One rationale for providing foreign aid to nations with struggling or potentially corrupt governments is to encourage them to adopt transparent and equitable governance practices. These loans typically come with a requirement for fiscal discipline. In a recent multi-billion dollar deal aimed at alleviating Egypt’s economic crisis, the International Monetary Fund (IMF) has intertwined a call for fiscal responsibility with subtle incentives.
The agreement, pending approval by the IMF board, links $8 billion in financial assistance to efforts to stabilize Egypt’s currency, reduce inflation, and diminish state and military control over the economy. Cairo has procrastinated on implementing such reforms for an extended period. The recent impetus for change may stem from the IMF’s recognition of the “significant macroeconomic challenges” imposed on Egypt by the conflict in neighboring Gaza.
This display of empathy seems to reflect appreciation for Cairo’s ongoing initiatives to resolve the Gaza conflict and secure the release of Israeli hostages held by Hamas. Khalid Ikram, a former Director at the World Bank, highlighted a crucial lesson from years of international financial assistance – the importance of adopting a more modest approach. This approach entails balancing economic principles with pragmatic political feasibility.
Similar to other Middle Eastern governments, Egypt has been cautious about implementing economic measures that could incite popular unrest akin to the Arab Spring of the early 2010s. The current economic turmoil in the country can be traced back to excessive spending on infrastructure projects and policies that bolstered the military’s control over state-owned enterprises. During President Abdel Fattah al-Sisi’s tenure from 2014 to 2022, Egypt’s foreign debt surged from \(40 billion to \)155 billion.
Negotiations between the Egyptian government and the IMF hit a roadblock in late 2022. However, a breakthrough occurred last month when Cairo secured a $35 billion agreement with the United Arab Emirates for investments in urban development. This shift in Egypt’s financial landscape paved the way for renewed discussions with the IMF. Egypt recently hiked its interest rates by 600 basis points and allowed its currency to float based on market forces. In response, the IMF promptly enhanced its stalled economic rescue program.
These actions are poised to mitigate the economic repercussions of the Israel-Hamas conflict, including revenue losses from reduced ship traffic through the Suez Canal due to attacks by Houthi rebels in Yemen. More significantly for ordinary Egyptians, these measures have prompted concessions from an unpopular government, which economists believe will spur private sector growth – and have elicited a display of humility from the IMF.
“The international and regional partners of Egypt will play a pivotal role in supporting the implementation of the government’s policies and reforms,” noted the IMF. “The IMF team expresses gratitude to the authorities for their collaborative dialogue, warm reception, and robust cooperation in finalizing the reform agenda.” In the realm of diplomacy, subtle gestures often wield significant influence.