On November 11, the International Monetary Fund’s executive board approved a US$12 billion loan to Egypt, the largest loan granted to an Arab country following the 2011 uprisings. Here’s a run-down of frequently asked questions about the loan.
The Finance Ministry said in a statement on November 13 that the first instalment, to be transferred upon signing the agreement, was $2.75 billion and that Egypt is expected to receive the second instalment of $1.25 billion in April or May 2017.
Egypt will not pay any interest before four and a half years, and the full loan is expected to be repaid within 10 years in 12 bi-annual instalments, at an interest rate of 1.55 to 1.65 percent. This is the longest repayment period possible for this type of loan.
The IMF loan Egypt obtained is through the Extended Fund Facility program, established to assist countries that “experience major disruptions in payments because of structural hindrances, or that suffer from slow growth and fundamental weakness in the balance of payments.” The program places an emphasis on state-led financial reforms over a period of time, and Egypt secured almost the maximum amount available within this program.
Egypt recorded a budget deficit of $2.8 billion in 2015-2016, compared to $3.72 billion the previous year, according to Central Bank data.
The loan will be used to finance Egypt’s budget deficit, deputy minister of finance policies, Ahmed Kouchouk, said, although he didn’t give specifics.
The loan will also benefit the Central Bank by supporting the nation’s dwindling foreign currency reserves, Kouchouk added. Reserves have already risen to $23.5 billion after the first loan instalment, according to statements by Central Bank Governor Tarek Amer.
Journalist and researcher Wael Gamal says this comes at a high price. Egypt already faces a growing domestic debt crisis and now is adding a foreign debt crisis that will require repayment in hard currency.
The British Embassy in Egypt issued a statement on November 14, commending particular aspects of the loan agreement, such as a commitment by the state to increase the budget allocation for social security by 1 percent of GDP, and the intention to service the state’s debts with international petroleum companies operating in Egypt.
The government was required by the IMF to provide a detailed description of planned expenditure in a letter of intent. While there are letters from other countries on the IMF’s website, Egypt’s letter has not yet been made public.
Egypt’s Finance Ministry asserted in July that there are no conditions associated with the loan, shortly after negotiations with the IMF were announced. The ministry insisted its reform program is “100 percent Egyptian,” and was approved by parliament. But the IMF states a number of conditions associated with its loans on its website.
The Fund mandates that borrowing states should “restore” their economic policies, in order to overcome the issues that drove them to seek external financial assistance in the first place. There is also strong encouragement to service the loan, so that other states can avail of funds. Reforms were made to the IMF’s lending conditions in 2009, in order to allow for “national sentiments,” which it explains means allowing states to formulate their own economic programs, as long as they fall within the bounds of the Fund’s conditions.
Egypt’s economic program and its implementation will be reviewed five times by the IMF during the loan period, and instalments will be dependent on progress.
According to an IMF statement on November 11, Egypt’s economic program includes: maintaining a flexible exchange rate, improving the country’s competitiveness abroad, supporting exports and tourism and attracting foreign investment. The loan is intended to allow the Central Bank to rebuild its foreign reserves, to increase government revenues through Value-Added Tax and to reduce energy subsidies.
IMF Director Christine Lagarde recommended Egypt decrease subsidies and adjust the exchange rate before final approval of the loan. The state has been introducing reforms along these lines in recent months: Parliament passed a VAT law in August, raising the tax on consumer goods, and on November 3, the Egyptian government floated the pound and raised the price of petroleum.
Chief of the IMF’s Egypt delegation, Chris Jarvis, said on a TV show on November 12 that Egypt would not impose any further cuts to fuel subsidies before the first IMF review, indicating the second loan instalment would not be dependent on this.
Translated by Assmaa Naguib