It is a move viewed as crucial for Egypt to overcome its hard currency shortage, and an important condition tied to the $3bn International Monetary Fund loan signed in December 2022.

In February, 32 state-owned companies were put up for sale, and despite some criticism about slow progress, last week the government announced that $1.9bn worth of state assets had been sold.

The sales included stakes in petrochemical and drilling companies to the Abu Dhabi Development Fund (ADQ); stakes in seven luxury hotels sold to a subsidiary of Talaat Mostafa Group; and stakes in Al Ezz Dakhalia to its mother company, Ezz Steel. The latter two buyers are Egyptian companies.

The IMF welcomed Egypt’s asset sale, reiterating that “divesting is a critical component” of the loan agreement.

In March, an IMF review of the status of economic reforms in Egypt – to be conducted before the release of the second tranche of the loan – was postponed due to a lack of progress made by Egypt, including what was deemed a lack of privatisation.

And so, with the loan necessary to ease Egypt’s worst economic crisis in decades, the government has moved to cooperate.

“The announced sales will certainly help the government’s talks with the IMF and make the IMF’s task easier – at least in the short term,” said Yezid Sayigh, senior fellow at the Malcolm H Kerr Carnegie Middle East Center. However, he added, “Egypt will face a continuing challenge to keep raising further amounts through additional sales.”

Annual inflation in Egypt has hit a record 36.8 percent, according to official statistics, with food prices rising at twice this pace. Dollars are essentially unavailable in the country, except on the black market.

Businesses suffer from import restrictions; government debt has risen tremendously; and international ratings agencies have downgraded Egypt’s credit rating. More than half of the 2023/24 budget is allocated to debt servicing.

For the IMF review to go ahead, more assets sales alone would not be enough, Sayigh noted. The IMF has also demanded that the Egyptian pound be truly freely floated on exchange markets. In the past 1.5 years, the Egyptian pound has gone through several rounds of devaluation, losing roughly half of its value, but since March this year, the official exchange rate has been steady, at between 30.8 and 30.9 Egyptian pounds to the US dollar.

On the black market, however, a dollar changes hands at about 38 Egyptian pounds. President Abdel Fattah el-Sisi himself has suggested that no further devaluation is coming, for now, as it is putting too much of a strain on Egyptians.

Shifting the blame

The government has maintained that the crisis was caused by external shocks – the COVID-19 pandemic and the Ukraine war – while analysts have argued the shocks have exposed structural weaknesses in Egypt’s economy.

They pointed, for instance, to massive government spending on projects that do not provide a return on investment, with a prime example being the $58bn New Administrative Capital. Egypt has borrowed aggressively to fund these projects.

Meanwhile, companies under the umbrella of the army and security services have expanded under the rule of el-Sisi, which observers said harms the private sector. Non-oil private sector activity has been contracting for 30 continuous months.

The underlying problems the economy faces include low private investment and low export rates, Ishac Diwan, researcher at the Paris School of Economics, wrote in an analysis piece. Both issues were not solved by a previous loan agreement with the IMF in 2016 and accompanying economic reforms.

“The disconnect between a rise in borrowing and a stagnant ability to repay is at the heart of the current financial crisis,” Diwan wrote.

The IMF sees a free-floating exchange rate as key to solving these issues.  Devaluation would eradicate the parallel market, restore business confidence, improve Egypt’s export position, and make the country more attractive to investors.

Yet, when Egypt devaluated its currency in 2016, it did not drive up exports and investments and economist Osama Diab questioned the IMF policy.

“Egypt suffers from structural trade deficit meaning there is always a lot more demand for foreign currencies than there is for the EGP [Egyptian pound],” he said. “IMF conditions have failed once and again in resolving these structural issues, and a new round of devaluation would always be ‘necessary’.”

On top of that, the size of the latest loan was much smaller than what Egypt had hoped for. The $3bn is “negligible in relation to the financing gap”, Diab said. Even still, the IMF loan can be “useful for the access to international capital markets it provides”, he added.

According to Diwan, the “loan leaves Egypt with a hugely underfunded program and unsustainable finances”. He believed that – “rather sooner than later” – the terms of the loan would have to be renegotiated, likely “in the context of a large-scale restructuring of Egypt’s debt”.

Fears of hyperinflation

As for the IMF loan, the asset sale has provided some immediate cash for urgent payments, but has not solved Egypt’s underlying debt problem.

“Whatever small announcements are made here or there, the matter at heart is one of systematic failure in economic policy,” said Hafsa Halawa, non-resident scholar at the Middle East Institute.

“The root causes that have led us here are not changing and there appears to be little to no political will to enact real change.”

Another way Egypt has dealt with its widening deficits is by expanding the money supply, which is likely to fuel inflation further and increase pressure on the pound. One visible measure has been the issuing of a new 20 pound bill that suddenly flooded the market early this month.

Within the business community, people fear Egypt is heading towards hyperinflation and instability, one entrepreneur, who spoke on the condition of anonymity, said.

“Nobody wants to invest. [Investors] wait to see what happens to the exchange rate of the Egyptian pound, and whether Egypt gets out of this situation in the first place.”

Many members of the community are leaving Egypt, he said. “The best of us are leaving. The whole conversation now is about getting out.”

The local independent media outlet Mada Masr reported that the debt situation is so precarious that, within government circles, the option “to voluntarily default on some of the debt and negotiate with creditors about a new payment schedule” is on the table.

The $1.9bn in assets sales has appeared to, at best, postpone this moment, rather than avoid it.

“Messaging from the IMF and other lenders to date only acts to empower a policy of ‘kicking the can down the road’, which results only in prolonging and increasing the pain that Egyptians on the ground will experience,” Halawa said.