a new loan of $3 billion for Egypt. The country faces a deepening economic crisis and, like Argentina and Pakistan, had to turn to the IMF for rescue. For the first time, the IMF used direct language to criticize the regime’s economic model. It called for a rejuvenation of the private sector, the end of the privileges enjoyed by military-owned companies, a reduction of public debt, and a move to a flexible exchange rate.

As of now, Egypt does not seem to have followed the IMF’s policy recommendations. In making the recommendations, the IMF demonstrated a systemic misunderstanding of the fundamental dynamics of Egypt’s political economy. This misunderstanding is bound to exacerbate Egypt’s economic problems and exacerbate the current crisis.

The Military Likes Moolah

For decades, the military has had first claim on Egypt’s resources. The IMF recommends that the military give up its privileged economic position. It also calls for leveling the playing field between the public and private sector. Yet signs abound already that the regime is circumventing these recommendations. In fact, it is deepening the economic footprint of the military.

In January, Sisi issued a presidential decree assigning prized land to the military. The military now has land two kilometers wide on both sides of 31 roads. The military uses this tactic to gain control over commercially viable pieces of land, which it then uses for profit-generating activities.

Sisi’s government has also instituted an amendment of the 1975 Law 30, which regulates the operation of the Suez Canal Authority. This came only a few days after the IMF deal. Prima facie, this amendment carries out the IMF’s recommendations. It creates the “Suez Canal Fund,” which will invest surplus revenue from the canal’s operations. This fund will also be able “to lease, sell, and purchase assets, establish companies, and invest in financial instruments.”

However, the devil lies in the details. A statement from the president reveals that the new fund will be under the control of a “sovereign entity,” a euphemism for the security services. Furthermore, the amendment provides for no parliamentary supervision for the fund. This means that the military will be able to siphon off hard currency from this fund, which could prove critical for meeting both Egypt’s debt obligations and the import needs of the population.

Finally, the government has no real plan to sell off state-owned assets as part of the effort to meet its debt obligations. Of the 32 companies it is selling off, only two of them are military-owned. Watanya, the petrol station chain, seems to have been subjected to asset stripping. Most of Watanya’s assets have been moved to ChillOut, another military-owned chain. Deals that have been done are also in trouble. In February, ADNOC acquired half of Total’s fuel stations . There are reports that this Emirati state-owned company is backing out of the deal.

It is clear that, as many predicted, the IMF’s recommendations are meeting stiff resistance. Hence, their implementation is extremely unlikely.

Increasing Inflation and Rising Debt Spell Trouble Ahead

Inflation rose from 21.9% in December to 26.5% in January. Food prices are up. Bread, meat and poultry cost a lot more. The IMF recommended “a shift to a flexible exchange rate while taking measures to help shield the Egyptian population from a mounting cost-of-living crisis.” Inherent in this recommendation is an admission. This shift will exacerbate inflation and worsen the cost-of-living crisis.

In January, Al Jazeera reported that the Egyptian pound had lost half of its value since March. Bloomberg has observed that devaluation has already hurt the Egyptian economy. As of February, the private sector had declined for 26 consecutive months. Scarcities persist and the private sector is struggling. Business sentiment has sagged to its third lowest level since April 2012. Remember, this was a time when the Muslim Brotherhood was in power.

Finally, Egyptian debt is showing worrisome trends. Even though external debt has declined by 0.5% on a quarterly basis, short-term debt has increased from 11.48% in September 2021 to 27.4% in September 2022. This rapid increase is alarming. Sisi’s regime faces pressure to repay its debt even as investor confidence remains low. So, the regime is relying on short-term borrowing to solve the problem. This debt comes at a higher price. It is issued with higher interest rates, driving up Egypt’s cost of servicing this debt. Unsurprisingly, Moody has downgraded Egypt’s credit rating from B2 to B3, piling up even more pressure on the Sisi regime.

In essence, the prospects for IMF’s policy recommendations are poor. Indeed some of its recommendations will only deepen the crisis and increase poverty. The only possible and durable solution to the crisis is a radical transformation of Egypt’s model of crony capitalism. The IMF economic policy recommendations cannot succeed under the country’s current political system, which the institution implicitly supports.Without a comprehensive understanding of Egypt’s political economy, the IMF will continue to throw good money after bad and its loans will only enrich elites in Sisi’s military regime while inflicting pain on Egypt’s long-suffering people.

[Arab Digest first published this piece.]