Thursday,23 November, 2017
Current issue | Issue 1312, (22-28 September 2016)
Thursday,23 November, 2017
Issue 1312, (22-28 September 2016)

Ahram Weekly

The IMF road to recovery

Participants at this week’s Euromoney Conference in Cairo stressed the importance of the IMF loan as an important step on the way to economic recovery, writes Nesma Nowar

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Al-Ahram Weekly

Egypt’s application for a loan from the International Monetary Fund (IMF) received the lion’s share of attention at the 21st Euromoney Conference held in Cairo this week.

The loan’s benefits, conditionality and impact were all pressing issues at the conference, with Minister of Finance Amr Al-Garhi saying there were no conditions attached to the loan as the IMF had approved Egypt’s “home-grown economic reform programme”.

Egypt and the IMF reached a preliminary agreement in August for a $12 billion funding facility over three years.

“Our real challenge is to commit to achieving what we have presented to parliament, which is to bring down the budget deficit to less than 10 per cent,” Al-Garhi said.

The current economic situation is harsh, with a gaping budget deficit that reached 11.5 per cent in the fiscal year ending in June 2016 and soaring inflation rates that climbed above 14 per cent in June, the highest in seven years.

Unemployment is hovering around 14 per cent and growth stands at 5.2 per cent. This is an improvement on the 2.5 per cent average over the past five years but is still not enough to kick-start the economy.

Al-Garhi said the current economic situation was the result of what had been happening in the five years after the 25 January Revolution of 2011.

He said that in these years Egypt had seen less economic activity with a growth rate of 1.2 to two per cent accompanied by an increase in public spending with no revenues generated in return. This had led to an increase in public debt to finance the expansion in spending.

There was a double-digit budget deficit “that we cannot continue with,” Al-Garhi said.

He said the government had introduced the economic reform programme as a way of curbing the deficit, and this had been approved by parliament. The IMF loan was an important part of this reform, though “we have to work hard to get tourism back and address other economic issues,” he said.

The tourism industry has been hard hit by the downing of a Russian airliner over Sinai last year that caused Russia, the UK and other countries to halt flights to the Red Sea resort of Sharm El-Sheikh. As a result, the number of tourists visiting the country in the first half of 2016 dropped by 50 per cent compared to the same period last year.

While the IMF loan could be a lifeline for Egypt’s economy, many fear that it will adversely impact the country’s poorer people who are already under strain because of the rising cost of living following the revolution.

The endorsement of the new value added tax (VAT), approved by parliament this month and now in effect, is widely believed to be related to acquiring the IMF loan.

However, Al-Garhi said the VAT had a long exemption list of 56 items, including the majority of foodstuffs and services like healthcare, transportation and education.

The negotiation of the IMF loan has also sparked fears of an imminent devaluation of the Egyptian pound. Egypt is expected to devalue the pound again in order to prove to the IMF that it will not use its currency reserves to prop up the currency.

Tarek Tantawi, deputy CEO of CI Capital, said that receiving the IMF loan would mean that Egypt was heading towards a more flexible foreign exchange regime and that there would be an imminent devaluation of the pound to reflect its real value.

“We believe that devaluation will happen before the end of this year, and we expect the pound to stand at LE11.5-12 against the dollar,” Tantawi said.

In March, the Central Bank of Egypt (CBE) devalued the currency by 14 per cent to LE8.78 per dollar. The CBE has since been keeping the pound artificially strong through its weekly dollar auctions.

Egypt has been grappling with a foreign currency shortage after the political instability in recent years strained its foreign currency earnings. The crisis became graver when tourism receipts fell sharply after the downing of the Russian plane.

It has negatively affected businesses in Egypt, which have had difficulty acquiring dollars and transferring foreign currency out of Egypt.

Dutch airliner KLM announced recently that it would suspend its services to Cairo in January 2017 as a result. The company said the devaluation of the pound and the CBE’s decision to impose restrictions on the transfer of foreign currency had had a negative impact on its results.

Experts at the conference this week concurred that the IMF loan alone would not be enough to address Egypt’s pressing economic problems. But they said it could work as a “catalyst” for reforms to start happening.

They said that receiving the loan would show that Egypt had the political will to pursue economic reforms and encourage investors to invest in the county. The government was responsible for implementing the reforms, which though perhaps unpopular were necessary for fiscal reform.

Egypt embarked on a fiscal reform programme in 2014 in order to reign in the gaping budget deficit, and this included cutting subsidies and the introduction of the new value-added tax.

In a poll conducted at the conference, 80 per cent of participants said that the IMF loan would be good for Egypt, while 20 per cent said it could be bad.

The loan has yet to be approved by the IMF’s executive board. Al-Garhi told the daily Al-Mal this week that approval was expected by the end of September or by 9 October after the IMF’s annual meeting. He added that Egypt had already secured the financing required for its reform programme in order to receive the first tranche of the loan, worth $2.5 billion.

IMF Egypt mission chief Chris Jarvis said Egypt should secure around $5-6 billion from bilateral creditors before the programme is brought to the IMF board in order for the international lender to be sure that the programme is fully financed.

Earlier this month, Egypt received the first tranche of a $3 billion World Bank loan worth $1 billion. Egypt will start talks with China over a $2 billion loan next week and plans to issue international bonds in October or November, Deputy Finance Minister Mohamed Meait told Reuters on Monday.

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