“Cannot live with them, cannot live without them” may be what best describes Egypt's relationship with the International Monetary Fund (IMF) these days. The country is seeking a $12 billion loan from the international financial institution, but has first to complete certain steps before the latter can agree to disbursement, including allowing for a flexible exchange rate regime and cutting fuel subsidies. Until last week it was not clear whether or not a devaluation of the currency was required before the executive board of the IMF reviewed the loan request. Tackling the country's energy subsidies was known to be a requirement, but the time frame was not clear. “There are several prior actions that need to be completed before the board can meet to approve the loan. These prior actions are almost complete. In relation to [the] exchange rate and subsidies, there is a little bit of implementation to be had before the board can meet,” Christine Lagarde, managing director of the IMF, said at a press conference in Washington earlier this week on the side lines of the IMF/World Bank annual meetings. Egypt reached a staff level agreement with the IMF in August on a three-year Extended Fund Facility (EFF) for the amount of about $12 billion. Disbursement of the loan depends on approval by the IMF's executive board. The additional requirements are not conditions of the IMF, but steps that Egypt has pledged to take itself. “It is a timetable of measures and benchmarks that are drawn from the programme of the government itself,” Masoud Ahmed, director of the IMF's Middle East and Central Asia Department, told journalists in Washington. Masoud hopes that Egypt could be in a position to go to the IMF board by the end of this month or in early November. When approved by the board, the first tranche of financing, which will amount to $2.5 billion, would be made available within days, he said. This puts the government in a tight spot, as if it wants the money, it must take action. Minister of Finance Amr Al-Garhi, in Washington for the meetings of the IMF and World Bank, told Bloomberg that the loan agreement with the IMF was “going well” and that “the fact that we are still completing certain issues does not mean there are any hiccups.” “The statement by Lagarde has added more pressure… it means that Egypt will certainly cut subsidies and devalue the Egyptian pound in the very near future,” commented Mohamed Al-Mesidy, a consultant at NGage Consulting, an Egypt-based consulting firm. “For sure the government is concerned about the social impact of these two decisions,” he added. “The decision to cut the fuel subsidies and devalue the Egyptian pound will lead to a new wave of inflation.” Egypt's inflation rate reached over 16 per cent in August. Though it fell against expectations to 14.6 per cent in September, it is expected to jump again in October when the full effect of the new value added tax (VAT), implemented in September, is felt. Al-Mesidy is expecting inflation to reach 20 per cent by the end of the year. He added that devaluing the pound in the absence of sufficient foreign reserves will push the value of the dollar on the parallel market to unprecedented levels. Egypt's international reserves currently stand at around $19 billion. The dollar is already trading at above LE14 on the parallel market because news of an imminent devaluation has been rife, bringing the black market rate to 100 per cent above the official rate. Cairo University economics professor Sherine Al-Shawarby commented that she did not understand where the delay in implementing a devaluation was coming from, given that in effect the devaluation has already taken place. Does Egypt have other options? Al-Shawarby does not see any, and nor does Al-Mesidy. Securing external financing in foreign currency is almost the only way out from Egypt's current foreign currency crisis, the latter said. With the poor performance of tourism, the Suez Canal, foreign investment and exports, along with declining remittances from abroad, an external injection of foreign currency is the only way to solve the dollar shortage and reactivate the economy. However, Al-Shawarby is worried about the “grave implications” of implementing these policies in one go. She pointed out that a 2007 study assessing the impact of the 2003 devaluation had showed that inflation was the dominant factor affecting poverty. That being the case, Al-Shawarby said, the government must be concerned about whether the mitigation measures it has in place are enough and whether it has the funds to cover them. “Many more people will drop below the poverty line,” she said, highlighting the fact that this could affect social and political stability, which are no less important than economic stability. All this makes the timing of the implementation of the reforms a political decision. “We have reached this situation because we have wasted opportunities in the past to take similar decisions separately, such as cutting the fuel subsidies and benefitting from lower fuel prices globally,” Al-Mesidy said, adding that “now the government has to take many painful decisions at once and at the same time figure out how to ease their impact on low-income groups.” Moreover, these “corrective measures,” as Al-Shawarby described them, will not alone solve Egypt's problems. “There needs to be clear vision and a comprehensive, detailed plan for how to grow the industrial sector and improve exports to boost foreign currency flows, for example,” she said, adding that the investment climate also left a lot to be desired. The benefits from the agreement with the IMF, according to Al-Mesidy, will depend on how the government uses the loan. “The loan should be viewed as one means to improve the economic situation in the short term,” he argued, pointing out that currently many companies cannot take decisions on investment due to the shortages of foreign currency, difficulties in profit repatriation, and the unclear economic situation. Yet, while the foreign currency crisis is the main cause of investors shunning Egypt, it is not the only one. Poor regulations, timid procedures, pervasive corruption and inconsistent and non-transparent policy-making have all been obstacles to investment, Al-Mesidy said. “The government needs to adopt a clear and bold structural reform plan, in parallel with fiscal and monetary reforms,” he added. He stressed that the government should start a real dialogue with the business community in order to agree on a clear plan to improve the business environment with time boundaries to achieve the agreed-on actions. The influx of foreign currency also needed to be used prudently, in productive ways and not just to fund imports. Aside from the devaluation and the cuts in energy subsides, Egypt has made progress on other prerequisites for the loan, such as the implementation of the new VAT, which began last month, and cutting subsidies on electricity. It is also collecting between $5 and $6 billion from sources other than the IMF to close the financing that will be needed for the first year. Al-Garhi told Bloomberg that the government was close to collecting this figure, though he did not mention the exact source. Saudi Arabia, the United Arab Emirates and China are among the countries that are said to be helping out. Egypt also hopes to issue between $3 and $5 billion in international bonds. Al-Garhi told Bloomberg that the government was targeting late October or early November as the date for the issuance. The IMF is helping Egypt procure this money also. “We are making very good progress on it, and I'm hopeful that we will be able to be in a position to firm up these financing pledges in the coming weeks,” Masoud Ahmed said in Washington. The IMF's World Economic Outlook is projecting growth in Egypt of 3.8 per cent in 2016 and four per cent in 2017.
