Egypt's first tranche of IMF finance worth $4 bln, to be delivered in 2 installments

Nevine Kamel, Monday 15 Aug 2016

IMF official Chris Jarvis at a news conference in Cairo, Egypt August 11, 2016. (Reuters)
IMF official Chris Jarvis at a news conference in Cairo, Egypt August 11, 2016. (Reuters)

The $12 billion loan facility that the International Monetary Fund has preliminarily agreed to provide for Egypt will be divided into three tranches, each worth $4 billion, the fund’s mission chief said.

In an interview with Ahram Online after Egypt and IMF reached an initial financial deal last week, Chris Jarvis said that each tranche will be divided up into two installments, with an expected interest rate to be set at 1.5 percent

According to Jarvis, the two installments will be worth $2.5 billion and $1.5 billion. However no details have yet been determined about the third tranche.

Egypt, which relies heavily on imports, particularly of foodstuffs, has been suffering a severe shortage of US dollars in the wake of political and security unrest that has scared off tourists and foreign investors, two major sources of hard currency.

The Arab nation’s foreign reserves have more than halved since 2011 to reach $15.5 billion in July.

There were intensive talks between IMF and the government over the last two week over the programme that Egypt is following to support the economy and reduce the budget deficit, public debt and inflation, Jarvis said, adding that this programme makes Egypt’s position stronger in its negotiations with the fund.

“All IMF-supported programmes have to be fully financed. In Egypt’s case, we would be looking for commitments of around $5 billion to $6 billion from bilateral creditors before the programme is brought to the board so that we can be sure that the programme is fully financed,” Jarvis said in an e-mailed note on Sunday.

“The IMF will be working together with the Egyptian authorities in the coming weeks to secure this financing,” he added.

In July 2014 Egypt embarked on a fiscal reform programme aimed at curbing the growing state budget deficit -- currently estimated at 11.5 percent of GDP in 2015/16 -- that included cutting subsidies and the introduction of new taxes, among them the value added tax (VAT), which is planned to be introduced next month at a rate of 14 percent.

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

According to Jarvis, the IMF has highlighted the importance of liberating the exchange rate and to make it more flexible within months in order to enable all citizens to get US dollars at “one price.”

The Central Bank of Egypt announced in March that it would adopt a more flexible exchange rate, devaluing the local currency by 13.5 percent to register EGP 8.78 to the dollar in an unsuccessful attempt to crush a burgeoning black market.

Commenting on the new VAT, which is pending the parliamentary approval, Jarvis said that the rate of the new tax is appropriate as long as the exemption list is not big.

In May, Egypt's finance ministry listed 52 commodities and services that will be exempted from VAT, including all essential food goods, dairy products, babies’ milk and their nutritional supplements, and petroleum products.

The parliament for its part has demanded the government reduce the VAT rate from 14 percent to 12 percent to avoid inflationary impacts.

Last month, Finance Minister Amr El-Garhy said that the average rate of VAT globally is set between 15 percent to 18 percent.

“The VAT is regarded as a consumer tax, which means those who consume a lot will pay more,” El-Garhy said.

The minister said that VAT may lead to price inflation ranging between 0.5 percent for low-income Egyptians and up to 2.3 percent for the upper class.

Jarvis denied that the IMF will send observers to the cebtral bank or the finance ministry to monitor the government's performance.

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