Egypt is moving ahead with talks over a standby loan agreement with the International Monetary Fund (IMF) pending an updated national economic programme that guarantees key reforms will be successfully implemented to pave the way for growth, an IMF official told Ahram Online.
Whereas Tunisia sealed a $1.7 billion deal with the fund last week, Egypt is now on its third attempt to conclude its own $4.8 billion IMF loan agreement.
Previous stats on the budget deficit and the soaring subsidies bill became outdated after disruptive politics forced post-revolutionary governments to suspend two previous agreements.
Now finance officials on both sides are busy aligning numbers and forecasts. Once the IMF receives the data it will verify and analyse it to ensure the Arab world’s most populous country can meet its target reforms and qualify for the loan.
“We and the Egyptian authorities are working to make sure we have the most recent data to design a programme which will be successful in its implementation,” Masood Ahmed director of the IMF’s Middle East and Asia department told Ahram Online at the fund’s Washington headquarters.
“As time goes on, the economic situation changes and the numbers move. The data at the time when we reached the earlier agreement is no longer relevant,” said Ahmed.
“We need to look collectively with the Egyptians at the recent data to make sure that what we are basing the programme on reflects the most complete information available.”
Egyptian officials are concluding a new package with updated figures and new deadlines for implementing reforms to present the IMF for review before sealing the deal. IMF officials including Ahmed and mission chief for Egypt Andreas Bauer held a follow-up teleconference call with their Egyptian counterparts earlier this week.
According to one Egyptian official, who requested anonymity, the new package currently being finalised will not include any new measures but will offer the most recent figures on the status of the country’s economy.
“Speed is of the essence as we do not have the luxury to kickstart reforms on subsidies and taxes slowly, gradually,” he said. “What is important is that we explain to people what is happening and ensure that it process is smooth and efficient.”
An agreement would shore up Egypt’s depleted foreign reserves, pave the way for more aid from donor countries and boost investor confidence.
To qualify for the loan, however, Egypt is in for some serious belt-tightening. It must introduce a string of austerity measures that include lifting energy subsidies that eat up a fifth of the country’s budget, and raising sales tax on select items to broaden the tax base.
With a slow growth rate of 2 percent annually and a high level of unemployment, the government has been reluctant to impose any of these fiscal measures, fearing a popular backlash in the chaotic return to the free market.
Egypt is seeking the IMF loan to narrow its widening budget deficit, which reached 10.8 percent of GDP in 2012. Because of delays in implementing fiscal measures, it is likely to miss its target deficit reduction for the year ending June, with the deficit expected to reach 11.5 percent of GDP verses the 10.4 targeted previously. The government has said it to reduce the gap for the year 2013/14 to reach 9.5 percent of GDP.
Negotiations and challenges
Political instability and the presence of multiple voices in a burgeoning post-Mubarak democracy have held back the pace of negotiations on the much-needed loan. Egyptian officials of various capacities and varying degrees of economic know-how have often come up against each other because of gaps in experience and approach.
Others have faced resistance from lawmakers at the Shura Council, currently Egypt’s only legislative body, which on Monday postponed studying a tax law draft the government has submitted and which lawmakers said was missing data.
A handover of financial expertise from long-standing Mubarak-era officials to those from the now-ruling Muslim Brotherhood is still in force. Government officials close to the negotiations with the IMF have expressed frustration over the decision-making process, specifically the speed of implementing reforms and who would be responsible for implementation.
Asked about delays in the past, Ahmed said that the IMF has always dealt with a core group of interlocutors who have been “diligent and cooperative” in working towards finalising an agreement. But he added that the challenge was for a new government like Egypt’s to gain the trust of the public and commit to fairly implementing reforms.
Delays have also been partly an outcome of the IMF adopting a new approach to negotiations, which no longer simply rely on government authorities but now involve outreach to opposition groups and the general public to explain why certain reforms are needed.
“People can understand that if you're buying a litre of gas [petrol] for $10 and selling it for $1 then there's an issue. What has been difficult to explain and is politically challenging for the government is that the public doesn't believe that when you make those savings you're actually going to spend it on something that is important to them,” he explained.
Egypt plans to ration diesel fuel using a smart-card system by July this year as part of its fuel subsidy reforms to shore up government finances. Under the new system, consumers will receive limited amounts of subsidised fuel, beyond which they will have to pay market prices. The IMF has had doubts on the government’s ability to implement such a system efficiently.
Many Egyptian opposition figures have strongly rejected the proposed loan deal, arguing that the price rises that will result from subsidy cuts will hit the poorest hard. In an interview with Reuters on Monday, leftist leader Hamdeen Sabbahi rejected the proposed loan, saying: "If you look at any country the IMF has gone into, you will find that poverty has increased...Talk about plugging a budget deficit does not get food to the people."