Egypt’s IMF Success Masks a Failing Economic Model – HORN REVIEW

Egypt’s latest agreement with the International Monetary Fund has been presented as another step in the country’s economic recovery. The IMF has raised its growth estimate, the government has exceeded important tax and budget targets, and a new financing package worth approximately $1.64 billion is awaiting approval. Cairo can therefore point to numbers suggesting that its reform programme is working despite wars on its borders, disruptions in the Red Sea and persistent pressure on the Egyptian pound.

But Egypt’s story is not primarily one of economic recovery. It is the story of a government becoming better at containing repeated crises without changing the economic system that produces them. The state has improved its ability to collect taxes, reduce subsidies, restrain spending and negotiate new financing from international lenders. It has been less successful at creating a competitive private economy, reducing its own commercial dominance, lowering the debt burden or protecting ordinary Egyptians from a prolonged decline in purchasing power.

The result is a form of stability sustained by continuous domestic pressure. Households absorb higher energy and food prices. Businesses face interest rates near 20 percent. The government sells assets and land to obtain foreign currency. Banks direct a large share of their resources toward financing the state. New IMF money then provides enough breathing space to prevent these pressures from developing into another immediate balance of payments crisis.

This is the price of Egypt’s resilience. The country has demonstrated that it can survive economic shocks, but survival is not the same as transformation.

The IMF’s July 2026 forecast illustrates how positive headlines can hide a less encouraging outlook. The Fund raised Egypt’s real GDP growth estimate for fiscal year 2025/26 from 4.2 percent to 4.6 percent. Economic activity had been stronger than expected, with GDP expanding by 5 percent in the third quarter and by 5.2 percent during the first nine months of the fiscal year. These are significant results for a country facing high borrowing costs and major regional disruptions.

However, the IMF simultaneously reduced its forecast for fiscal year 2026/27 to 4.4 percent, a downward revision of 0.4 percentage points. The Fund attributed the weaker outlook to lower investment, higher financing costs and uncertainty connected to the regional conflict. In other words, the upgrade applies to a fiscal year that was already close to completion, while the forecast for the year ahead was cut. The positive headline reflects economic activity that had already occurred. The downgrade provides a clearer picture of where the economy may be heading. The distinction is explained in the IMF’s July 2026 World Economic Outlook briefing.

Growth itself also says little about whether Egypt is building a more sustainable economy. GDP can expand while the state becomes more indebted, private companies lose access to affordable credit and the country becomes more dependent on external financing. Egypt’s central challenge is not simply whether it can produce growth of four or five percent. It is whether that growth generates exports, private investment, productivity and employment on a scale sufficient to reduce reliance on creditors and foreign capital.

So far, the new IMF agreement suggests that this reliance remains firmly in place.

The staff level agreement covering the seventh review of Egypt’s Extended Fund Facility and the second review of its Resilience and Sustainability Facility would release approximately $1.5 billion under the main programme and another $136 million under the resilience facility. If the IMF Executive Board approves the reviews, total disbursements under the two arrangements will reach approximately $7.2 billion, according to the IMF’s June 2026 statement.

The government can reasonably describe the agreement as evidence that it has met important IMF conditions. International lenders are not providing money without requiring policy changes, and Egypt has shown that it can implement enough of those changes to keep the programme moving. The financing also reduces the danger of an immediate foreign currency shortage.

But another IMF disbursement is not proof that Egypt is becoming economically independent. It is evidence that external assistance remains essential.

Egypt entered the current IMF arrangement in December 2022. The programme was later expanded to $8 billion as the country’s financing needs increased. In February 2026, the IMF released approximately $2 billion under the Extended Fund Facility and $273 million under the resilience arrangement. Only a few months later, Egypt was preparing to unlock another $1.64 billion. The IMF’s February review acknowledged that stabilisation had improved but warned that high public debt, large financing requirements and slow structural reform continued to restrict the country’s economic prospects.

A successful reform programme should gradually reduce the need for repeated emergency financing. Egypt’s programme has instead developed into a cycle of reviews, policy conditions and disbursements. Each agreement gives the government more time, but none has yet removed the economic weaknesses that make the next agreement necessary.

The government’s strongest evidence of success is its fiscal performance. By the end of March 2026, Egypt had exceeded both its primary budget balance and tax revenue targets. The primary surplus is projected to rise from 4.8 percent of GDP in fiscal year 2025/26 to 5 percent in 2026/27. The tax to GDP ratio is also expected to increase by 1.2 percentage points following measures to widen the tax base and improve administration. These are measurable improvements, and they indicate that the state has become more effective at collecting revenue and controlling parts of its expenditure.

Yet the primary surplus is also one of the most misleading measures in the Egyptian economic debate because it excludes interest payments. Egypt can record a large surplus before interest while its overall budget remains overwhelmed by the cost of servicing debt.

The IMF reported that interest payments were absorbing approximately 83 percent of government tax revenue. It also estimated that Egypt’s gross financing needs would remain close to 40 percent of GDP over the following three years and above 30 percent over the medium term. The IMF’s February 2026 country report warned that the government’s planned fiscal adjustment alone would not be sufficient to restore the main debt indicators without stronger debt management and structural reforms.

This changes the meaning of the primary surplus. The government is collecting more taxes, reducing subsidies and limiting ordinary expenditure, but much of the resulting fiscal space is being consumed by creditors. The state may be balancing its accounts before interest, yet schools, hospitals, infrastructure and social programmes must compete for the small portion of revenue remaining after debt costs are paid.

Egyptians are therefore being asked to accept fiscal austerity without receiving the public investment normally used to justify that sacrifice. Taxes rise and subsidies are reduced, but debt servicing absorbs the gains. The government becomes more disciplined in the narrow sense required by creditors while remaining unable to redirect sufficient resources toward long term development.

The monetary system creates a similar contradiction. In July, the Central Bank of Egypt kept its overnight deposit rate at 19 percent, its lending rate at 20 percent and its main operation rate at 19.5 percent. The rates can be found in the Central Bank’s July monetary policy decision. They are intended to suppress inflation, support the currency and discourage another rapid increase in prices.

Maintaining restrictive monetary policy is understandable when inflation remains high. Urban headline inflation stood at 14.6 percent in May, while the IMF projected that it could rise to 15.8 percent by the end of the fiscal year because of higher energy costs and the effect of exchange rate depreciation. Core inflation then increased from 13.8 percent in May to 14.3 percent in June, according to the Central Bank’s June inflation release.

But interest rates near 20 percent are not a sign of a healthy economy. They are evidence of how difficult it remains for Egypt to control prices and retain capital.

At these rates, businesses face extremely expensive financing. Companies postpone expansion, entrepreneurs struggle to obtain credit and households avoid borrowing for homes, vehicles and major purchases. High rates also increase the government’s own domestic debt costs because the state remains one of the largest borrowers in the banking system.

The arrangement creates a self reinforcing cycle. The central bank maintains high rates to control inflation. Those rates increase the cost of government borrowing. Higher debt costs force the state to generate larger primary surpluses. The government then raises revenue, reduces subsidies and restricts expenditure, placing greater pressure on businesses and households.

Egypt’s banking system further demonstrates how state borrowing weakens the private economy. The IMF found that private sector lending represented less than 43 percent of total bank lending and had been declining since 2020. Bank assets remained heavily concentrated in government securities. The same report described the banking system as financially resilient, but resilience for banks does not necessarily translate into productive credit for the wider economy.

Banks can earn attractive and relatively secure returns by financing the government. They therefore have less incentive to take the risks associated with lending to small businesses, manufacturers or new investors. The state absorbs credit, banks profit from government securities, and private enterprises are left competing for a limited and expensive pool of financing.

Cairo repeatedly promises that the private sector will become the main engine of growth. Yet its fiscal and banking systems continue to organise capital around the needs of the state.

The burden of the adjustment is most visible in the government’s energy policies. Fuel and electricity price increases were among the measures that helped Egypt manage the regional shock and meet IMF requirements. The government has also committed itself to a fuel pricing mechanism that increasingly links domestic prices to actual costs. The IMF reported that gasoline and diesel prices had been raised twice during the programme period, with cumulative increases of between 11 and 15 percent depending on the product. These measures reduced the budgetary cost of energy subsidies, but they also raised transportation, production and household expenses.

Fuel prices do not affect only motorists. They influence the cost of moving food, operating factories, running generators, transporting workers and delivering basic services. Electricity increases affect homes, farms, shops and industrial production. Currency depreciation adds another layer of pressure by raising the domestic price of imported food, medicine, machinery and energy.

For the IMF and the Ministry of Finance, these are necessary price adjustments. For the population, they are a repeated reduction in real income.

The government’s decision to increase pensions by 15 percent from July 2026 illustrates the social consequences of its own economic programme. The increase was introduced to improve the living conditions of pensioners and compensate for rising prices, according to Egypt’s State Information Service.

The pension increase is necessary and should be acknowledged as a genuine attempt to protect a vulnerable group. But it does not prove that the government has contained the social cost of reform. When inflation is already close to the size of the nominal increase, pensioners may gain little or no real purchasing power. The adjustment can prevent their incomes from falling further without restoring what previous inflation and devaluations have already taken away.

This reveals the circular logic of the programme. The government reduces broad subsidies and allows higher energy prices to pass through the economy. Those policies strengthen the budget but increase living costs. The state must then raise pensions and social transfers to compensate part of the population for the consequences.

Rather than generating a broad improvement in living standards, the government repeatedly manages the damage caused by each stage of adjustment.

The deeper failure is the state’s unwillingness to reform its own role in the economy with the same aggression it applies to households and public spending. Egypt’s economy remains heavily influenced by state owned enterprises, public authorities and military linked companies. These entities operate in commercial sectors while often benefiting from access to state land, financing, contracts and regulatory influence unavailable to ordinary private firms.

Reducing this footprint has been a central requirement of the IMF programme, yet progress has been slow. The Fund reported that no material divestment had occurred during the previous 24 months while new military entities had been created. Egypt had originally been expected to generate approximately $6.5 billion through its divestment programme. The authorities later identified transactions expected to produce around $1.5 billion. Even after including a $3.5 billion Qatari land transaction, the programme remained below its original objective.

More importantly, selling land or minority stakes does not necessarily change the structure of the economy. A land transaction can supply foreign currency and reduce immediate financing pressure, but it does not establish equal competition between state companies and private businesses. Selling part of a company while retaining state control may produce revenue without changing management, market power or commercial privileges.

Egypt appears more willing to monetise state assets than to surrender state control.

The IMF identified the state’s pervasive economic role as the main constraint on private sector activity. It estimated that faster privatisation, stronger competition and more credible divestment could produce gains up to three times larger and more durable than the regulatory reforms currently being pursued.

This is a particularly damaging conclusion because it means Egypt’s central economic problem is not hidden from either the government or its lenders. The obstacle has been identified, repeatedly discussed and incorporated into formal programmes. It has simply not been removed.

The external position also looks stronger than it is. Egypt has rebuilt reserves and attracted foreign inflows, but much of this improvement rests on volatile or nonrecurring sources. Nonresident holdings of Egyptian government securities reached $32.8 billion at the end of 2025, twice their level one year earlier. The rise in reserves was also supported by external borrowing, higher gold prices and a $3.5 billion payment linked to a Qatari land transaction.

These inflows are useful, but they are not equivalent to a durable increase in export earnings. Portfolio investors are attracted partly by Egypt’s high interest rates and can withdraw quickly when regional risks or exchange rate expectations change. Land can be sold only once. External borrowing must eventually be repaid.

Egypt is therefore paying high returns to attract capital, selling assets to obtain foreign currency and borrowing to strengthen reserves. These policies can stabilise the external position, but they do not necessarily strengthen the productive economy underneath it.

The Red Sea crisis has further exposed this vulnerability. Suez Canal revenue fell from a record $10.25 billion in 2023 to approximately $3.99 billion in 2024 as attacks on commercial shipping encouraged vessels to avoid the Red Sea and travel around southern Africa. The collapse was reported by the Associated Press using Suez Canal Authority figures.

Egypt did not create the Red Sea attacks, and the government deserves credit for absorbing such a severe loss of foreign currency without allowing a complete external payments collapse. The shock was real and largely beyond Cairo’s direct control.

But the crisis also demonstrated the weakness of an economy that depends heavily on a small number of external income sources. When canal revenue falls, when Gulf investment slows or when portfolio investors leave, Egypt immediately faces pressure on its currency and reserves.

A more resilient economic model would absorb these shocks through diversified exports, competitive industry and sustained private investment. Egypt instead responds through currency adjustment, higher energy prices, tighter monetary policy, asset transactions and new external financing.

The country uses the same emergency instruments after every major shock because the underlying structure remains largely unchanged.

It would be inaccurate to argue that Egypt has achieved nothing. Tax collection has improved. The government has generated a substantial primary surplus. Growth during fiscal year 2025/26 was stronger than expected. The current account deficit narrowed to 4.2 percent of GDP in fiscal year 2024/25, supported by remittances and tourism, even as Suez Canal disruptions continued to reduce receipts. Reserves remained broadly stable during the latest regional shock, and the banking system avoided a major crisis.

These are important achievements in economic stabilisation.

They are not evidence of structural transformation.

Egypt has become more capable of preventing an immediate crisis, but it has not created an economy that prevents the next crisis from developing. Interest payments consume most tax revenue. Gross financing needs remain exceptionally high. Private credit remains restricted. The state’s economic footprint is still extensive. Divestment has repeatedly fallen behind the target. Inflation continues to erode incomes, and foreign currency stability remains dependent on creditors, asset transactions and capital that can leave quickly.

The most serious imbalance is that citizens are being asked to carry the cost of reform while the state avoids reforming itself. Households pay more for electricity, fuel, transportation and food. Pensioners require emergency increases to preserve part of their income. Private businesses face interest rates near 20 percent. The tax base is widening.

At the same time, state and military linked enterprises continue to occupy major parts of the economy, the government remains the banking sector’s dominant borrower and meaningful divestment continues to be postponed.

Egypt’s resilience is therefore real, but it is the resilience of a system learning to survive its failures rather than eliminate them. The IMF agreement provides more time, the growth upgrade improves the government’s public narrative and the primary surplus reassures creditors. None of these developments proves that the economy has become more competitive, productive or independent.

The true measure of success will not be whether Egypt receives the next IMF disbursement. It will be whether the country can eventually operate without needing one.

Until Cairo reduces the state’s commercial dominance, expands affordable credit for productive businesses, develops stronger export industries and directs more public revenue away from interest payments, every recovery will remain temporary. The latest agreement may delay the next crisis, but it does not show that Egypt has escaped the cycle that created it.

By Makda Girma, Researcher, Horn Review