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Egypt: Seeking a financial buffer

Egypt looks to the IMF to provide a hedge against the negative economic repercussions of the coronavirus outbreak

Sherine Abdel-Razek , Wednesday 29 Apr 2020
(FILES) In this file photo taken on March 27, 2020 An exterior view of the headquarters of the International Monetary Fund in Washington, DC. (Photo: AFP)
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This week Egypt followed many countries and asked the International Monetary Fund (IMF) for financial support to help weather the coronavirus crisis. Talks about a deal are expected to start within days.

The IMF has secured $1 trillion in lending capacity to help it meet “an unprecedented number of emergency financing requests — from over 90 member countries so far”, according to IMF Managing Director Kristalina Georgieva.

Egypt opted to resort to the international lender less than six months after the end of its three-year agreement. The virus has placed unprecedented pressure on the economy, straining the balance of payments.

Prime Minister Mustafa Madbouli said in a press conference on Sunday that the government would use IMF financing to support the tourism industry which has been hard hit by the closure of airports in March. The cabinet last week approved a six-month debt and utilities payment holiday for tourism companies, hotels and private airlines.

“Travel restrictions have brought the country’s tourism industry, which was close to returning to its pre-Arab Spring peak, to a grinding halt,” Jason Tuvey, senior economist at the London-based Capital Economics, told Al-Ahram Weekly.

Tourism receipts are a vital source of foreign currency for Egypt. The industry accounts for just over six per cent of GDP and 4.5 per cent of total employment. Decimated by the 2011 Revolution and the aftermath of a terrorist attack that grounded a flight in 2015 killing all its passengers, tourism revenues had finally started to recover when the global pandemic hit.

The problems, says Tuvey, are compounded by a slowdown in demand for Egyptian exports, most of which go to Europe, and the downturn in global trade which is pushing down Suez Canal revenues.

The crisis is also threatening remittances from Egyptians working abroad, especially in the Gulf region which is suffering the consequences of the severe decline in oil prices. Remittances from abroad currently account for 8.8 per cent of GDP, while Suez Canal revenues provide two per cent.

The drop in tourism receipts, canal revenues and remittances translates into a current account deficit of more than $14 billion on a rolling 12-month basis, calculates Allen Sendeep, head of research at Al-Naeem Brokerage.

The situation has been exacerbated by a fast outflow of foreign investment in treasuries as investors liquidate their holdings, says Amr Al-Alfi, senior economist and secretary of the CFA Society in Egypt. According to Al-Alfi, the value of investments in treasuries has declined by half since the coronavirus outbreak.  

The pandemic is also cutting growth rate projections.

“We expect to see negative figures for the quarter ending in June and the quarter after. Part of the reason will be decline in tourism impacting on jobs and the current account. Remittances will be hit as well due to lockdowns across the Gulf,” Charles Robertson, chief economist at Renaissance Capital, said during an online conference call on the Egyptian economy held last week.

Robertson added that it is widely assumed GDP will slow down to two to four per cent from the government’s initial guidance of 5.6 per cent in the current fiscal year, and then another two to four per cent in the fiscal year that follows.

“IMF support is important during these exceptional circumstances to maintain the stability of Egypt’s economic indicators and guard against negative effects that could hinder its ability to return to economic growth,” IMF’s Georgieva said in a statement commenting on Egypt’s application for assistance.

“We fully support the government’s aim to safeguard the significant gains made under the successfully completed three-year Extended Fund Facility last year,” the statement added.

Having successfully implemented tough fiscal reforms within a short span of time under its previous deal with the IMF, Egypt has an advantage over other countries applying for IMF support, says Sandeep.

“Egypt enjoys strong support from the US, the UK and the Gulf, meaning the debt crisis issue is hardly relevant despite Egypt’s high level of debt,” Renaissance Capital’s Robertson said in last week’s conference call. He pointed out that the fact Egypt’s economic outlook was not downgraded by S&P last week will stand Cairo in good stead in its IMF application.

Despite the economic turmoil wreaked by the pandemic, Egypt is in a stronger position than when it asked for assistance at the end of 2016.

“A combination of stronger exports and weaker imports, attributable to the effects of the 2016 devaluation as well as a marked improvement in the energy trade balance, has supported a narrowing of the current account deficit,” notes Tuvey.

Egypt’s international reserves may have declined by $5 billion last month but their current level of $40.1 billion is triple that in 2016 and, according to Central Bank of Egypt Governor Tarek Amer, “sufficient to cope with the impact of the epidemic for one or two years”.

Like most countries looking for a bailout, Egypt has asked for emergency financing via the IMF’s Rapid Financing Instrument (RFI) which allows the government to address any immediate balance of payment needs and support the most affected sectors and vulnerable groups of people. But Egypt is one of the few countries to have also begun negotiations over a traditional Stand-By Arrangement (SBA) to “support its strong set of macroeconomic policies”.

The total value of the assistance is yet to be revealed. While Capital economics expects that Egypt’s total support under both the RFI and SBA could amount to $15 billion, “which would be enough to cover Egypt’s external financing needs for around a year”, most local analysts anticipate a lower figure.

In a commentary issued on Monday Radwa Al-Swaify, head of research at Pharos Security Brokerage, suggested Egypt would seek around $3 to $4 billion from the IMF.

Sandeep estimates that Egypt is eligible for $2.85 billion under the RFI and $4.15 billion under SAB arrangements, and repayments would start between 3.25 and five years from the date of disbursement. Egypt has yet to begin repayments on the $12 billion already disbursed by the IMF.

The stock market reacted positively to the IMF application, gaining 2.5 per cent on Sunday and ending flat on Monday. The value of transactions on the two days came in at 53 and 51 per cent more than the previous 90-day average, according to online news outlet Enterprise.

“The news came at a time when the market is optimistic that lockdowns will be relaxed in Egypt post-Ramadan, triggering a gradual recovery during the summer,” says Al-Swaify.

Whereas the emergency funding provided via the RFI does not come with conditions attached, the SBA does.

“The IMF’s to-do list for Egypt is unlikely to be as long as it was in 2016. The focus is likely to be on ensuring the authorities do not repeat past mistakes and implement policies that threaten macro stability once the current crisis is over,” says Tuvey.

He expects the IMF’s main concern to be the exchange rate, and the prioritising of structural reforms. There was little progress on the latter under the previous programme, says Tuvey. “Steps were taken to improve the business environment but the privatisation programme stalled and land reform got nowhere.”

A deal with the IMF covering technical assistance on non-financial structural reforms has been on the table since Egypt completed its $12 billion Extended Fund Facility arrangement last year. Egypt signed the $12 billion Extended Fund Facility, under which its currency was devalued by half, a value added tax was introduced and fuel subsidies were slashed, in November 2016.

*A version of this article appears in print in the  30 April, 2020 edition of Al-Ahram Weekly

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