Egypt and the IMF: The rumbling saga's myth and reality
In a recently televised interview given to Al-Jazeera Channel, Egyptian president Mohamed Morsi has asserted that the delay in the International Monetary Fund (IMF) negotiations is largely due to “Egypt’s refusal to succumb to the IMF’s terms”.
This marks the continuation of rhetoric which attempts to politicise a simple loan. This rhetoric started in the time of the El-Ganzoury cabinet, at which time the ruling Muslim Brotherhood and their Freedom and Justice Party staunchly opposed the loan. While the anticipated IMF loan is dwarfed by the EGP 820bn budget and the EGP 200bn budget deficit, Egypt is in dire need of a conclusion to this financing deal.
While the Egyptian government may not rely much on this loan, it is looking to gain additional financing from the EU, Gulf countries, the African Development Bank and the World Bank which could be made easier should IMF “blessing” be obtained. Ahmad Al-Najjar, advisor to the Finance Minister, has asserted that: “We don’t intend to obtain the total value of the IMF loan, but the agreement itself would be an international certificate of trust that our economy is safe. It also would help the government to persuade international financial institutions to invest billions of dollars in Egypt.”
While the rhetoric remains defiant and reluctant to accept certain reforms imposed by IMF, the reality suggests that Egypt can no longer sustain the current economic situation without taking some measures to reform several aspects of its ailing budget, such as fuel subsidies. Aside from the “strong talk” which is geared predominately to placate the public, the current cabinet understands that it must “succumb” to several reforms imposed by the IMF.
This week, Trade and Industry Minister Hatem Saleh announced that Egypt aims next month to issue a schedule of gradual rises in the subsidised prices that various industries pay for fuel, to bring them near to global levels in four years. This move will usher in a reduction in energy subsidies; a move which is seen as a cornerstone for securing the $4.8bn loan from the IMF.
Egypt spends roughly a fifth of its budget on fuel subsidies, a situation which is no longer sustainable. The growing demand and the weakening Egyptian pound are expected to push the energy subsidy bill to more than EGP 120bn ($17.4bn) in the financial year ending in June.
The reality suggests that ultimately, the IMF deal will be concluded and that the Egyptian government will have to show some reliable commitments. Several observers of the situation echo the same opinion. Recently, U.S. Treasury Secretary Jacob J. Lew said he sees “signs of progress” in the IMF’s discussions with Egypt for a loan program intended to put the country’s economy on a sustainable path.
However, the May timeline for concluding the loan recently expressed by Central Bank chief Hisham Ramez may be a bit too aggressive. The reality suggests that the Egyptian government will struggle to secure IMF funding before the now “up in the air” parliamentary polls, leaving its bonds and currency vulnerable to further declines, EFG-Hermes Holding SAE and Bank of America Merrill Lynch said this week.
Make no mistakes, the loan will eventually be secured and subsidy and tax reforms will be the means to this end. The rhetoric voiced by the president and the ruling party will remain mere propaganda masking the paradox of how a revolution brought about by social injustice may end up causing further social injustice!