Egypt to ink IMF deal before elections
Egypt will sign a long-awaited financing deal with the International Monetary Fund (IMF) before upcoming parliamentary elections, the planning minister has told Al Arabiya, hinting that elements of the government’s economic program such as a controversial sales tax rise could be subject to change in a revised agreement.
Minister Ashraf El Araby also dismissed reports that newly announced aid from Qatar could delay the IMF loan.
On Tuesday, Qatar threw Egypt’s ailing economy a multi-billion dollar lifeline amid plummeting foreign exchange reserves and mounting pressure on the Egyptian pound. Following a meeting with President Mursi in Cairo, Qatar's Prime Minister Sheikh Hamad Bin Jassim al-Thani announced a doubling of financial support to Egypt with an additional $2 billion in five-year central bank deposits and $500 million in grants, bringing the total Qatari aid to $5 billion, the largest funding by any donor since Egypt’s revolution.
Al Thani dismissed talk of Qatar’s increasing “dominance” over Egypt and said that “a strong Egypt is important for Arabs and for Qatar in particular.” Local media reported a Qatari delegation would visit Egypt in the coming weeks to discuss investments worth up to $18 billion.
Some economists caution the latest Qatari funding could further delay an IMF deal by buying the Mursi administration time and reducing the urgency of implementing necessary but tough economic reforms, seen as key requirements to IMF financing.
Experts also say a further decline in the value of the currency is “unavoidable” and warn that in the absence of an IMF agreement, the Egyptian pound risks a “disorderly devaluation” in which it could lose up to 50 percent of its value in a matter of weeks.
An IMF technical team is reportedly returning to Cairo on Jan. 17 to resume negotiations over a $4.8 billion financing package seen as crucial to regaining investor confidence and the fund's board is said to be holding a meeting in mid-February to review Egypt's economic situation and assess the government's ability to carry out its debt obligations. Egypt needs to repay more than $1 billion in external debt obligations in the coming 6-8 weeks, of which $ 900 million is due this month.
Egypt reached a “staff level” agreement with the IMF in November and the fund’s board was set to ratify the loan in December but the deal was postponed following the government’s request to put talks on hold in the wake of a political crisis trigged by the battle over the country’s constitution.
In an interview with Al Arabiya TV, Egypt's Minister of Planning and International Cooperation Dr. Ashraf El Araby said the IMF’s technical team would be back in Cairo “as soon as possible” and a deal would be agreed before parliamentary elections. Elections were expected to be held within the next couple of months but a report on Wednesday indicated they could take place as late as April.
"We will reach an agreement as soon as possible and definitely before parliamentary elections," El Araby told Al Arabiya.
El Araby said it was “very likely” the Egyptian government could negotiate an increase in the size of the first tranche, previously estimated to be worth $1 billion.
Egypt’s foreign currency reserves fell to $15 billion last month, barely enough to cover the cost of three months of imports and a level described by the central bank as “the critical minimum.” El Araby said the government aimed to increase reserves to $19 billion by June of this year but acknowledged that it could fall short of that target.
El Araby’s comments followed a meeting earlier this week with IMF officials in Cairo that also included Egypt’s prime minister, central bank governor and newly appointed finance minister. The IMF’s director for the Middle East Masood Ahmed described the discussions as “productive” and said the Egyptian authorities “expressed their firm commitment to articulate and implement a home grown macro-economic program that enjoys broad support.”
Egypt’s economic reform program, presented to the IMF in November, centers around deficit reduction and features two key components: cutting government spending by reducing subsidies on fuel and electricity and increasing revenue through raising taxes on income, capital gains, goods and services.
A number of economic policies seen as key to reducing the budget deficit and securing the IMF loan were met with popular resistance, most notably a proposed sales tax increase that was quickly retracted after public outcry. It is unclear if the newly appointed finance minister, el-Morsi Hegazy, less familiar with details of the economic program and with no previous political experience, will be able to reach the needed consensus to carry out the necessary reforms.
El Araby said there were no new conditions to the loan and the economic program presented to the IMF had not changed but hinted there could be some flexibility on the contentious issue of sales tax rises.
“There are no new conditions,” El Araby said. “There is consensus around the majority of policies but there are some reservations concerning the procedure regarding general sales tax so there could be a revision of this procedure.”
Said Hirsh of Maplecrost risk assessment told Al Arabiya “the ball is in Egypt’s court” and the biggest concern for the IMF would be the government’s ability and willingness to implement the necessary reforms as well as the degree of political consensus it could achieve.
The IMF has long stipulated broad based support for economic policies as a prerequisite to funding and on Tuesday the fund’s managing director Christine Lagarde re-iterated the importance that the Egyptian government take ownership of the economic program and sell it to voters.
"The IMF needs to have the commitment of the political authorities that can actually endorse the program, own it, and propose it to the population as theirs," Lagarde told Reuters.
Lagarde’s comments were reported by local media as “a strong warning” to the government to “be honest with the Egyptian people about the austerity measures it is planning on implementing to secure the IMF loan.”
President Morsi’s decision to suspend tax increases raised doubts about his administration’s commitment and capacity to implement reforms and some analysts say the latest Qatari support could be an incentive to postpone “the hard choices” needed to implement painful economic reforms until after parliamentary elections.
Alia Moubayed of Barclays Capital said the Qatari funds were a “big relief” for Mursi and could help plug Egypt’s financing gap until March or early April and take some pressure of the local currency but cautioned that an attempt to re-negotiate the IMF terms could delay the deal.
“The government may try to persuade the IMF to water down or postpone some of these reforms even further, thinking they have enough buffers now,” Moubayed said in a note, adding that it was not clear if the IMF would be ready to accommodate further leniency.
Minister El Araby told Al Arabiya the Qatari support would not affect the IMF deal and confirmed the latest deposit “is not related in any way to the IMF loan.”
Putting off reform implementation until the election carries other risks, Moubayed warned. The elections law is still being discussed and could be contested; the elections timetable is unclear and could change; and the key Islamist parties may not support tough economic reforms.
Analysts also expect any additional delay on the IMF deal to add more pressure on the pound and warned that in the absence of an agreement, the currency could see a disorderly devaluation.
“If an IMF deal can be secured the pound is still likely to fall by around 15 percent, and history suggests that the adjustment is likely to be relatively rapid,” Neil Shearing of Capital Economics said in a note. “But without IMF support, there is a real risk of a more disorderly devaluation, whereby the pound could plunge by up to 50percent.”
In the best-scenario, if Egypt secures an IMF deal based on the original agreement, Shearing expects the pound to fall by around 15 percent to LE7.5 versus the dollar, with most of the adjustment in the next six months. But without the backstop of an IMF agreement, a disorderly devaluation would be more likely and the pound could fall by as much as 50 percent in a matter of weeks.
Shearing said one factor that could stave off a full blown currency crisis is the ‘drip-feed of aid from the Gulf and other strategic partners.”
The Egyptian pound has lost 5 percent of its dollar value since the end of December when the central bank introduced an auction system for buying and selling dollars aimed at conserving foreign exchange reserves and managing a gradual devaluation of the pound. The central bank also introduced currency controls for companies and individuals following a rush to convert pounds into dollars in the wake of declining reserves and loss of confidence in the government’s ability to deal with the economic crisis.
The currency has lost 10.7 percent of its value since the 2011 uprising with nearly half that drop taking place in the past couple of weeks.
On Wednesday, the pound fell to LE6.47 versus the dollar at the seventh central bank auction under the new system. The bank scaled back the dollar amount on offer to $50 billion from $60 billion earlier in the week and $75 billion offered last week.
Moubayed of Barclays Capital says that while the currency auctions may help avoid a disorderly devaluation of the pound in the short term, they do not solve the underlying imbalances in the economy and the need to attract foreign investment.