IMF loan deal ‘to improve fiscal balance of Egypt’

A customer exchanges US dollars to Egyptian pounds in a foreign exchange office in central Cairo. (Reuters)

JEDDAH: The IMF loan agreement with Egypt has drawn positive reactions from economists.
“Initially the $12 billion IMF bailout program will help stabilize the currency although the currency will remain under downward pressure,” Said Al-Shaikh, group chief economist at the National Commercial Bank (NCB), told Arab News. The loan will lessen the downward pressure on the Egyptian pound, he added.
Al-Shaikh said there are certain measures required for IMF to approve the loan, including the depegging of the currency and also the introduction of value added tax (VAT). Also, certain subsidies have to be removed.
“The purpose of these measures is to improve the fiscal balance of the country,” Al-Shaikh said, adding that the depreciation of the currency will help in improving the export sector. Also, imports will be more expensive.
IMF board approved Friday Egypt's $12 billion loan agreement, of which $2.75 billion had been disbursed, Reuters reported.
The remainder will be phased in over the next three years subject to five reviews on required reforms.
The injection of new funds increased the Central Bank of Egypt's foreign reserves to $23.3 billion, state television said in Cairo.
Commenting on the IMF loan agreement, a regional analyst, said this will obvious reduce the near-term strain caused by the fiscal and external deficits. It should also help stabilize the currency, which is important as rapid depreciation can be inflationary.
"Clearly, the longer-term challenge for Egypt is to restore its competitiveness in the eyes of investors and visitors. The weaker currency should increase the appeal of local assets and holiday packages while the deal will boost confidence. However, much more will have to be done, both in terms of ensuring internal security and articulating a clearer policy direction for economic policy in the country. Given the magnitude of challenges, this is likely to be a gradual process at best," the analyst said.
IMF Managing Director Christine Lagarde described the Egypt bailout as a homegrown economic program that the IMF will support to address longstanding challenges to the economy.
"These include a balance-of-payments problem manifested in an overvalued exchange rate and foreign exchange shortages, large budget deficits that led to rising public debt and low growth with high unemployment," Lagarde said. "The authorities recognize that resolute implementation of the policy package is essential to restore investor confidence."
Import-dependent Egypt has struggled to attract dollars and revive its economy since tourists and investors fled after the 2011 uprising. Facing a gaping budget deficit, plummeting foreign reserves and a burgeoning currency black market, it agreed the IMF loan in August but had to secure around $6 billion in bilateral financing for the deal to be completed.
Egypt made the final push for the loan after the central bank abandoned its currency peg of 8.8 pounds to the dollar last week in a dramatic devaluation move welcomed by the fund and World Bank. The pound traded at just over 16 to the dollar on Friday.
The government of Egyptian President Abdel Fattah El-Sisi took other key steps required by the IMF, including passage of a value-added tax to raise revenues and reductions in fuel subsidies. The program also requires legislation to reduce Egypt's public sector wage bill.
The IMF said the program is projected to reduce Egypt's debt-to-GDP ratio, now hovering near 100 percent, by about 10 percentage points over three years, Reuters said.
Lagarde also emphasized that Egypt needs to make structural reforms to its economy such as streamlining regulations for business start-ups, passing insolvency reforms and labor reforms aimed at increasing labor participation.
Egyptian authorities had embarked on an ambitious reform program to put the country’s economy on a sustainable path and achieve job-rich growth.
“Over the past few months, the Egyptian authorities have embarked on an ambitious reform program to put the country’s economy on a sustainable path and achieve job-rich growth.
“The liberalization of the exchange rate and the adoption of the second phase of the fuel subsidy reforms are important measures in the authorities’ reform agenda. Allowing the exchange rate to be determined by market forces will notably improve Egypt’s external competitiveness, address shortages of foreign currency, support exports and tourism and help attract foreign investment. Adjusting fuel prices will contribute to lower budget deficits and will free up public resources for much-needed and better targeted social spending on health, education, and growth-enhancing investments.
Earlier, S&P Global Ratings revised its outlook on the long-term sovereign credit rating on Egypt to stable from negative. At the same time, we affirmed our “B-“ long-term and “B” short-term foreign and local currency sovereign credit ratings.
The devaluation of the Egyptian pound and the central bank's stated intention to allow the currency to float are major steps in Egypt's external, monetary and fiscal adjustment and are positive for the sovereign's credit profile, Fitch Rating says. But such a large currency adjustment puts the spotlight on social and political risks in an already challenging policy environment.