Egypt: Economic balancing act

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Egypt’s government is working to obtain support for a new economic reform package it has prepared to qualify for a $3.2bn loan from the International Monetary Fund (IMF), though it may be a difficult task to convince opposition leaders and the public to back the plan.

On February 8, Faiza Abu El Naga, the minister of planning and international cooperation, announced that the government had completed drafting its long-awaited programme of economic reforms required by the IMF as the basis for any agreement on a funding deal. However, the plan still has to overcome one more major hurdle before it can be formally submitted to the IMF for consideration, the minister said.

“It was decided that this programme would be presented for a public debate and that the IMF would be notified when the programme gets finalised,” she said. “Then the technical delegation would be invited to resume the second stage of talks.”

The IMF has said it wants broad-based agreement within Egypt before it will release funding, though consensus may be hard to come by. The government of Prime Minister Kamal Al Ganzouri will have to tread a very fine line between implementing austerity measures that the IMF requires in return for a bail out and widespread demands from the Egyptian public for wage rises, relief from inflation and increased social support.

The Muslim Brotherhood’s Freedom and Justice Party (FJP) has already said it will closely scrutinise the economic programme and will reject it if it does not find it satisfactory. The largest single block in the new parliament, FJP’s elected representatives will be required to vote on any such loan agreements.

The government is already under pressure from protestors calling for the pace of democratic and economic reforms to be stepped up. However, with both fiscal reserves and revenue falling, it is in no position to make significant increases in spending. Conversely, if it fails to present the IMF with a convincing economic programme, one that may include reductions in some state subsidies, Egypt may not qualify for the international assistance it is seeking.

In mid-February, Gerry Rice, the director of external relations at the IMF, said Egypt, with the assistance of the IMF, had made progress towards shaping a support package that was intended to safeguard macroeconomic stability, and create conditions for a recovery and inclusive growth. However, some further steps still needed to be taken before an agreement could be completed, he said.

“In terms of where we stand now, the technical work toward possible IMF assistance is continuing and will continue in the coming weeks as the authorities finalise their programme, reach out to garner broad political support in Egypt and mobilise the international financing that is necessary for that,” Rice told a press briefing in Washington.

Developing an economic programme that is acceptable to both the IMF and the electorate is taking on greater importance as time passes. In the early days of the 2011 revolution, many donors offered to support a post-Mubarak Egypt but Cairo has complained that few have delivered. On February 8, the prime minister told a press conference that many potential donors were waiting to see the outcome of talks with the IMF.

“Arab and Western countries have tied their assistance to Egypt to an agreement with the IMF,” he said.

Another cause for urgency is the rapid shrinking of Egypt’s foreign currency reserves, which over the past 12 months have fallen from around $36bn at the beginning of 2011 to $16.3bn at the end of January 2012. According to some, this has reduced coverage for imports to around three months.

Uncertainty over the country’s economy and its ability to pay its debts have pushed up Egypt’s borrowing costs, with the Ministry of Finance having to offer a record-high yield of 15.92% on a nine-month bond and treasury bill it floated in early February. Even with this, take up on the offer was only lukewarm, with final sales 31% lower than the targeted total.

Some estimates put Egypt’s external funding requirements at up to $12bn over the coming 18 months, a figure it may struggle to achieve if the global economy slips back into recession. This would require greater calls for assistance from other indebted countries at a time when donors may be forced to tighten their purse strings.

“The biggest concerns of the banking sector and the general economy are the sovereign risk and free fall of reserves,” said Francois Edouard Drion, the managing director and senior country officer of Credit Agricole Egypt. “The budget deficit, balance of payments and FDI are all key indicators which are worrying. The IMF loan should set a solid standard for international investors to enter the market and boost confidence.”

There is at least some relief in sight, however, with the World Bank in the process of negotiating a $1bn loan and the African Development Bank also set to open talks on advancing the government a further $500m. While such support will help stabilise the current situation, pushing down Egypt’s borrowing costs and restoring investor confidence, it will be some time before a full recovery takes hold.

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