Egypt is angling to acquire the $21bn loan package from the World Bank, the African Development Bank, the International Monetary Fund (IMF), and international sovereign bond issuance.
Egypt has requested to borrow $12bn from the IMF over three years, thus $4bn each year. The IMF delegation arrived in Cairo on 30 July for talks which are expected to go on for two weeks. The state aims to reach a preliminary accord with the Washington-based lender by the end of the visit.
The IMF discussed the economic reform programme—part of Sustainable Development Strategy: Egypt Vision 2030—with the Central Bank of Egypt (CBE) and the Ministry of Finance. This programme, announced by the government, is related to tax system reform, such as imposing new taxes, legislation reform, lifting all kinds of subsidies, floating the Egyptian pound, and increasing the price of some government services provided to citizens.
Egyptians are afraid that unfair conditions may be imposed by the IMF, believing this would affect standards of living, income, and cause price hikes, besides fewer subsidies.
However, Minister of Finance Amr El-Garhy announced earlier this week that if the IMF’s conditions were too tough, the Egyptian government would refuse the deal.
Daily News Egypt spoke to a specialist regarding possible scenarios following the potential success or failure of the deal, and whether any alternative sources would be suitable to bridge the deficit.
Former assistant to the executive director of the IMF Fakhry El-Fekky sees that a failure in the deal would be caused by two main reasons. The first being that the government or the parliament would not agree to or sign a letter of intent (which often has a memorandum of economic and financial policies attached to it). The second reason would be that the IMF’s board would refuse to adopt the Egyptian economic reform programme due to the refusal of [at least] five main countries involved in the IMF’s decision making.
El-Fekky said that in the case that the government is unable to implement the programme due to the lack of coordination between officials after obtaining the loan, the IMF will denounce the lack of commitment and halt the transfer of the second tranche of the first payment. Regarding the first payment, the IMF should transfer the first tranche after signing the deal and the second tranche six months following the application of the reform programme.
If Egypt fails to reach an agreement, the country’s financial and economic ratings will be lowered which could affect investments and cause a higher degree of risk, El-Fekky said. Besides this, failure of the deal would lead to the US dollar exchange rate rising in the informal market. Further, there would be no incentive for foreign countries to offer Egypt loans or US dollar bonds; additionally international finance corporations would only allow loans at a high interest rate.
The IMF’s conditions are not unfair, he conceded. The difficulty lies in committing to a timeline by which the reforms will be implemented and following up on performance indicators for reduction of the budget deficit and other reforms.
However, he added, the IMF will not demand to monitor the Armed Forces’ budget because it is not concerned with the details of the state budget, but rather with a reduction of the budget deficit.
“The rate of possible failure of negotiations lies at 40%, but accepting the conditions of this loan is the only way to reduce the deficit because other sources, like exports, remittances, and tourism are greatly affected by the slowdown in the movement of international trade,” El-Fekky said.
Cairo-based senior economist at Arqaam Capital Reham El-Desoki said that this deal has to go through. She thinks the Egyptian government would obtain the loan but that the larger issue lies in how it would best make use of it.
El-Desoki added that the IMF-leveraged deal is mandatory because it is the last option for the government.
El-Desoki explained that if the government does not stick to its reform commitments after obtaining the loan, there would be a real crisis. The loan is a viable source of funding to cover the lack of foreign reserves and the budget deficit.
The issue that would most affect the rate at which the economic reforms schedule is implemented is the current circumstances in Egypt, she said.
“The fund should be used in two ways. The first is providing liquidity for economic crises and the second is using it for developing projects and new investments,” said El-Desoki. “People in Egypt envisage the IMF as a demon and are afraid of it, but Egypt’s commitment to repaying the loan is the basis of the deal and the IMF should not have to interfere with any governmental policies.”
COO of Pharos Holding Angus Blair agreed with El-Desoki that the IMF is showing a great deal of willingness to agree to a deal with Egypt.
“I believe that if a deal is not agreed on during this visit, then the IMF team will be back again within a few weeks to work on completing a deal,” said Blair. “Given the size of the domestic debt and the interest payments, it is unlikely that the government will resort to the domestic markets.”
Blair added that the government will have to be open and transparent in terms of conditionality, and a few issues may worry the IMF post-deal.
Regarding the rumours of unfair conditions such as interfering in the Armed Forces’ budget, Blair said that will not be one of the conditions, adding there are far more important issues.
Contrary to this, professor of economics at Cairo University, Alia El-Mahdi, said that the IMF should enforce strict conditions to guarantee the government’s commitment to implementing the economic reforms on schedule.
El-Mahdi asserted that, during this visit, the IMF delegation should propose a deal with the government to avoid suspending the programme, as happened in 1987.
“The president would be the reason behind the success of the deal, if it is concluded. I expect a 65% to 70% likelihood the deal will be accomplished. An unexpected action is the only thing that could prevent the completion of the deal,” said El-Mahdi. “An incomplete deal would result in negative repercussions on the credit rating, solvency, and the degree of risk.”
In this case, the only option for overcoming the budget deficit is improving the investment climate so as to depend on foreign funding and investments without the need for loans, she said. Further, Egypt could follow the same conditions set by the IMF without borrowing from the group.
The economics professor explained that the conditions are necessary, attributing this to necessary amendments of the tax system, subsidy reductions, and floating the Egyptian pound.
Regarding the rumours about the Armed Forces’ budget, El-Mahdi said any such monitoring would be a red line as the government does not even allow the parliament to monitor the military budget, so how could a foreign organisation do so.
