(AFP Photo)
The over two-year delay in reaching an agreement over the proposed $4.8bn loan package from the International Monetary Fund (IMF) has pushed Egypt to the verge of a full-blown economic crisis, according to economic experts.
Since becoming Egypt’s first democratically elected president in 2012, President Mohamed Morsi requested an increase in an initially agreed upon $3.2bn loan to $4.8bn, citing a widening budget deficit and contracting levels of foreign currency reserves. The proposed loan sparked controversy among the public, and experts are raising concerns over Morsi’s inability to meet requirements set by the global lender a year after his election.
Controversy and public outcry
Before Morsi was elected, many religious conservatives claimed borrowing from an international institution conflicted with Sharia, since interest payments made to the institution would qualify as usury. This soon changed following Morsi’s election, as clerics retracted their statements.
“Some disagreements occurred between Islamist parties due to the existence of the interest payment, but it was later agreed upon, after consulting with Islamic clerics and economists, that the payments are more [analogous to] administrative fees rather than usury,” Mohamed Gouda, spokesperson of the Freedom and Justice Party’s economic committee, told Daily News Egypt.
Since its installment, Morsi’s incumbent government, led by Prime Minister Hesham Qandil, has insisted that the controversial $4.8bn IMF loan would have “no strings attached”, taking pains to assure the public, particularly the poor, that the loan would be not harm them. However, public outcry broke out last December when the government re-launched negotiations with the global lender and Morsi approved sweeping increases in sales taxes through the imposition of tax hikes on 25 goods, part of the deal with the IMF.
The prime minister further confirmed that the plan will be applied with or without the IMF loan. “There are no preconditions, the IMF will merely check how committed we are to our national programme.”
Despite Morsi’s efforts to reassure the public, he retracted his decision early the next day, saying he “does not accept that the Egyptian citizen carries any extra burdens without his consent.”
But austerity measures were still imposed in order to secure the long-delayed loan. In October 2012, Qandil said the government will “soon begin applying austerity measures to address the budget deficit” and reduce it to 9.5% in the upcoming 2013/14 fiscal year, to secure the loan.
These measures mainly included slashing fuel, agriculture and food subsidies, raising indirect taxes on goods, and amending income and property tax laws. The global lender has also requested that a political consensus among parties be reached as concerns the loan.
A technical commission from the International Financial Organization (IFO) visited Egypt last year to scrutinise this programme and negotiate its clauses, timeline and expected foreign currency reserves.
So far, the government has launched a smartcard programme, through which it hopes to record the consumption of fuel and combat smuggling, which it blames for a recent massive hydrocarbon shortage. The government hopes to be able to ration its energy subsidy based on collected data, cutting it from EGP 120bn to EGP 100bn in 2013/2014.
The government has also amended the income tax law, keeping the lowest bracket of earners who receive under EGP 5,000 exempted from taxes, while raising taxes on those making more than EGP 250,000 per year from 20 to 25%.
The income tax law is considered one of the most progressive measures undertaken by the government to date, effectively transferring much of the tax burden to higher-income segments of the public. Additionally, the government amended 2008 property tax laws, which should come into effect in July.
Negotiations, challenges and what’s next
Earlier this month, the IMF said there had been progress with the Egyptian authorities regarding negotiations over the loan.
In April, the Mission Chief of Egypt Andreas Bauer said in a statement: “The authorities have already taken valuable first steps to improve the targeting of energy subsidies and are seeking to broaden their revenue base. They intend to build on these steps with further actions to address the country’s fiscal and balance of payments deficits.”
But postponement of some of the measures has caused the budget deficit to continue to widen further, reaching EGP 205bn in 2012/13, up 48% from the same period in the previous fiscal year. The long-running budget deficit has led to greater internal and external borrowing, causing local public debt to hit EGP1.3tn by the end of March 2013.
Notably amid the current climate, political stability and consensus over the loan were cited by the IMF as paramount to any deal.
Gouda believes, however, that this will continue to be a stumbling block, saying: “It is difficult to make everyone approve of the loan, especially with the number of political parties we have at the moment.
