When President Abdel Fatah al-Sissi came to power in a 2013 military coup, he promised to fix Egypt's mounting economic problems. Three years later, those problems had only intensified. The country was struggling with low economic growth; 13 percent unemployment; a 12 percent inflation rate; a large trade deficit, amounting to 7 percent of GDP; a persistent budget deficit of around 12 percent of GDP; and public debt, which by 2016 stood at 92 percent of GDP. The tourism trade, a major source of foreign currency, had collapsed in the wake of concerns about terrorism, which included an Islamic State-linked insurgency in the Sinai Peninsula that claimed the bombing of a Russian passenger jet in 2016. Foreign direct investment, another source of foreign currency, had also slumped in the wake of Egypt's economic and political problems.

One major issue was a lack of foreign currency in the country, which made it difficult to pay for imports and resulted in shortages of key commodities. For example, Egypt imports one-third of its sugar. By mid-2016, this commodity was in short supply due to the inability of Egyptian traders to get the foreign currency required to pay for imported sugar. Historically, in times of trouble, the oil-rich Arab states of the Persian Gulf had loaned foreign currency to Egypt at low interest rates, but a collapse in oil prices had left those states financially strained, and loans were not forthcoming. In an indication of the depth of Egypt's problems, while the official exchange rate of the Egyptian pound was pegged at 9 pounds to the U.S. dollar, the black-market rate had soared to 18 pounds to the dollar.

In mid-2016, with its foreign exchange reserves being rapidly depleted, the Egyptian government applied to the IMF for a loan. The IMF agreed to loan Egypt up to $12 billion, but only if the government undertook a number of economic reforms. These included liberalizing the exchange rate, letting the Egyptian pound float against other currencies. The thinking was that the pound would depreciate against major currencies such as the U.S. dollar and the euro, making Egyptian exports cheaper and its imports more expensive. The IMF believed that this would help the country to improve its trade deficit and earn more foreign currency. At the same time, the IMF required the Egyptian government to implement an austerity program that included an immediate end to energy subsidies, which had kept energy prices artificially low; reforms to public enterprises to make them more efficient; tighter monetary policy to rein in inflation; privatization of state-owned enterprises; and the imposition of a value-added tax to raise government revenues.

In November 2016, Egypt let the pound float freely. It immediately lost 50 percent of its value against the U.S. dollar, trading at around 13 pounds to the dollar. Egypt also moved rapidly to impose the value-added tax. In return, the IMF released the first $2.75 billion of its loan to Egypt. Additional tranches of the IMF loan were released over the next three years as Egypt made progress implementing IMF policies, with the last IMF loan payment being made in July 2019.

So did the IMF program work? The signs are mixed. On the positive side, while export growth has been less than hoped for, despite the devaluation in the Egyptian pound, the country's current account deficit has narrowed on the back of rising gas exports and a modest improvement in tourism. Foreign direct investment inflows have increased somewhat. Inflation has declined from over 30 percent in 2017 to around 9 percent in 2019, and unemployment has fallen from 12 percent to 8.1 percent over the same time period. The government has also cut public spending, as required by the IMF, and there have been some privatizations.

On the other hand, while these macroeconomic numbers have improved, most Egyptians have seen a marked decline in their living standards due to a reduction in government subsidies and higher prices for basic goods such as cooking gas, oil, electricity, and foodstuffs. Today, around half of the Egyptian population now lives in or near poverty, which the World Bank defines as living off $1.90 a day. Since 2011, the percentage of Egyptians living below the poverty line has risen from 25.2 percent to 32.5 percent.

Moreover, substantial structural problems remain. Companies owned by the Egyptian army, which make up a large proportion of the economy, have been excluded from privatization plans. Businesses owned by the army have also been exempted from value-added tax levied on consumer goods under the IMF program. Perhaps because of this, productivity growth remains low, which may limit future economic growtha serious problem in a country whose population is still expanding rapidly. Development economists have called for deeper reforms, but in a country where the army has substantial political power, this seems unlikely. The government has also dramatically increased its international borrowing since 2016. Foreign debt now equals around 40 percent of the country's GDP. By 2019, 70 percent of the taxes paid by Egyptian citizens went toward debt servicing, rather than investment in public goods. If foreign institutions limit future lending to Egypt, the country could be in trouble again and forced to go back to the IMF.

Did the IMF Help Egypt? case:

01. Why was Egypt experiencing economic difficulties in the 2013-2016 period? To what extent were these problems the result of poor governance and economic mismanagement?

2. Why do you think Egypt pegged its exchange rate to the U.S. dollar? When the peg was removed in November 2016, the Egyptian currency immediately fell by 50 percent against the U.S. dollar. What does this tell you about the peg?