This blog article is a summary of the author’s, Osama Diab, recent article, published on January 16, 2025: Austerity without stability: a non-technical analysis of Egypt’s enduring economic crisis.[2]
Introduction
The rise of military authoritarianism in Egypt has facilitated the sharp erosion of social protection rights through extreme austerity measures that would have been unimaginable just years earlier. Amid the successive economic reform programmes deluging Egypt since 2016, the latest IMF agreement aims to further cut spending on key social protection areas to achieve a primary surplus of 5% by 2026/27.[3] To attain such a strenuous goal, the program aims to reduce public wages from 4.6% of GDP in 2021/22 to 3.7% in 2026/27, food subsidies and social benefits from 4.4% to 4.1%, and social security pensions from 1.5% to 0.6%. The harshness of IMF-mandated austerity measures under Egypt’s authoritarian military regime marks a significant erosion of the social contract — of which social protection is a fundamental cornerstone — that the Mubarak regime was cautious to radically tamper with after the 1977 bread riots and that the revolutionary politics of 2011-13 had emboldened. And yet, these extreme austerity measures, disproportionately borne by vulnerable groups, did not produce the IMF and Egyptian government’s stated advantage of achieving macroeconomic stability and controlling inflation.
Mainstream critical discourse often attributes Egypt’s enduring economic crisis, despite successive waves of IMF-sponsored reforms, to the ‘failure’ of neoliberal policies. In this blog summary of my latest article, I refrain from framing the crisis as a ‘failure’ because it maintains the illusion that policymakers and the IMF are actively working to solve Egypt’s economic instability. Instead, I propose adopting a historical and political economy perspective that highlights the IMF’s differential treatment of Global North and Global South economies across different periods as well as how certain national, regional, and international groups profit from inflationary regimes. Using this lens, I argue that Egypt’s experience of ‘austerity without stability’ — of harsh economic reform that does not deliver macroeconomic stability — stems from three interacting factors: contradictions inherent to the IMF’s policy, changes in oil prices over time, and vested interests in high levels of inflation.
The IMF’s Contradictions
Two contradictions lie in the very design of IMF policy. First, the IMF’s current demand for floating exchange rates as a means to control inflation contradicts its founding principles. When most of its clients were Global North countries under the Bretton Woods system, the IMF would fund balance of payments to prevent severe currency devaluation that could spark high inflation. In the 1970s however, the IMF started placing faith in self-correcting mechanisms by promoting floating exchange rates in North Africa and much of the Global South. The IMF now consistently demands its clients, almost exclusively from the Global South, to correct external balances through currency devaluation. Second, there is a gap between the IMF’s official discourse and actual policy. The IMF’s professed objective is to control inflation using both monetary policies, such as controlling the money supply and raising interest rates, and fiscal policies concerned with public spending. But inflation control became, and still remains, almost exclusively the function of monetary policy.
Why History Matters
These contradictions have manifested differently however in the inflation outcomes of the 1991 and 2016 economic reform programs. Inflation fell from a three-year average of 18.6% before the 1991 program to 13.1% after while it rose sharply from 10% before the 2016 program to 17.7% after. A discrepancy in inflation outcomes therefore persists despite the similarity of measures required by the IMF — namely increases in fixed energy and food price, consumer tax increases, and currency devaluations. The reasons behind this are historical and ideological. When considering historical and structural circumstance, inflation was significantly higher before the 1991 program was implemented compared to the relatively low inflation rates before the 2016 program. The conditions before the 2016 program were driven by decade-low oil prices in addition to the lingering effects of the 2008 financial crisis that had pushed down inflation and interest rates worldwide. This, in turn, presented the Egyptian government and IMF with an opportunity to implement extreme austerity measures such as eliminating energy subsidies, sharply devaluing the currency, and raising value-added tax rates.
Ideologically, the discrepancy is due to the exclusive monetarist belief that the inflationary effects of austerity measures could be combated by raising interest rates alone. This policy has proven to be ineffective in Egypt because raising interest rates largely reduces the demand for non-essential goods but not for essential products such as staple foods. Having to spend a larger share of their income on food, inflation disproportionately impacts lower income groups as a result.
Vested Interests
Though high inflation might not be a deliberate policy, economic systems long standing on high inflation create vested interests for some groups while vulnerable groups struggle. For the government on the one hand, high inflation reduces the real burden of sovereign debt, particularly those denominated in Egyptian pounds, because only the nominal value of debt has to be paid. High inflation can also support propaganda, allowing pro-government outlets to claim increased spending on wages and social spending even if they fall sharply in real value. Financial elites, on the other hand, benefit from high inflation because store of value assets — such as real estate, gold and stable foreign currencies — increase in value.
International lenders, in addition, benefit from interest rate hikes by borrowing at low interest rates to invest in high-interest debt. This transaction, known as ‘carry trade,’ puts pressure on foreign exchange reserves when interest payments are due and can result in sudden capital outflows during crises — as witnessed in the 2018 emerging markets crisis, the COVID-19 pandemic, and the 2022 Russian invasion of Ukraine. Nonetheless, banks investing in Egypt’s debt have made record profits in the past few years. Foreign investors also stand to profit from inflation and currency depreciation as they acquire assets, labor, and inputs at lower prices.
Conclusion
The IMF’s theoretical dogmatism, the government’s desire to control debt size and government spending through inflation as well as the interests of local and international financial elites impede an effective confrontation of economically destabilising inflationary policies in Egypt. ‘Failure’ as an explanatory framework to Egypt’s economic crisis and the subsequent erosion of social protection rights only allows policymakers and the IMF to maintain a charade of ‘actively’ working on the technicalities of fiscal deficit and inflation control while ignoring the historical and structural causes of instability.
[1] Acknowledgment: This executive summary was written by Nadi Farag, Social Protection Program Intern at the Arab Reform Initiaive (ARI).
[2] Diab, O. (2025). Austerity without stability: a non-technical analysis of Egypt’s enduring economic crisis. The Journal of North African Studies, 30(3), 351–361. https://doi.org/10.1080/13629387.2025.2450997
[3] A primary surplus of 5% is where the state’s revenues must exceed its expenditures by 5% of GDP after deducting interest payments.
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