One can but respect and admire the government's efforts to prepare itself early enough for the March event: the conference to revitalise Egypt's ailing economy. It seems that the month of November was full of these efforts. The successful trips of President Abdel-Fattah Al-Sisi to Italy and France to talk in person to Italian and French investors, enticing them to come to Egypt, the encounter of the president with over 160 CEOs of renowned American firms a week earlier, come in addition to the ongoing work by the government to streamline investment laws and render them attractive to potential investors. Furthermore, in an attempt to resume contacts with the IMF (International Monetary Fund) after three years of lukewarm relations, the government invited the institution to resume the periodical Article IV consultations following the last one in 2010. It was the right move at the right moment. The economic mismanagement of the Muslim Brotherhood government compounded Egypt's economic, financial and social challenges. Structural unemployment and increased poverty reached unprecedented levels. Egypt seemed to be on the verge of becoming a failed state. Egypt as a state not only lost the prestige of its institutions, but also their ability to deliver services and carry out their mandates towards citizens. Far from rebooting the economy, the Muslim Brotherhood government let growth rates fall to less than one per cent and the budget deficit to more than double to LE190 billion, from LE70 billion before the revolution. Today, the budget deficit is equivalent to more than 14 per cent of GNP, an exorbitant rate of public debt accumulation. Today, domestic public debt stands at LE1.5 trillion, or 75 per cent of GNP. These debt levels not only burden Egypt's youth and future generations, they narrow the country's financial options and undermine its creditworthiness as reflected by the lowering of the international ratings assigned to the country. Today, Egypt's authorities are endeavouring to put the country back on a sustainable, inclusive growth path. The trough reached during Muslim Brotherhood rule cannot be surmounted overnight. The road ahead remains long and bumpy. However, the recent November IMF mission concluded that Egypt's economy was on its way to recovery. This statement was made in the framework of consultations conducted by the institution for more than 10 days with Egyptian officials. During this extended period, the IMF delegation had ample time to check on the policy reforms undertaken by the government and monitor closely the economic situation, as well as the potential risks of economic instability. Before I delve on the details of the IMF visit, let me clarify the difference between negotiations with the IMF to secure financing in the framework of an adjustment programme and the periodical consultations conducted pursuant to Article IV. The latter is conducted with all IMF member states, without exception, including the United States. These consultations are basically more for the purpose of monitoring and following up the economic situation and conditions of the member states, thus allowing the institution an opportunity for early warning in case of any danger or potential risks. (Allegedly, Fund officials had warned the United States in advance of the financial crisis in 2007/2008, and given recommendations that the US then refused to heed.) Consultations under Article IV are different from negotiations conducted by the Fund with countries that want to borrow from the international financial system, or reschedule their debt, or are in the process of structural reform. These countries need to obtain explicitly the Fund's blessings on their economic policies, a kind of certificate that the country's policies will promote its adjustment and recovery. Recommendations provided by the Fund in this context become part of a mutually agreed programme that incorporates rights and obligations for the parties, including the provision of financing by the IMF and the pursuit of policies by the concerned authorities. Once approved and executed, the agreement cannot be breached by either party without loss of credibility. A breach by the country can adversely affect its options on international credit and capital markets. An ineffective programme implemented by the country jeopardises the credibility of the IMF and its ability to play its international role. Such were the negotiations for the $4.8 billion loan that Egypt opted to discontinue. The Fund's mission in the context of Article IV is the first of its kind with Egypt since three years. These consultations were at the request of Egyptian authorities in September. Egypt was keen to demonstrate the serious steps it had undertaken on its own since President Al-Sisi took office in May. It was worthwhile at this stage for Egypt to undergo a thorough and neutral assessment of its economy and for the Fund to view the steps that have been embarked upon by the government. The result came as a challenge to the Fund, having originally doubted the skills of the new government. The step was also meant to secure a positive IMF assessment of the economy, the policies in place and those to be pursued prior to the economic conference due in the first quarter of 2015. The invitation and the Fund's assessment should enhance investor confidence in Egypt's capabilities and the potentials of its economy. The IMF mission praised efforts by the Egyptian government to at least reconstitute macroeconomic indicators to previous levels. In particular, the reduction of the general budget and of public debt to what it was before the revolution (ie to eight per cent and 80 per cent of GNP, respectively, over the next five years). The IMF mission also concluded that the actions taken by the government so far regarding the gradual lowering of subsidies, reform of the tax system and raising of levels of taxation, along with contractionary and more disciplined monetary and fiscal policies, will lead to an increase in the growth rate, expected to rise to four per cent next year. Needless to emphasise the fundamental role of a healthy and modern competitive domestic private sector, to fully integrate in the national fabric in order to contribute to attracting foreign direct investment and to reassure foreign investors of a healthy Egyptian economy. That private sector needs to be efficient and not rely on rents as it often did in the past. On the whole, the mission recognised Egypt's success in mobilising national consensus behind the trajectory of reform and away from traditional temporary reliefs. Despite the positive statement by the Fund's mission and its acknowledgment that the Egyptian economy is on the right track to recovery after four years of decline and failure, the challenges faced by Egypt today remain gigantic. Whether the worsening unemployment situation and extreme poverty, or the challenges of political transition and combating terrorism, draining economic resources and youth energy to the maximum — all these challenges continue to prevail. What we perceive today as a slow renewal of confidence in Egypt, whether in regard to the visit by representatives of more than 160 US companies to invest in potential projects, or the visit by the Egyptian president to Italy and France to meet personally with investors of the two countries and reassure them on the positive transformation of the Egyptian economy, or the future planned official visit to China — all this will create the right momentum and pave the way for a successful economic conference in March 2015. While these are acknowledged steps to prepare for a supportive external environment, Egypt will have to establish a similar momentum internally and raise its competitiveness to help integrate soundly in the world economy.
The writer is director of the Prince Alwaleed Centre for American Studies and Research at the American University in Cairo.
