Ratna Sahay is deputy director of the Middle East and Central Asia department at the International Monetary Fund (IMF). She was in Egypt on the eve of the revolution as part of a regular Article IV mission, which had initially concluded that Egypt was well on its growth track. But ever since the revolution the economy has been under much strain.
Sahay returned to Egypt last week on a fact-finding mission, in order to assess the extent of the damage. She talked to Ahram Online in Washington about the country's prospects in the short and medium term.
Ahram Online: You were in Egypt on the eve of the revolution, and you have just returned from a fact- finding mission. What have you found?
Ratna Sahay: Things are very different from my last trip. First and foremost, I see a lot of hope and excitement in the people of Egypt who would like to plan their own future and make things better for themselves. Enhanced transparency, governance and inclusiveness will help increase Egypt's medium-term growth potential.
In the short-term, the economic situation is challenging, particularly for the tourism, construction and manufacturing sectors. Moreover, remittances will decline and unemployment will increase as Egyptian workers from Libya return. Another big challenge is the increase in food and fuel prices, which is a global phenomenon and unrelated to the revolution in Egypt, but it is adding to the domestic problems. All these factors make the situation quite challenging at this time.
That said, Egypt has many inherent strengths, including a dynamic and young population, a large market size, a privileged geographic position, and access to key markets. I am therefore very hopeful for its future.
AO: What are your growth expectations for Egypt after your latest visit?
RS: We expect growth between one to two per cent, based on the information we have collected so far. Next year, we project growth to be around four per cent.
You make your growth forecasts for Egypt on the assumption that the effects on tourism and capital flows will be temporary. But what if they are not?
We think they will be temporary after having looked at the experience of other countries which have gone through these kinds of revolutions. What we have found is that for a short time economic activity does get disrupted, and then it resumes. And we are already seeing that in Egypt. For example, during the peak period of the protests, tourism had gone down to almost zero per cent occupancy. Now it is back at around 25 per cent. What cannot be predicted is if there are more shocks to the system, such as even higher food or fuel prices.
AO: Is the fact that the current government is an interim government an obstacle to extending help?
RS: We work with any government whether it is an interim government or a permanent government as long as it is a legitimate government that is recognised internationally, as is the case in Egypt. And if there is a new government we would expect to continue our dialogue with them.
AO: When does the IMF decide to extend its help?
RS: First, it is up to the country to decide whether it wants help or not. Then the IMF finds out if there is a need. For example, if the country has suffered from a number of shocks such as the increase in prices of imported food, its balance of payments and foreign exchange reserves can decline.
There is no magic number on the comfortable level of reserves but there are some standards. For example, if a country has reserves to cover four or five months of imports, that is pretty good. And by that measure, Egypt does have enough external reserves. There are other indicators. For example in the case of Egypt, if foreigners who have bought treasury bills want to sell them, that also affects the reserves. A third factor that is very important in the case of Egypt right now is that with the revolution, aspirations and expectations have gone up on the social side. If the government feels that these are very important objectives but does not have the resources, then the government can ask international institutions for help temporarily to meet these very important goals, but keeping in mind that borrowed resources will need to be paid off later with expenditure savings or higher tax revenues.
AO: What type of lending would Egypt be eligible for?
RS: It depends on what they ask for and the nature of their economic needs. If it is short-term help then the more appropriate one would be a Stand-By Arrangement. With this kind of arrangement, the loan would need to be paid off within five years and carry an interest rate that is well below Egypt's borrowing cost in the market.
AO: What form does the IMF lending take?
RS: Typically the form of Balance of Payment Support.
AO: Egyptians have always had reservations against IMF lending and the conditionality that comes with it. What is your comment on this?
RS: The IMF has changed a lot over the past 15 years in term of the type of arrangements that it offers. First, it is the government that must come up with its programme; it is not for the IMF to say what it should do. It has to be a comprehensive programme that meets the short-term goals but is also sustainable in the medium term. So we agree on a set of measures to meet the goals of the Egyptian people. I prefer not to call these measures "conditionality" as these are not imposed by us but are agreed upon mutually with the government. In the case of Egypt, the two short-term objectives of the government, as we understand it, are to ensure social cohesion and macroeconomic stability.
Any economic programme should aim to maintain socio-economic stability and social cohesion, and therefore we would welcome specific measures that address, for example, targeted safety nets for the poor and some programmes on job creation. And for job creation to be sustainable, the government itself should not be creating all the jobs. Part of that could be public works programme but most of it should come from creating more competition in the private sector, encouraging the small and medium enterprises, and making sure land sales and loans advances take place in a fair and transparent manner. A second but very important component of the economic programme should be to make sure there is macroeconomic stability. Because without it, it will be difficult to achieve the social goals.
AO: How can you be sure that the programme the government is presenting actually represents what the people want?
RS: We see that the current government is making an effort to reach out to the Egyptian people in an open manner. We also talk to different stakeholders to get their feedback and understand what policies are broadly owned by the population. And we do this because we have learned over many years that the programmes that are most successful are the ones that are homegrown and owned not just by the authorities but by the people.
AO: How much money can Egypt borrow?
RS: The Egyptian finance minister has indicated that they anticipate a financing need of about $10 billion until June 2012, and that they are discussing with bilateral and multilateral agencies, including the IMF, how this financing could be mobilised. As we have said, the IMF stands ready to consider financial support for Egypt's economic reform programme if the authorities choose to request this. We have not discussed the details or amounts of any loan from us.
AO: So it will be a package with other donors?
RS: Typically that is how it works. The official creditor community will come to the table and jointly contribute to the package.
AO: What is the advantage of an IMF-supported programme?
RS: First, it provides temporary financing that can help overcome hard times. Second, it is typically less costly than borrowing from the private sector. Third, when there is agreement on economic policies between the IMF and the government it sends a signal of confidence to the market as well as other multilateral and bilateral lenders such as the World Bank or the African Development Bank. They also feel more comfortable to provide additional financing.
AO: Would you recommend cutting subsidies to free up more resources?
RS: This is not the right time to cut subsidies on food and fuel because prices have gone up dramatically, and it would hurt the poor. So we would not suggest to the government to cut these subsidies in the short term. But subsidies in Egypt and in several other countries are very general subsidies which benefit everybody. For example, most of the benefits of fuel subsidies are really going to the rich or upper middle income groups. So, in the future, whether there is an IMF programme or not, it is in the benefit of the population and for the social cause of the country that the government reduces or eliminates these generalised subsidies and uses the saved resources to create a safety net that is targeted to the most needy. That should be the goal in the medium term.
AO: What would be your advice to the monetary authorities regarding interest rates?
RS: Currently, inflation is mostly coming from food prices and economic activity is below potential. If inflation starts passing to the non-food items, we would advise the Central Bank of Egypt to watch it closely and possibly to tighten monetary policy.
AO: To what extent should the monetary authorities support the value of the pound?
RS: What the authorities should do is allow more two-way flexibility. They were already doing that in the second half of last year and we encourage them to do so in the future.
AO: What do you think of the banks' position after the revolution?
RS: One of the strengths going into the revolution was the banking sector. It was well capitalised. One can expect the non-performing loans to go up, but because they are well capitalised they should be able to absorb that shock.
AO: Egypt had been growing at seven per cent before the global crisis yet not enough jobs were being created. Why is that?
RS: On the supply side the pressure comes from the demographics. But from the demand side, there are some incentives that encourage capital intensive rather than labour intensive projects. Moreover, there have been studies which show that some sectors, such as the tourism sector, are labour intensive and have actually created more jobs. Incentives should be provided to make sure that the sectors which are more labour intensive grow faster.
AO: Privatisation was among the IMF's recommendations yet it has always been criticised. Was it the wrong advice?
RS: If you look at the privatisation experience in other countries, some have gone well and others have not. The one lesson that we have learnt is that it is not enough to say privatise because what really matters is how this privatisation is executed.
At the same time, the government alone cannot create growth or jobs; they do not have enough resources. The role of the private sector should be expanding a lot more but there is a very important caveat. This has to be done within a framework that ensures transparency, good governance and equal access to opportunities for all. It is therefore important that if you do privatise the state sector you have to do it a lot more carefully and you have to make sure that these companies are sold in a fair and transparent manner.