Hussein Choucri, Chairman and Managing Director, HC Securities & Investment, on Egypt and the IMF

Hussein Choucri, Chairman and Managing Director, HC Securities & Investment

The government of Egypt started negotiations with the IMF more than a year ago during Samir Radwan’s term as Minister of Finance. The negotiations continued under his successors, halting and restarting, because of disturbances in politics and national security. In addition, leadership in the Egyptian administration was not fully convinced of the need and necessity to go through with such borrowing. Recently, the Minister of Finance announced that the IMF halted discussions with the government out of concern that there were no political or broad consensuses in society for concluding the agreement. The IMF also harboured concern of repeating the Greek experience after several political parties reneged on their previous acceptance.

There is a broad understanding that Egypt has a budget deficit of LE145bn ($24.3bn). Egypt is also suffering from deterioration in foreign exchange reserves, which declined since the revolution by around LE21bn ($3.5bn), due to foreign portfolio outflows. To finance the deficit, the government relied mainly on borrowing locally in Egyptian pounds through the issuance of Treasury bills and government bonds. To avoid the crowding effect to the private sector, the Central Bank, in a successful move, twice cut the legal reserves of commercial banks to inject liquidity in the market.

Borrowing from abroad in foreign currency is not recommended most of the time. However, Egypt is going through unusual events, which makes borrowing from the IMF of paramount importance. In addition to providing funding to finance the deficit, borrowing from the IMF is considered a positive marker for donor countries and private international financial institutions, which are watching Egypt closely for economic developments, in search for any positive indication to resume their investment activity.

Many point to Turkey’s economic success in the past 10 years as a viable example for Egypt. Turkey faced a severe economic crisis at the end of 1999 and early 2000 which almost brought about the near-failure of the Turkish banking system and bankruptcy of several banks and companies. Inflation soared to over 100%. The Turkish lira collapsed against foreign currencies to a point that the lira exchange rate changed daily. To resolve the crisis, Turkey had to resort to an IMF loan and signed up for technical assistance in restructuring its economy. In 2000 the IMF set up an office in Turkey which stayed for several years, until Turkey was able to overcome its economic problems. Today Turkey is a magnet for foreign investment and is considered a model for efficient economic management.

Emerging countries in Latin America have also obtained financial assistance from the IMF. It is important to note, however, that borrowing from the IMF is not restricted to emerging countries, but also includes industrialised countries. The most important example is the UK, which in 1976 faced economic problems including a runaway budget deficit and severe deterioration in the currency. The UK central bank had to increase interest rates substantially to protect the pound and asked the IMF for assistance. The IMF granted a loan of $3.9bn, which was at the time the largest loan ever granted by the IMF. The UK government started reducing the deficit, as obligated by the conditions set forth for receiving IMF assistance, using a partial draw-down of the loan. This led to a gradual improvement in UK economic indicators and appreciation of the pound. The UK economy improved and the government did not have to withdraw the remaining part of the loan.

It is unfortunate that the government of Egypt missed the opportunity to make an agreement with the IMF at the beginning of the revolution, because of the misapprehension that an IMF loan would mark some kind of succumbing to foreign influence. An agreement with the IMF would have been much easier to reach when Egypt’s economic indicators were more positive.

It is important that Egypt is given the time to regain its balance so that direct and indirect investments can start flowing inward again. Egypt’s foreign currency reserves had previously accumulated because of foreign investors and their confidence in investing in Egypt.

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Hussein Choucri

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The Report: Egypt 2012

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