IMF deal a 'lifeline' for Egypt but long-term impact unclear, economists say

Mariam Mecky , Friday 12 Aug 2016

The International Monetary Fund head of delegation for Egypt, Chris Jarvis (L), Egypt’s Minister of Finance Amr al-Garhy (C) and Central Bank of Egypt chief Tarek AmeR (R) attend a joint press conference in Cairo on August 11, 2016 (AFP)

Egypt and the International Monetary Fund announced Thursday that they had agreed on an initial financing accord, and many economists agree that the reforms it will entail are inevitable in order to boost the economy.

But to what extent the deal will be helpful in the long-term is nevertheless contentious.

Egypt and IMF reached a staff-level agreement on a $12 billion fund facility over three years which is expected to be approved by the fund's executive board in the coming weeks. 

Hany Genena, head of research at Beltone Financial, argues the loan is indispensable, as without it Egypt's economy would reach a "catastrophic state of recession."

Agreeing with Genena, Hany Farahat, senior economist at CI Capital, calls the deal a "lifeline" for Egypt.

"The impact of the loan is inflationary on the shorter term but it guarantees higher stability over the longer term which is what we need," he said. "I would rather bite the bullet on inflation over the short term, in return for long-term stability of prices and better micro-dynamics than continuing with the status quo."

"We are in desperate need for that loan not because of the funding itself but because we need a vote of confidence in our reform programme following five years of instability. This is what investors want to hear," Farahat added.

Egypt relies heavily on imports to feed its 91-million population, and has been suffering from an acute foreign currency shortage since the 2011 revolution and following unrest, which have spooked investors and tourists.

According to the IMF, the reform programme "aims to improve the functioning of the foreign exchange markets, bring down the budget deficit and government debt, and to raise growth and create jobs, especially for women and young people. It also aims to strengthen the social safety net to protect the vulnerable during the process of adjustment."

Amr Adly, a non-resident scholar at the Carnegie Middle East Center, said that even though these "austerity measures" are inevitable in all cases with the IMF loan or without it, "such as the currency devaluation", the benefits of the deal over the longer term amid risks of global economy recession are not guaranteed.

However, he said that loan may improve the indicators of the macro-economy such as decreasing inflation and stabilising the currency.

'No alternative'

It is not the first time Egypt has reached a staff-level agreement with the IMF; a previous occasion was in November 2012 for $4.8 billion dollars.

However, the talks were stalled due to the lack of consensus among political parties after several economists criticised the pre-conditions such as phasing out subsidies and implementing the value-added tax (VAT). Thus, the loan did not come through.

"It is a different case than the case of 2012. The IMF is confident that the current government will push through these reforms that it planned," Farahat said.

"The likelihood of having a full final agreement is much higher."

Since July 2014, Egypt has embarked on a fiscal reform programme in an attempt to curb the growing state budget deficit -- estimated at 11.5 percent of GDP in 2015/16 – that has included cutting subsidies and the introduction of new taxes, including the VAT planned for implementation in September of this year.

The government decided to slash its total subsidy bill in the current 2016/17 budget, which began in July, by 14 percent compared to the last fiscal year’s bill, estimated at EGP 154 billion.

"On the parliament level, I met some parliamentarians who said that we need this loan in such circumstances... They also said that it’s more important to see the political commitment to execute not only the loan’s conditions but reforms on a deeper level," Genena said.

On foreign investments, he speculates that the loan would increase foreign debt in the short term, but would also increase foreign investment in the long-run.

"This accord requires flexible exchange rate and reducing budget deficit, which especially the latter is a great concern for investment. The IMF accord focuses so much on reduction of budget deficit. Hence this loan would increase foreign investment," he added.

Speaking about the currency, Genena said that there will be imminent devaluation, referring to it as a floating currency rate or depreciation, in the third quarter of the year, as the central bank is expected to do it to prove to the IMF that Egypt will not use up its currency reserves propping up the pound.

"There is no other alternative," he explained.

In an op-ed in Al-Shorouk newspaper last week, economist and former deputy prime minister Ziad Bahaa-Eldin said the state should "change its economic approach, so it’s not just a matter of taking on more foreign debt and further burdening the middle and poor classes without a genuine improvement in economic management."

The central bank already devalued the local currency by 13.5 percent to register EGP 8.78 to the dollar in mid-March, but the devaluation has not crushed the burgeoning black market. 

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