Monday,23 October, 2017
Current issue | Issue 1306, (4 - 10 August 2016)
Monday,23 October, 2017
Issue 1306, (4 - 10 August 2016)

Ahram Weekly

Jump-starting the economy

Is the IMF loan the economic lifeline Egypt needs, asks Niveen Wahish

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Al-Ahram Weekly

This time last year Egypt was preparing for the inauguration of a new Suez Canal channel. It had been financed, to the tune of LE60 billion, by certificates sold to the public. The entire enterprise seemed to embody a vote of confidence in the economy. Twelve months later and the mood is very different. In the wake of a global economic slowdown expected increases in Suez Canal revenues failed to materialise. Tourism, foreign direct investment and remittances, Egypt’s other sources of hard currency, have also been negatively affected by global conditions, a downturn often compounded by inept economic policies.

The budget deficit reached 11.5 per cent in the fiscal year ending June 2016. Inflation climbed above 14 per cent in June, the highest in seven years, and unemployment is hovering around 14 per cent. Growth stands at 5.2 per cent, which though an improvement on the 2.5 per cent average for the past five years is still not enough to kick-start the economy.

The political discourse has changed as well with President Abdel-Fattah Al-Sisi hinting at hard times ahead. Speaking during a youth leadership forum this week he said Egyptians will be able to overcome the challenges ahead but the public must be informed about the hard times that are coming. Not that it was all gloom and doom. Al-Sisi also said good news would soon be announced, and “Egyptians will be able to acquire the dollar at a unified rate”. Lingering dollar shortages have seen the black market exchange rate touch LE13 per dollar while the official rate remains around LE9.

Al-Sisi’s comments have been widely interpreted as an endorsement of measures to be taken to restructure government finances ahead of pocketing a $12 billion loan from the International Monetary Fund (IMF).

After months of denial the government has announced it is in talks over a three-year standby agreement with the IMF worth $12 billion. Once the agreement is signed Egypt could receive an additional $10 billion from other sources, including the World Bank, the African Development Bank and affiliated international financial institutions. Ahmed Kouchouk, deputy finance minister for fiscal policies, has told the press Egypt could receive the first $2 billion of the loan within two months.

The IMF says the extent of the financing will depend on the assessment of Egypt’s financing needs and the strength of the government’s reform programme by an IMF mission currently in Cairo.

In the last five years Egypt has been close to reaching a loan agreement with the IMF on two occasions but bailed out at the last minute. This time round the political backing by President Al-Sisi suggests there will be no backtracking.

The current loan request from the IMF is four times larger than in 2011, a reflection of the $30 billion financing gap Egypt faces over the next three years.

Egypt will use the IMF loan to support its budget deficit, prop up hard currency reserves and hopefully win the confidence of the international investment community with a programme of reforms that have gained the IMF stamp of approval.

News of the negotiations met with positive reactions. The pound-dollar exchange rate, which had shot to LE13 on the black market, cooled down closer to LE12 with few transactions taking place, according to Reuters. “Securing an IMF funding deal will be credit positive for Egypt,” says Fitch Ratings, giving Egypt a ‘B’ rating with a Stable Outlook. However, Fitch warns of high implementation risks, saying the country will continue to face severe economic challenges. The agency said the IMF is likely to be “accommodating to Egyptian concerns over too sharp a fiscal retrenchment given the political risks and need for economic growth.”

The Ministry of Finance has repeated several times this week that there is no conditionality attached to the loan. The government insists the reform programme being considered is home-grown and has been approved by the House of Representatives. But will it be enough to give the economy the boost it so desperately needs?

The programme that was presented to parliament was very modest, wrote former minister of finance Ahmed Galal in an article for the daily Al-Masry Al-Youm. “When the ambition is to reduce the budget deficit by one per cent and increase growth by a similar figure, and when there is no mention of an inflation rate that the poor and middle class can live with and public debt is at 100 per cent of GDP, it is hardly a programme that leads us forward in the way we need,” he wrote.

“What is wanted is a more aggressive reform agenda and the IMF maybe the catalyst that brings this about,” Galal told Al-Ahram Weekly.

As a member of cabinet in the summer of 2013 Galal opposed borrowing from the IMF. Now, he argued in his article, “the IMF loan may not be ideal but it appears to be our only way out.”

An economist who preferred to remain anonymous agrees. “Egypt has received a lot of donors’ support but in the absence of a comprehensive economic plan to set the economy on the right track and revive investors’ confidence those resources have been used up without ever addressing the underlying problems,” he says.

Many observers are apprehensive about the social costs that will be exacted by the reform programme, as well as what the loan means for Egypt’s indebtedness.

“Some social impact is inevitable in the near term given the reform agenda will involve further removal of subsidies and cuts in what is deemed wasteful spending in order to reduce the deficit and reform public finances,” says the anonymous economist.

The government programme already provides for a value added tax (VAT) that is currently being reviewed by parliament, higher bills for utilities such as electricity and a 14 per cent cut in subsidies though it does not specify when and on which products the cuts will fall. Divesting tranches in government-owned entities in the petroleum and banking sectors is also in the cards. A more flexible exchange rate regime is also expected. “We consider that a gradual move towards a more flexible exchange rate policy focused on achieving a market-clearing rate would serve Egypt’s interests,” the IMF said in its report at the end of 2015 on regular Article IV consultations with Egypt.

These measures, coupled with a depreciating pound and a high unemployment rate, are bound to make life harder for the majority. The number of Egyptians living below the poverty line increased to 27.8 per cent of the population in 2012/2013, according to the Central Agency for Public Mobilisation and Statistics (CAPMAS).

The IMF reforms focus on restoring macroeconomic balances, explains Galal, “but it is our job to implement serious reforms aimed at stimulating sustainable inclusive growth: improving the quality of life of individuals, improving the business environment and investing in human capital.”

While the government has already put some programmes in place to protect the poor and most vulnerable — Takaful and Karama both provide cash subsidies to the neediest women, children and the elderly — and is striving to provide cheap food items, such measures are unlikely to be enough, warns Karima Korayem, professor of economics at Al-Azhar University.

“There are good intentions but the mechanisms to ensure the sustainability of these supporting measures are not yet in place.”

Korayem argues the programmes prescribed by the IMF may suit advanced free market economies but Egypt is not one of them.

“Egypt can espouse free market principles as much as it likes but its market is not mature enough to protect against monopolistic practices nor is it large enough to provide the kind of competition that guarantees the best prices for consumers,” she says.

Another point of concern is Egypt’s increasing foreign debt. Minister of Finance Amr Al-Garhi says the IMF loan will increase foreign debt to $53.4 billion, a figure he is confident Egypt will be able to repay. Galal, too, believes servicing the debt “is not a challenge, just yet”.

The anonymous economist agrees. “If the economy grows at a faster rate as planned the added indebtedness and its associated burdens should be easily managed without compromising debt sustainability.”

The real problem is with domestic debt, which has grown steadily until it has reached 100 per cent of GDP. It is important to secure a positive trajectory in which the rate of growth of public debt is slower than the rate of growth of GDP, says Galal.

To ensure the public feels improvements in macroeconomic indices filtering through to their daily life, something which did not happen in the period of growth from 2004 to 2007, the anonymous economist argues that this time round economic programmes must be structured with inclusive growth in mind and structural reforms implemented that increase incentives to create jobs. Support must be provided for sectors that are labour intensive and education overhauled with an eye on employment needs.

With interest rates of between 1.5 to two per cent borrowing from institutions such as the IMF is much cheaper than seeking to raise funds on the global market. The IMF’s stamp of approval also helps cut borrowing costs on international markets, a significant consideration given Egypt aims to tap the international bond markets for an additional $1.5 billion.

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