Qatar's $2 billion deposit to Egypt no substitute for IMF package: Economists

Ahmed Feteha, Wednesday 15 Aug 2012

Deposit from the gas-rich emirate should help Egypt's balance of payments, but experts say a loan will be crucial to carry out state spending plans


Qatar's pledge to deposit $2 billion in the Central Bank of Egypt will help boost the country’s economy but won't replace the need for a $3.2 billion-plus loan from the International Monetary Fund (IMF), economists have told Ahram Online.

Experts distinguish between two majors problems affecting Egypt's economy; a balance of payment deficit, and the need to finance state spending without pressuring the local market.  
The Qatari deposit is seen to mainly help the balance of payments, while the IMF loan will ease worries over covering state expenses.
Qatar's pledge was made following the visit of the country's Emir Sheikh Hamad bin Khalifa Al-Thani to Egypt on Saturday, when he met with President Mohamed Morsi.
In 2011, Qatar said it would provide Egypt with $10 billion to support its economy, but only disbursed a grant of $500 million later in the year.
With political instability hampering a tourism rebound and investors still wary of entering the Egyptian market, the Qatari funds will give urgent support to Egypt’s monetary position.
The deposit will likely be used to help stabilise the local currency through increasing the supply of US dollars inside Egypt. 
The pound had been under severe pressure due to a widening balance of payment deficit resulting from the last year's slowdown in capital inflows and tourism revenues.
Egypt's finance minster said on Monday that an initial amount of $500 million will be deposited in the Central Bank of Egypt (CBE) before Sunday.
Details of the interest rate have not been made public, but Egyptian daily Al-Alam Al-Youm cited an unnamed Central Bank official as saying that the deposit will be priced at the LIBOR benchmark interest rate, which is currently around 1.05 per cent.
"This Qatari dollar injection is essentially a loan to the Central Bank of Egypt," says Amr Tantawi, vice president of Cairo-based Misr Iran Bank. 
"The deposit will go straight to the reserves and accordingly, Egypt will be able to support the pound for a while [longer]."
The deposit, Tantawi said, is a temporary measure that needs "real improvement" in foreign currency inflows to be effective.
Ever since the January 2011 uprising which unseated Hosni Mubarak, the Central Bank of Egypt (CBE) has poured its once extensive foreign currency reserves into supporting the Egyptian pound. 
Reserves fell to $14.42 billion at the of July, after inching up for three months in a row. Reserves stood strong at $36 billion in January 2011.
Despite the benefits of the Qatari deposit, IMF fiscal support is still needed on the budget front, say economists.
Egypt’s state budget deficit for 2012/13 is projected at LE140 billion, almost 8 per cent of GDP.
Covering the budget gap has been most important order of business for finance ministers over the course of the past 18 months. The first negotiations for an IMF loan began in the opening half of 2011.
"Egypt’s economic problems could be very well be diagnosed as a liquidity problem," Ahmed Atta, managing director of Piraeus Egypt’s asset management company, told Ahram Online.
"You have a budget deficit to cover and it is better to cover it from outside Egypt, rather than inside."
The government has resorted to excessive local borrowing to fill its funding gap over the past 18 months, driving yields to skyrocket to "unhealthily" high levels.
Commercial banks, being the major lender to the government, transferred the pressure to private borrowers who, unsurprisingly, are finding it hard to compete
with the rates the government is willing to pay -- nearing 16 per cent on annual Treasury Bills.
"A foreign injection of funds, unlike using up local funds, will not put inflationary pressures on the economy," Atta says
Egypt has recently invited the IMF to restart discussion on the loan, previously valued at $3.2 billion - but which may now reach $4.8 billion, according to a report from Reuters. The fund's Managing Director, Christine Lagardem will visit Egypt on 22 August, according to a statement issued on Wednesday.
Egypt's parliament, which was dissolved in June, had initially objected to the reform programme attached to the IMF loan package, which suggested a shake-up in sales taxes.
The tide, however, seems to have turned, and the current Muslim Brotherhood regime looks willing to work closely with the IMF to rebuild Egypt’s economy.
The funds pledged by Qatar, being a simple bank deposit, do not have an attached economic programme.
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