Egypt reached a preliminary agreement with an International Monetary Fund delegation Tuesday, putting into action the disbursement process for a US$4.8 billion loan from the fund that has been more than a year in the making.
The announcement is the closest the country has come to securing the loan, with officials saying it indicated a path out of the economic crisis.
Though the initial reaction from analysts may be a positive one, most agree the exact economic program presented by the government, as well as its implementation with support from the public, are the key to any real and sustainable economic recovery.
Officials said the details of the fund-approved economic reform plan will be released Wednesday, though IMF officials described its main components.
“The Egyptian authorities have developed a national program that seeks to promote economic recovery, address the country’s fiscal and balance of payments deficits, and lay the foundation for rapid job creation and socially balanced growth in the medium term,” Andreas Bauer, IMF Division Chief in the Middle East and Central Asia Department, said in a statement marking the end of the delegation’s visit.
IMF officials called the first step “a staff-level agreement” for a 22-month standby arrangement in the amount of about $4.8 billion, which would support the implementation of a broad economic reform plan aimed at reducing the country’s ballooning government deficit.
The budget deficit currently stands at 11 percent of the gross domestic product.
Officials have previously said the loan would be administered with the interest rate of 1.06 percent, with no additional fees.
The IMF loan and the government’s economic reform plan have been issues of contention for Egypt and its transition governments.
Mention of a $3.2 billion IMF loan was first heard in June last year, when IMF officials said Egypt needed the funds to promote social justice and jumpstart an economic recovery.
In the following months, Egyptian officials approached the fund twice to see about securing the loan, but negotiations stalled, either because of a lack of popular support or the government’s failure to draw up a reform program.
“We are happy that the IMF is supporting our program at this stage,” Planning and International Cooperation Minister Ashraf al-Araby told a news conference with the head of the IMF delegation, Andreas Bauer, and other IMF officials Tuesday, according to Reuters.
The loan has been touted as a stamp of approval on the government’s budget, and is hoped to usher in a return of foreign investment.
“A signing of the IMF agreement will signal to investors that government officials will commit to necessary fiscal reforms,” Tarek Shahin, Africa investment specialist at UK-based Investec Asset Management, says. “The fiscal strains of the national budget dictate a narrow range of imperative policies, and the IMF loan supports these measures, which are now likely to be a matter of course, irrespective of the politics.”
Nasser Saidi, former Lebanese minister of economy and trade and a Dubai-based economist, concurs.
“This initial agreement with the fund will provide a welcome signal to Egypt’s [foreign exchange] and credit markets, easing pressure on the exchange rate and the balance of payments, as well as easing borrowing terms and conditions,” Saidi says.
The agreement was no surprise for most experts, many of whom say the real news will be tomorrow’s release of the details of the economic reform program and the IMF’s final approval in December.
Wael Ziada, head of research at investment firm EFG Hermes, says that if the loan is approved then, he expects the market to respond positively. He points to the EGX 30 gains made just after the announcement of IMF agreement on Tuesday, before the market closed.
However, the benchmark index still ended the day down 0.07 percent.
Ziada expects the details of the government program to likely explain the lifting of subsidies and other budget deficit reducing measures.
Araby, the planning minister, has said the details would be posted for the public on a government website.
“I hope it will be a clear road map,” Ziada says.
He downplays fears that the reform plan would include severe austerity measures.
“It’s a very broad term,” he says. “Austerity in Egypt might not be the same as austerity in Greece, and restructuring fuel subsidies is not austerity.”
In his statements, Bauer said the program consists of more efficient targeting of the poor in Egypt’s subsidy program, the implementation of a progressive income tax system, and levying a broader value-added tax rather than the country’s current sales tax.
He projected that the reforms, if implemented should reduce the budget deficit from almost 11 percent in 2011/12 to 8.5 percent of the GDP in 2013/14.
“The envisaged deficit reduction will help alleviate the public debt burden and free up financing to support social spending and private sector growth,” Bauer said.
To ensure the program’s success, Bauer said, the reform measures would be accompanied by strong financial management, and transparency and accountability of the public sector operations.
Bauer also implied that, under the reform program, the value of the Egyptian pound would be allowed to fall in accordance with market pressures and interest rates would be adjusted to avoid inflationary pressures.
“Monetary and exchange rate policies will be geared toward ensuring declining inflation over the medium term,” he said.
A lower pound could increase Egypt's international competitiveness, Bauer said, stimulate trade and attract capital inflows, increasing international reserves to protect against external shocks.
Shahin says plans to reform subsidies and “other areas of state inefficiency” have been in the works for years, “but the current government should have more success because it has a reasonable popular backing, even if there are changes in its formation in the interim.”
After the initial positive reaction, Saidi says that the real effect of the loan will “depend on effective implementation of measures to reduce and rationalize subsidies, which are a major burden on the budget and are not targeted on the poor.”
Some experts worry that for all the IMF and the government’s talk about social justice, they are adopting a reform plan that will hurt the country’s poor the most.
“Without real control of the prices of cement, steel and fertilizer, these measures will affect the ordinary life of the poor,” says Salwa Antary, economist and head of the Egyptian Socialists Party Economics Committee.
She expects the government will take the loan, and in doing so will commit to a reform plan without taking into account the humanitarian cost of some of the budget-reducing efforts. It is, Antary says, “the recipe of the IMF,” and it could spell serious trouble for President Mohamed Morsy’s government.
“At the end of the day, the regime and government don’t give a damn about popular opposition,” she says. “The poor had high expectations at the arrival of the Muslim Brotherhood to power, and when they realize that it’s them who will be affected, I expect there will be an explosion.”
Araby, however, says the economic program “would achieve social justice, and targets those on limited incomes.”
Just last week, several hundred protesters marched against IMF loan negotiations. Participants included the Popular Campaign to Drop Egypt’s Debt, the Strong Egypt Party, the Popular Current and the April 6 Youth Movement.
A day before, the 17 groups organizing the protest sent a letter to Prime Minister Hesham Qandil and IMF head Christine Lagarde stating their opposition to the proposed loan, and what they expect will be harsh measures imposed as conditions by the IMF.
They chanted against what they described as “economic colonialism” and against all sources of foreign credit. Many were protesting the government’s lack of transparency throughout negotiations with the IMF and its failure to find alternative solutions to the country’s desperate economic problems.
Reining in popular support may not be high on the agenda before the deal is actually sealed; however, it could easily become an issue at the implementation stage if the reform plans do not sit well with the general public, or do not have the desired effect on the economy.
“More important will be the ability of the government to convince the private sector to invest and create jobs,” Saidi says.
Egypt’s unemployment rate topped 12 percent in the second quarter of 2012.
“The new government and authorities will need to invest in generating credibility in their program and policies...The markets will be testing the government through its actions and effectiveness, not merely announcements and signing agreements,” Saidi adds.
This piece appears in Egypt Independent’s weekly print edition.