During his visit to Cairo earlier this month, U.S. Secretary of State John Kerry announced the transfer of $190 million in “budget support funds”— a vote of confidence in the Muslim Brotherhood government of President Mohamed Morsi. As the United States moves to shore up Egypt’s reserves, Egypt’s European and Asian creditors—who collectively own 35 percent of Egypt’s external debt—are likely to follow suit despite even the most daunting political challenges. In the meantime, Egypt’s creditors are waiting for the country to finalize a $4.8 billion IMF loan, which Egypt needs to resolve its currency crisis and stave off further social unrest. Following the uprising, plummeting foreign reserves eroded Egypt’s ability to support its currency, the Egyptian pound (LE), driving up the cost of importing commodities and endangering the country’s onerous fuel subsidies. Now, far from a comprehensive solution to Egypt’s economic woes, an IMF loan should stabilize Egypt’s reserves, restore confidence in the pound and unlock even more extensive funding from the European Union, the World Bank, and a number of other multilateral creditors. 

By the end of last summer, the depreciation of the Egyptian pound had been painful, although the worst seemed to be over; for a time, the exchange rate had stabilized. Egypt’s reserves rose slightly and in August climbed to $15.1 billion. Then came Mohamed Morsi’s presidential decree, and the situation exploded once more—touching off a row over the constitution, and  affecting the pound and currency reserves most acutely. Standard and Poor’s soon lowered Egypt’s credit to the same ignominious rate as that of Greece and Pakistan, and reserves further dropped to the oft-repeated “three month level” critical to cover imports. By  December 24, 2012, the pound had slid to 6.18 against the dollar.

The Central Bank of Egypt (CBE) responded through two key initiatives. First, it capped the amount of money Egyptians could convert into foreign currency, limited individuals leaving Egypt to $10,000, and simultaneously reaffirmed its guarantee of all local and foreign currency deposits, the effective equivalent of FDIC protection. Second, the CBE announced a series of foreign currency auctions. These resembled a “mini-devaluation,” as economists had suggested at the time, the purpose of which was three-fold: to manage the pound’s depreciation, to allow the market—as opposed to speculators—to value currency transparently, and to re-capitalize Egypt’s banks with dollars. By early February 2013 results of these initiatives were mixed and the pound had dropped 9 percent. The political paralysis worsened these conditions, and by March reserves had fallen to $13.5 billion.

As the value of the pound lessened, Egypt’s cost of doing business increased dramatically. Not only did its purchasing power weaken, but since lenders now lacked confidence in Egypt’s solvency, the country was no longer afforded its former credit lines. In many cases, Egypt could no longer buy crucial commodities on margin, and if it could, conditions were tougher. All of this has put substantial strains on the government’s ability to subsidize fuel. To preserve Egypt’s social equilibrium, the government has been reluctant even to debate ending fuel subsidies, but maintaining them has become exceedingly expensive. At the beginning of January, Egypt’s state-run General Petroleum Corporation feared that the cost of subsidies could climb to LE30.9 billion per quarter. Given the exchange rate at the time (LE6.45 to the dollar) supplying Egypt with fuel cost a staggering $4.8 billion every quarter. With only $13.6 billion in the bank by the end of January, either Egypt would continue to receive emergency inflows of foreign currency, or its subsidies were simply unsustainable. Earlier in the month, Qatar had pledged an additional $2.5 billion to Egypt, temporarily calming fears of a default and somewhat solidifying Egypt’s reserves.

Amid all of the country’s juxtapositions, there is one with disproportionate weight over its future: the divide over foreign aid. A mix of strange bedfellows, among those who opposed the IMF loan were Marxists averse to its capitalist connotations, academics who see it as a manifestation of U.S. and European imperialism, and Salafis who vehemently reject interest payments as haram. Opponents of foreign aid, like Hamdeen Sabahi and, to a lesser extent, Abdel Moneim Abou el-Fotouh, were quick to argue that neoliberal policies destroyed Egypt’s economy in the first place, and insist Egypt can survive without foreign funding. While Egypt’s leading liberal coalition, the National Salvation Front (NSF), announced its boycott of parliamentary elections, the anti-IMF agitators, in an uncanny resemblance to House Republicans opposed to increasing the U.S. debt ceiling, would sooner see Egypt default than meet its obligations by expanding the debt burden. In both cases—an election boycott or a sovereign default—Egypt loses.

There are elements of truth to the opposition’s arguments. Corruption was rampant under Mubarak and was clearly a drag on Egypt’s growth. Still, what widened the country’s imbalances was not so much corruption or neoliberalism, but the fact that investment bypassed the mass of the population en route to high-skill sectors like information technology. There was a social cost to the limited investment flow but there was also enormous upside. After all, it was no coincidence that the uprising materialized (at least partially) from within Egyptian online social media and that its most visible organizers emerged from this sector as well.

What opponents of any IMF deal fail to appreciate is that the country’s reserves are not an abstract measure of national wealth but a critical benchmark that allows the government to deliver goods and services and that enables ordinary people to sustain their livelihoods. If Egypt defaults, it can only worsen the already severe pressures on imports and the price of staple foods and commodities. Debt markets, themselves, still seem to have a degree of confidence in Egypt. Yields on both short and long-term Egyptian debt—important indicators of a country’s solvency—could be much higher and are nowhere near the 48.6 percent that 10-year Greek bonds reached at the height of that country’s debt crisis.

If Egypt’s economic policymakers have made mistakes, they have (mostly) acted responsibly under extraordinarily difficult circumstances. For its part, the IMF should be realistic about what it should expect in return; austerity has not worked in Europe and is unlikely to work in Egypt. Rather than accelerate an immediate end to subsidies, the IMF should approach the issue sensitively through a steady phasing out of the least complicated subsidies (like high octane fuel) on down. It should emphasize the areas where the government can actually make a difference, like a moderate capital gains tax, a revitalization of Egypt’s tourist infrastructure, a digitization of data collection and vocational training programs. An IMF deal and increased sources of domestic revenue are not mutually exclusive. But only political consensus can lead the way, and as of now, the impasse remains frightening.

Max Reibman is a Gates Scholar and Ph. D. candidate in Modern Middle East History at Pembroke College, Cambridge.