Egypt seeks US$12 billion IMF loan, but at what cost?
 
 
Courtesy: International Monetary Fund
 

Egypt is approaching the final stages of negotiations with the International Monetary Fund (IMF) for a three-year, US$21 billion financing program, to include $12 billion in loans from the IMF, officials say.

In a television interview on Tuesday, Finance Minister Amr Garhy said Egypt is seeking three loan installments of $4 billion each over the next three years, with an interest rate of 1 to 1.5 percent. Additional financing will come from international bond issuances, support from the World Bank and the African Development Bank, as well as floating shares in public sector enterprises.

The Cabinet confirmed it has been in talks with the IMF for three months over the fund’s support for Egypt’s economic reform plan. An IMF mission will reportedly arrive in Cairo within days to complete negotiations with the governor of the Central Bank and finance minister, the Cabinet confirmed in a statement on Tuesday.

The deal will help cover Egypt’s financing needs and support the government’s reform program, the Cabinet said. The statement did not explicitly tie the IMF loan to any particular reforms, instead noting that the government’s current economic program includes measures like the adoption of a Value Added Tax, the Civil Service Act, subsidy reform and increasing exports and decreasing imports.

The announcement comes after months of denial from officials that Egypt is seeking an IMF loan. In March, Central Bank Governor Tarek Amer dismissed the idea that Egypt intended to open loan negotiations with the IMF, the privately-owned Aswat Masreya news site reported. Last month, the independently owned Youm7 newspaper quoted Amer saying there had been no formal request for a loan from the fund.

Once approved, the IMF loan would be the latest in a series of loans obtained by Egypt’s government. In December, an agreement was reached with the World Bank for a three-year, $3 billion loan package.

The loan agreement, signed by President Abdel Fattah al-Sisi and the World Bank for the first tranche of funds, specified a number of required economic reforms, including the adoption of a Value Added Tax, a measure currently being debated in parliament.

The World Bank money has still not been released. Earlier this week, Minister of International Development Sahar Nasr said Egypt had begun negotiations for the release of the World Bank loan, as well as a $500 million loan from the African Development bank, and would receive the money “soon.”

In a May presidential decree, Sisi approved a $25 billion loan from Russia to build a nuclear power plant on Egypt’s Mediterranean coast.

Garhy emphasized that Egypt resorted to the new loan after the country’s fiscal deficit rose to LE320-330 billion pounds. He added that the country cannot move forward with its economic reform program while public debt approaches 100 percent of GDP and the interest on public debt costs Egypt LE300 billion per year.

The stock market reacted positively to the news, with the benchmark EGX30 index rising by 4.97 percent on Wednesday, and President Sisi hailing the loan as a step towards achieving monetary and financial stability. However, economic researcher Amr Adly says the IMF loan presents problems, due to both its sheer size and the government’s plans for the money, which will be used to finance the budget deficit and ease the foreign exchange crisis.

The biggest question is whether the Egyptian economy can generate enough foreign currency to service the debt, Adly told Mada Masr. “The loan will go into the general budget to help [the country] cope with the deficit and the dollar crisis. These are things that don’t generate any returns and won’t help to repay the loans and their interest,” he said.

In his televised interview, Garhy said the loan would both help meet Egypt’s financing needs and boost foreign investor’s confidence by serving as a stamp of approval for Egypt’s economic program. The IMF will supervise Egypt’s reform measures, encouraging other financial institutions to fill any funding gaps, he said.

When asked how the government intends to minimize the impact of the loan and associated reform measures, Garhy said creating jobs is the most pressing social justice priority. These jobs, he said, will be provided by the foreign investment expected to arrive in Egypt.

Adly dismisses the government’s plans to attract foreign investment by borrowing money to raise growth and improve economic indicators as “counting chickens before they hatch.”  Betting on increasing GDP growth during a global economic downturn could be risky, Adly says. Foreign investment is also not a sure thing at a time when global trade is decreasing. “The only certainty is the obligations Egypt will incur with these loans,” he says.

Journalist and researcher Wael Gamal says the loan will give Egypt’s Central Bank room to maneuver as it tries to counter currency speculation. However, this comes at a high price. Egypt already faces a growing domestic debt crisis, Gamal explains. Now Egypt is adding a foreign debt crisis that will require repayment in hard currency.

The shortage of foreign currency is a result of the collapse of tourism and declining revenues from exports and Suez Canal tolls, Gamal asserts. In the short term, the government might solve the currency shortage by taking on loans, but it’s creating an even bigger problem in the medium and long term, he says.

Adly agrees the government’s actions indicate that officials are willing to resort to any solution under pressure of the short term crisis, even at the expense of increased medium and long-term risks. “Within seven or eight years, the economy’s inability to generate enough foreign currency to service this debt could cause a big problem,” he says, explaining that Egypt’s policy looks like a step along the road to a Greek-style financial crisis.

 

Translated by Isabel Esterman

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Mohamed Hamama