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IMF and Egypt edging nearer on loan deal: Interview

On the eve of the IMF's latest visit to Cairo, Ahram Online sat down with Masood Ahmed, the fund's Middle East director, to discuss the key issues regarding a $4.8bn loan for Egypt

Ezzat Ibrahim in Washington DC, Tuesday 30 Oct 2012
Could this week's IMF visit be the final one before a borrowing deal is made? (Photo: Reuters)
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An International Monetary Fund delegation is due to arrive in Cairo on Tuesday for the latest round of negotiations with the Egyptian government over a long-awaited and controversial $4.8 billion-plus loan.

On the eve of the visit, Ahram Online sat down in Washington DC with Masood Ahmed, director of the IMF's Middle East and Central Asia department, to get some idea of what will be under discussion in the coming days.

Ahram Online: Egypt's political uncertaintly has impacted efforts to agree a loan. Why is the IMF sending a technical team now?
Masood Ahmed: The IMF has been ready to work with the Egyptian authorities from the very first day after the revolution. 
As you may recall, about a year and a half ago, in May or June 2011, we did reach agreement on a programme that was put together by the government and which we were ready to support. 
But then the government and the military council [which ruled Egypt from February 2011 - July 2012] decided that they did not want to go ahead with the loan ... partly because they felt they could cut expenditures rather than borrow. We said "we are ready to work with you at any time."
After the election of President Morsi there was a government in place and the Managing Director of the IMF visited in August. 
At that time the president and the prime minister asked the IMF to support them now. As a result, we have said that as soon as the Egyptian authorities have a[n economic reform] programme ready we'll send a team.  
They now say they have a programme ready, so our team is ready to go.
AO:  Have you received any details of Egypt's economic reform programme?
MA:  I think they're still working out some of the details, but the broad outlines of the programme have been clear. They have already been explained, I believe, by the Egyptian authorities to the people, and they are essentially to deal with two kinds of challenges.  
The first challenge is that Egypt has been hit by a crisis  -- a crisis that is partly an international one.  The world economy has slowed down. That has affected tourism, it has affected the demand for exports, but also because of the domestic political transition. 
There has been an impact on confidence on economic activity inside Egypt. As a result, we have seen a rise in the government's budget deficit. 
The interest rate they are paying to borrow money locally has also gone up quite dramatically, from nearly 8 per cent in 2010 to as high as 15 to 16 per cent [in recent months]. 
Now it has come down a little bit. The government is borrowing more and it's paying more to borrow, so this is putting pressure on the budget. One of the things that the programme will have to do is address this pressure.
The second big part of the programme is the idea of moving forward.
It's not just to solve the immediate problem, but to create a better economic future for all Egyptians which means to move to a growth rate that is going to be higher but also more inclusive.  
[By that I mean] growth that creates more jobs and whose benefits are shared more broadly, not just held by a few people. 
This will mean improving the competitiveness of the economy and allowing small businesses more access to credit so they can grow, because most jobs will come from smaller enterprises. It will also mean improving the effectiveness with which the public money is used.  
AO: Some in Cairo criticise the social aspects of IMF policy, including the conditions placed on policites to qualify for a potential loan. How do you answer them?
MA: Let me answer it in two parts.
The first thing is that the budget deficit has become very large. In the end this will be paid by Egyptians today and Egyptians tomorrow. The budget has to be cut.  That is just a reflection of the economic reality.  
But what the IMF is focused on is how it should be cut in a way that minimises the impact on growth and protects the poor.
Let's take one area which is very much in discussion nowadays in Egypt and also in many parts of the region. The subsidies that the government has been providing in Egypt and elsewhere on petroleum products are a big reason why the budget deficit has become so large.  
Everybody recognises that you have to tackle this problem.  But as you tackle the problem of subsidies, you have to do it in a way that protects the poor.  How can you do that?  
The first thing that we have to recognise is that the current system of subsidies is actually benefiting the rich much more than the poor. The people who are consuming petroleum products like Octane 95 for the SUVs are not ordinary people. They are people who can afford it.  
The hotels that are getting subsidised electricity are easily able to afford to pay the real price. 
That's why what we say in the IMF is that, yes, you must reform and cut back subsidies, but you must do it in a way that protects the poorest people.  
What the IMF loan can do is slow the pace of adjustment by giving some additional financing which helps to spread it out.  
Also by borrowing from the IMF, you don't have to borrow so much money from the local banks. If you don't borrow that money then banks can loan instead to small businesses are having problems borrowing at very high interest rates.  
If the government is borrowing less from the banks, the rate of interest will also begin to go down, confidence begins to improve and that money can go to the small businesses.  That also helps job creation.
AO: Do you have any projections on how much the deal with affect the flow of direct investment to the country?
MA: No, we don't have. It's very hard to say because it depends on how quickly the confidence is restored. 
But what we can say is that when you talk to investors outside, they were investing a lot of money into Egypt until 2010. Investment went from being a very large inflow to a negative number and now it's more or less zero.  There is a big potential even a small recovery going back to the -- even if you reached half the level of 2010 in a year or two, you can have a lot potential.  
The Egyptian economy has a lot of potential.  It's important, as we are focused on the short-term problems, not to lose sight of the fact that the Egyptian economy has a lot of medium-term potential.  It has a strong tradition of a manufacturing and services sector.  It has a diversified industrial structure.  It has a strategic location.  It has a qualified entrepreneurial class.  
All of these factors mean that an economy of 80 million people sitting where it does should be able to attract a lot of investment.  And people have a tradition of investing in Egypt, so it's not a new market for them, but they are waiting for this confidence to resume. 
They feel that if the IMF is there, maybe that means the macroeconomic framework is consistent, that there is a set of policies that will help Egypt to move forward. But ultimately confidence comes from policies.  
AO: The IMF director has said the Fund is not a charity and that any country should meet its conditions. What if Egypt fails to do so?
MA:   Our conditions we have said from the beginning are three types.  First, any programme that is put together has to address the challenges that Egypt is facing.
That means that the policies in the programme have to deal with the issue of how do you make the budget.  How do you improve the competitiveness of the economy?  
The policies have to deal with the real problem, and Egypt is facing some substantial economic problems in the short-term .. so they have to be bold and choose policies that will address those issues. 
Second, we have said that for us to be able to support a programme, we have to be that convinced that the measures will achieve the objectives.  
The second condition that we have said from the beginning is that the programme has to reflect broad ownership within the country... the precise policies chosen have to come from within the country.  
The policies have to come from within Egypt rather than the IMF arriving and saying you must raise this tax, you must cut that subsidy.  We are not better placed than the Egyptians are to do that.  They have to make those choices.  But we also meant that the program has to be developed by the Egyptian authorities. It has to be presented and explained to the Egyptian people and has to have the support of the leadership.  
To be effective the programme also has to have enough financing. We are providing some of the financing, but the rest will come from other sources, including some of the countries in the region,
AO: To what extent will US debt relief plans for Egypt affect your decision?
MA:  When there is a programme that addresses the challenges and is broadly supported in the country, with financing available, then the IMF will be ready to go.  
Our role in Egypt is not just to help them get through the immediate problem, but also to support a programme that will make the future better than the past. 
AO: Still some critics are insisting that the IMF is applying the same old criteria when it comes to social policy.
MA:  The IMF of course is an external institution which has a relatively narrow focus.  We do macroeconomic and macro financial budgets. Societal transformation which is to change the functioning of society, first of all, it's a very broad issue well beyond the mandate of any international institution.  
Secondly, the force for this, the impulse for this, has to come from within societies and that's what you are seeing today in Egypt.  
There is a discussion of these issues.  There is a questioning of the model.  There is a discussion of what are the ways in which we can ensure that the future is going to be different.  
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