IMF releases staff agreement on Egypt loan, mission chief commends economic program’s progress
Courtesy: International Monetary Fund
 

The IMF mission chief for Egypt Chris Jarvis has commended the country’s performance on its economic program following the US$12 billion loan it approved last November, saying it is likely to receive the second tranche of the loan by late April.

In a video briefing aired on Wednesday Jarvis said that the exchange rate liberalization, the recently implemented value added tax and the reduction of fuel subsidies were positive developments, adding that if the government sticks to the current program it is likely to overcome the short-term challenges and achieve the success seen in Eastern Europe, Brazil and Turkey.

The IMF also released documents containing the details of its staff agreement with Egypt, signed in November, on Wednesday. The documents includes the IMF’s staff report, a Memorandum of Economic and Financial Policies and an accompanying letter of intent written by Egypt’s Finance Minister Amr al-Garhy.

The document includes details of the reform program, including the timetable for the implementation of economic policies by Egypt, which includes further increasing energy prices, a social spending package of at least LE25 Billion and a plan to restructure the oil sector drawn up by an independent consultant.

Jarvis emphasized the “homegrown” nature of the reform program, saying it was drawn up by the Egyptian government according to its own preferences and circumstances.

The mission head allayed fears about what he said was a higher-than-expected depreciation of the Egyptian pound following the exchange rate liberalization in November, asserting that overshooting has occurred in other countries before and he expects the Egyptian Pound to appreciate if the reform program stays on track.

According to official figures published in December annual inflation reached its highest point in eight years, increasing to 20.2 percent.  It is expected that the inflation will continue due to the currency flotation.

Jarvis affirmed that the IMF is wary of the potentially negative impact the reforms, and subsequent inflation, may have on middle and low income groups. However, he insisted that such effects are inevitable and should be alleviated by the eventual appreciation of the pound and stimulation of economic growth resulting from the program. He further emphasized the importance of a free currency exchange regime and a balanced budget for the achievement of these goals.

“Headline inflation was slightly higher than the we expected, but the key thing is what happens within the next three months” Jarvis said, adding that the IMF expects inflation to be curbed and growth to pick up during the next year.

The IMF wanted to ensure the most vulnerable members of society would be protected from the initial effects of the program. These were cushioned, according to Jarvis, by budget increases in areas like food subsidies, and social programs like the Takaful and Karama programs, subsidies for transportation and children’s medicine, areas which may see further expenditure increases in the future.

Jarvis said the IMF thinks about mitigating political risks resulting from the programs, but assured that so far many risks identified by them have not materialized, such as a volatile and disruptive foreign exchange adjustment, or that the government suspends some of the reforms.

The IMF program was not discussed by Parliament prior to its signing in November, leading critics call the process unconstitutional, as the Article 127 of the Constitution stipulates Parliament’s discretion over loan agreements.

When asked about these accusations, Jarvis expressed his hope that the negotiations were “fairly transparent,” but said “sometimes during the cooking process, you don’t want everyone looking into the kitchen.”

He said that the IMF was keen to involve more government ministers in the negotiations to garner more support, and that they had already met “some” members of Parliament. He added that the IMF is keen to engage with public discussion of the program, saying that the government recently sent it to Parliament, and that he hoped the briefing would help in this regard.

Jarvis also answered a question posed by Mada Masr regarding the delay of the staff agreement’s disclosure, saying “both we and government wanted to make sure we got everything right.” Ambiguities and factual errors were present in the report, he said, so while it was ready two weeks ago the Finance Ministry took some time before passing it to Parliament.

The IMF’s executive board gave the final approval for a three-year US$12 billion extended loan to Egypt last November and subsequently released the first tranche, amounting to US$2.75 billion.

The approval came three months after Egypt and the IMF reached a staff-level agreement regarding the loan, following which the government implemented a series of economic reforms to meet the fund’s conditions. These included the devaluation of the local currency, the lifting of fuel subsidies in addition to aggregating $6 billion in bilateral loans, all of which Egypt has achieved since November.

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