Egyptian reforms and IMF loan
Once parliamentary elections are out of the way, Egypt stands a chance of securing an International Monetary Fund loan to help address its currency and budget crisis; the problem is that no one knows when that will be.
With face-to-face contact between Egypt and the IMF re-established this week after a two-month gap, both sides are pushing for urgent action, but with strikingly different emphases.
President Muhammmad Mursi’s government wants a full $ 4.8 billion loan, as agreed in principle last November, but based on a gentler reform program than originally planned, “in light of preserving growth rates, employment and protecting the poor.”
By contrast, the IMF’s top official for the region, Masood Ahmed, spoke only of “possible financial support” after he met the government and central bank in Cairo recently.
Also, the IMF has vigorous reform in mind to tackle problems such as energy subsidies, which are draining huge sums from the state budget. “Egypt needs bold and ambitious policy actions to address its economic and financial challenges without further delay,” spokeswoman Wafr Amr said last week. Such “policy actions,” most likely tax rises and subsidy cuts that will send fuel costs soaring, would not go down well at any time with a population suffering from a steady economic slide since the 2011 revolution, let alone before an election.
“The IMF will want to see measures to rein in the budget deficit in order to agree to a package which the government may be loath to implement prior to elections. An imminent agreement seems unlikely,” said Giyas Gokkent, Chief Economist at National Bank of Abu Dhabi. Cairo already had to request a delay in the IMF loan in December during serious street violence, and trouble has regularly erupted since then over a variety of grievances.
In such a volatile atmosphere, matters would be helped if everyone knew when a new lower house of Parliament would be installed. Mursi announced last month that the elections would start on April 22, only for a court to cancel his decree on a procedural technicality.
So, at this crucial stage of a turbulent transition to democracy since the fall of Hosni Mubarak, Egypt has had no lower house for nine months, and nobody, from Mursi down, can say when it will.
Egypt’s needs are pressing. In its plan drawn up for the IMF, the government forecast the budget deficit would hit 12.3 percent of the country’s entire annual economic output in the year to June unless it made urgent reforms. Far wealthier and more stable Portugal, which restored democracy almost 40 years ago, had to take a bailout from the IMF and European Union in 2011 after running a deficit that peaked below 10 percent of gross domestic product.
Egypt’s pound is also steadily losing value, even though the central bank, which spent roughly two thirds of the Mubarak era foreign currency reserves trying to prop it up, is drastically rationing the supply of dollars. This is crippling many small and medium-sized businesses, which are forced to turn to the black market, where unfavourable exchange rates can wipe out their profits.
On the streets, motorists queue for scarce supplies of diesel and other cheaper fuel, and anger is growing over inflation, which leapt to an annual 8.2 percent in February from 6.3 percent the previous month, eating into the living standards of people struggling to make ends meet. This is creating a sense of helplessness among ordinary Egyptians about the reforms likely to come with an IMF loan.
Shabaan, who makes a living chauffeuring visitors and expatriates around Cairo, has much to lose. According to the projections, the most commonly used 90 octane gasoline would leap to 5.71 Egyptian pounds ($ 0.85) a litre from 1.75 if subsidies go, while diesel would go up to 5.21 pounds from 1.10. The government has promised limited amounts of subsidized fuel would remain available to some drivers under a smart card system due to start in July, but Shabaan’s larger engined car would be excluded from the scheme.
