Egypt at a crossroads: regional turmoil must not derail crucial IMF reforms

President Abdel Fattah al-Sisi's recent declaration that Egypt may need to re-evaluate its commitments under the International Monetary Fund (IMF) accord due to escalating regional turmoil is a precarious signal at a critical juncture for the nation's economy.

While the intensifying conflict in the Middle East undeniably presents new challenges, using it as a rationale to delay or abandon much-needed economic reforms would be a grave mistake with long-term consequences for Egypt's stability and prosperity.

Since securing a $3 billion support package from the IMF in December 2022, Egypt has been obliged to implement a series of structural reforms aimed at addressing deep-seated economic vulnerabilities. These include transitioning to a flexible exchange rate, reducing the state's heavy footprint in the economy, and fostering a more robust private sector.

However, progress has been sluggish, and commitments have been sidestepped-most notably with the Egyptian pound effectively pegged at around 30.90 to the dollar since March 2023, despite pledges for flexibility.

Egypt's economy has been grappling with a severe foreign currency shortage since early 2022,exacerbated by Russia's invasion of Ukraine, which prompted the exodus of approximately $20billion in foreign investment from Egyptian treasury markets. Inflation has soared, reaching over 38% in September 2023-the highest in decades-eroding the purchasing power of ordinary Egyptians and increasing social pressures.

The IMF's first review of Egypt's program, originally scheduled for March 2023, has been postponed multiple times due to the government's failure to meet key conditions, particularly regarding exchange rate flexibility and the sale of state assets. This procrastination has strained relations with international creditors and delayed the disbursement of crucial funding.

President Sisi's assertion that regional conditions might necessitate a policy shift risks further undermining investor confidence. While ongoing conflict in the region poses geopolitical risks and potential economic spillovers, it should not become a pretext for evading reform commitments. On the contrary, it underscores the urgency of fortifying Egypt's economic resilience.

Abandoning or delaying IMF-mandated reforms would have several detrimental effects. First, it would erode Egypt's credibility with international investors and financial institutions, making future financing more difficult and expensive. Consistency in policy implementation is vital for maintaining trust, and repeated delays or backtracking undermine this trust.

Second, without structural reforms, Egypt's economic challenges-such as high inflation, fiscal deficits, and a burgeoning debt burden (which reached around 89% of GDP in 2022)-will persist or worsen. The lack of a flexible exchange rate contributes to currency overvaluation, hampers export competitiveness, and encourages black-market activity.

Third, delaying reforms stifles growth opportunities. Reducing the state's dominance in the economy and promoting private sector participation are essential for sustainable growth and job creation. Postponing these reforms discourages foreign direct investment, which is crucial for technology transfer and development.

Moreover, in a volatile regional environment, economic strength is a key pillar of national security.A weak economy limits Egypt's ability to respond to external shocks and assert its interests on the international stage. The conflict in Gaza adds urgency to the need for a resilient economy that can withstand regional turbulence.

It is important to acknowledge the social and political sensitivities associated with economic reforms. Measures such as subsidy reductions and currency devaluation can lead to short-term hardships for the population and risk social unrest. However, postponing these reforms only defers the pain and amplifies future challenges. The government can mitigate adverse impacts through targeted social safety nets and transparent communication with the public about the necessity and benefits of reforms.

Egypt's strategic importance in the Middle East cannot be overstated. As the most populous Arab nation and a key player in regional politics, its stability is crucial not only for its citizens but also for broader geopolitical dynamics. A robust, reformed economy enhances Egypt's capacity to navigate regional turmoil effectively.

The path forward thus requires steadfast commitment to the agreed-upon reforms. Rather than viewing the IMF accord as an external imposition, Egypt should embrace it as a roadmap to long-term prosperity. Accelerating the implementation of policies that promote macroeconomic stability, encourage investment, and stimulate inclusive growth is essential.

Abandoning the IMF accord risks undermining decades of progress and could plunge Egypt into a deeper economic crisis. The government must seize this moment to reaffirm its commitment to reform, demonstrating to both its citizens and the international community that it is serious about securing a prosperous future.

Vijay Pathak is a PhD candidate at the University of Oxford. He is a graduate of Yale University where he was a Brady-Johnson scholar in Grand Strategy and a PDLI Fellow. He is a recipient of the 2024 NATO Youth Award and writes on EU foreign policy and global affairs. Vijay is from Capellen, Luxembourg.

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