People buy dates from a market selling food at discounted prices, after a devaluation of the Egyptian pound led to a sharp increase in prices, in Giza, Egypt, January 28, 2023. REUTERS/Hanaa Habib

Egypt’s Economic Crisis Heightens Need for Reforms

Amid severe economic headwinds, Egyptians have seen their currency collapse and food prices skyrocket. A new IMF loan is putting pressure on state officials to reform the economy and potentially take on the military's vast economic interests. Will this crisis finally be the impetus for real change?

February 15, 2023
Adel Abdel Ghafar

Egyptians are facing a dire economic situation. Since early 2022, the Egyptian pound has lost more than 40 percent of its value against the U.S. dollar and prices of imported goods have soared, as the impact of the war in Ukraine compounds the effects of stringent bailout conditions set by the International Monetary Fund (IMF). A third of Egyptians already live under the poverty line and rapid inflation is having a devastating impact on the most disadvantaged segments of society. Egypt’s middle class is rapidly disappearing and basic goods such as eggs and meat are becoming luxuries available to a privileged few. To tackle its mounting challenges, Egypt needs to encourage the private sector by seeing through promised structural, monetary, and administrative reforms. 

Before the coronavirus pandemic and the Russia-Ukraine war, the Egyptian economy had been growing at a solid rate as the government invested in several mega infrastructure projects. Yet much of that growth had been financed by debt, burdening the country with one of the highest debt-to-GDP ratios in the world. To bring in dollars, the government had relied on so-called hot money, foreign buyers of government bonds who bet on the relatively high returns they can reap from emerging markets.  

Adding to its vulnerabilities, Egypt is the world’s top importer of wheat. This meant it was heavily shaken by the Russia-Ukraine war in early 2022, which drove global cereal prices up sharply. Egypt was already struggling with a shortage of foreign currency, but now investors fled the country, selling up their treasury bills and taking approximately $20 billion with them. These factors piled yet more pressure on the Egyptian pound, prompting the governor of the Central Bank to resign 

Further adding to the pound’s woes, several Egyptian banks announced they were offering 25 percent interest on deposits, to encourage savings in the local currency. Rather than calming the market, the news spooked investors and led to another big drop in its value. 

The government has attempted to calm the markets and the population. Last month, President Abdelfattah El Sisi urged Egyptians not to worry over the economic woes gripping the country, insisting that the government is doing everything it can to deal with the crisis. But official rhetoric aside, there is indeed cause for concern.  

Challenges for the Private Sector  

In January, the government agreed to a string of conditions the IMF had set for a $3-billion loan deal: to move to a flexible exchange rate, privatize state enterprises, and slow public investment in large infrastructure projects. 

The United States strongly backs the deal, according to Secretary of State Antony Blinken, who visited Cairo briefly in January. He said the government’s privatization plans were “significant” but hinted that implementation would be challenging, without commenting on the military’s economic role. 

The heart of the deal is a push to revitalize the private sector to create more jobs and provide growth. This is easier said than done, given the oversized role the state, and particularly the military, have played in the economy for decades. It is estimated that the Egyptian army controls up to half of the economy, even if the government claims the figure is just 1.5-2 percent.  

Given the opacity of the Egyptian state, it is impossible to know the true figure. What is clear is that the military’s oversized role is an obstacle to the private sector, scaring off foreign investors and giving military-owned firms unfair advantages, including substantial tax exemptions. 

The army’s grip on the economy has even drawn criticism from prominent Saudi commentators, including Turki al-Hamad, who describedan Egypt of unemployment, economic and political crises, social dilemmas and violent radical fluctuations.” Given al-Hamad’s close ties to de facto Saudi ruler Mohammed Bin Salman, this suggests that the Gulf heavyweight, whose backing has been vital to Sisi’s regime, might be losing patience with the Egyptian president. 

With its most recent bailout loan, the IMF is also laying down the gauntlet by requiring the privatization of companies directly or indirectly owned by the military. This pushes back against moves by the army over the past couple of years to extend its grip on the economy further still.  

Yet the army is not the only obstacle to the private sector. Egyptian businessmen have also been targeted. Safwan Thabet, the founder of Juhayna Foods, Egypt’s largest dairy producer, was jailed along with his son on dubious charges in 2021 related to alleged ties to the Muslim Brotherhood. Their arrests were rumored to be aimed at pressuring the Safwan family to cede their assets to the state, which sent alarm bells through Egypt’s business community, as well as global investors.  

The Safwans resisted the pressure to sell their business and were released, perhaps as a signal to the IMF and to calm investors. Despite their release, their case highlighted how easily businessmen can be targeted by the state. Perhaps fearful of the Juhayna scenario, some Egyptian business families have moved the ownership of their assets to overseas financial entities to protect against potential seizures by the state should they fall out of favor. 

These dynamics all work against the emergence of a strong private sector that can create jobs and help the pound regain some of its value. To truly encourage the private sector, the government needs to embark on structural, monetary, and administrative reforms, including issuing a unified law for industry. This would require years-long reviews of industry legislation, some of which dates back to the 1960s. The government must also convince entrepreneurs that they can invest freely and securely in the country, particularly by abandoning its coercive tactics against businessmen.  

Finally, and perhaps most importantly, the Egyptian government needs to follow through on promises to ease the military’s grip on the economy. Given the military’s resistance to such moves, this will be the most challenging reform of all, politically speaking. Yet as the country’s woes mount, the institution will have to acquiesce to the sale of more of its assets, to be listed on the stock exchange. Such reforms have been discussed for years, but given the dire state of Egypt’s economy today, the need could hardly be more pressing. 

The opinions expressed in this article are those of the author and do not necessarily reflect the views of the Middle East Council on Global Affairs.

Issue: MENA Governance, Political Economy
Country: Egypt


Fellow and Program Director
Adel Abdel Ghafar is a fellow and director of the Foreign Policy and Security program at the Middle East Council on Global Affairs. He was previously a nonresident fellow at the Brookings Institution’s Foreign Policy Program and a fellow at the Brookings Doha Center, where he was also acting director of research. Abdel Ghafar is… Continue reading Egypt’s Economic Crisis Heightens Need for Reforms