Morsi on thin ice with IMF deal

Published November 28th, 2012 - 11:07 GMT
The political situation in Egypt would not delay the approval process
The political situation in Egypt would not delay the approval process

When the International Monetary Fund (IMF) board meets in a few weeks to consider a nearly $5 billion financing agreement for Egypt, its members will need to ensure that the economic outlook for the country has not changed and, perhaps more pertinently, that the government is capable of successfully implementing its economic reform program. 

Concern is mounting in financial circles over IMF approval as the country is gripped by a wave of protests against a presidential decree issued on Nov. 22 by Egypt’s Islamist leader Muhammed Mursi granting himself sweeping powers and putting his decisions beyond judicial review. 

“Consideration of the agreement by the IMF Executive Board will require that there is no major change in the economic outlook and implementation plans,” said Wafa Amr, IMF spokesperson. 

Amr added that the IMF will also be looking for assurances from other donors - such as the United States, the EU and international financing institutions- that their share of financing will also be forthcoming. It is as yet unclear how the President’s decisions and backlash against them will affect external financing agreements between the Egyptian government and these partners. 

The latest unrest has already affected the Egyptian stock market, with volatile trade over the past few days, and some fear the turmoil could derail government efforts to implement unpopular economic policies such as the removal of subsidies on petrol products – some of which came into effect this week. 

The financing agreement for Egypt, already approved on a ‘staff-level’ in Cairo earlier this month, will be presented to the fund’s executive board for final approval in a meeting scheduled for 19 December. 

Egypt’s Minister of Planning Ashraf El Arabi said the political situation would not delay the approval process and expected the first tranche of the loan to be disbursed shortly after the board’s ratification. 

However, local media quoted an IMF source as saying Mursi’s declaration could delay the loan and economists cautioned that the latest political deadlock pitting Islamists against secular and liberal groups poses risks to the IMF program. 

“Given the proposed nature of the staff-level agreement, and the requirement by the IMF to ensure a broad consensus about the package of reforms, the recent escalation in political confrontation may pose risks to the proposed timetable, and cause slippage in board approval and possibly reform implementation,’ Barclays Capital said in a note. 

Barclays Capital described the current political confrontation as the fiercest since the start of the revolution and said, “Even without this latest crisis episode, political volatility and instability were to constitute a key risk to the implementation of the IMF program, and to the authorities’ ability to meet expected targets on both the fiscal and monetary fronts.” 

Capital Economics, a research consultancy, echoed that warning, saying that “if nothing else the events of the past few weeks in Egypt illustrate that progress over the next year will be extremely bumpy.”

The Egyptian government has already begun implementing the first phase of fiscal reforms described by the IMF as ‘main pillars’ of its financing agreement: reducing ‘wasteful expenditures’ on energy subsidies and boosting revenue by introducing a new tax bracket for high earners. 

On Sunday Nov. 25 three days after the controversial decree was announced, the government lifted the subsidy on octane 95 fuel, with the price going up from LE2.75 to above LE5. This measure is only expected to generate negligible savings of LE100 million ($16.3 million) but, longer term, the budget aims to reduce spending on energy subsidies by more than LE30 billion ($5 billion) to LE70 billion ($11.4 billion) a year – an estimate considered to be optimistic by some economists. 

Earlier this month, the Cabinet approved a new tax bracket of 22 percent for annual incomes between LE1 million ($163 ,000) and LE10 million ($1.63 million). An increase in sales tax, the introduction of a value added tax (VAT), as well as property and telecommunications taxes will follow. 

The bulk of economic reforms and spending cuts are expected to be ‘back-loaded’ with measures generating the most savings implemented after a constitution is finalized and a new parliament is elected. One reasoning being that the presence of an elected parliament and functioning government institutions would facilitate implementation of IMF reforms – some of which are likely to meet with popular resistance. 

Under the original timetable, these political milestones were expected to be completed by April 2013, however the timing could change due to the current political upheaval. It is also unclear if the current standoff between the President’s Islamist backers and secular forces will leave Mursi and his administration with a strong enough mandate to implement the wide ranging economic reforms, most of which are expected to kick in next year. 

Also, the IMF has long stipulated broad based domestic and international support for Egypt’s economic program as a pre-requisite to any deal because it is ‘crucial for successful implementation of the planned policies’. Given the events of the past week, it remains unknown if Mursi and his cabinet can maintain support for their economic plan let alone implement it.

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