There were no surprises last week when the International Monetary Fund (IMF) announced it had approved a three-year arrangement under its Extended Fund Facility (EFF) with Egypt in an amount of about $12 billion. The deal had been in the making since August. Unlike on previous occasions over the past five years when Egypt had contemplated reverting to the IMF for assistance but had never taken the actual step, this time there was strong political backing to conclude the agreement. Since the approval last Friday, Egypt has received $2.75 billion as a first tranche of the loan. Egypt will receive $4 billion each three years of the duration of the agreement. Every six months a part of the money will be disbursed following a review by the IMF to check that the country is meeting the targets set in the programme. The money will be used to “support the economic reform programme” put in place by the government, and the IMF has emphasised that there are no conditionalities involved and that the steps taken by the government are ones it has set for itself to restore macroeconomic stability and promote inclusive growth. It has also been revealed by the UK embassy in Cairo that part of the money will be used to repay outstanding arrears to international oil companies. Prior to the signature of the loan, Egypt's Central Bank (CBE) had taken the drastic decision to float the Egyptian pound, and on the same day the government announced major fuel subsidies cuts. The IMF had said that it would not approve the agreement before these two measures had been taken and that these were milestones that the government had set for itself. The IMF funding will be used to plug the budget deficit and is not targeted at any specific projects. Egypt has a financing gap of $30 billion for the next three years, according to a Ministry of Finance press release. The IMF money has been deposited with the CBE, which in turn will give the equivalent of the sum received to the government while using the hard currency to support its foreign reserves. Besides the IMF funding, Egypt had secured funding from other sources ahead of the signing. These include support from the United Arab Emirates, a currency swap agreement with China and more recently issuing bonds on the Irish stock market. The latter move, not previously announced, entailed the Finance Ministry selling $4 billion in bonds on the Irish stock exchange. These included a $1.36 billion bond maturing in December 2017 at 4.62 per cent, a $1.32 billion note maturing in 2024 at 6.75 per cent and a $1.3 billion bond maturing in 2028 at seven per cent, said a Ministry of Finance press release. The CBE used part of the bond issue as collateral to execute the IMF agreement, meaning that it received $2 billion. The bond issue reflected the increased confidence of international financial institutions in the potential of the Egyptian economy, the ministry said. It added that the bond issue did not conflict with government plans to issue Eurobonds on the international markets. The government had planned the Eurobond issue for mid-November, but the minister of finance recently said it could be delayed until the international markets settle following the US elections. The steps taken by the government and the signing of the IMF agreement were lauded internationally. Even prior to the signature with the IMF, the ratings agency Standard & Poor's revised its outlook on Egypt's long-term sovereign credit rating to stable from negative. It maintained B-long-term and B short-term foreign and local currency sovereign credit ratings. The stable outlook reflects the agency's expectations that the IMF loan “will provide external financing to Egypt to meet its foreign exchange requirements over the coming 12 months.” S&P's rating remained constrained by Egypt's “wide fiscal deficits, high public debt, low income levels and institutional and social fragility,” it said. The IMF funding, however, and the related borrowing from international markets as well as the government's reform measures did not go without criticisms that Egypt was taking on higher levels of foreign debt. But the Ministry of Finance said Egypt's external debt “is relatively low when compared to the average of peer countries.” Egypt's external, government and non-government debt recorded $53.4 billion, equivalent to 17.1 per cent of GDP, at the end of March 2016, compared to $48.1 billion at end of June 2015. “Middle East and North Africa countries recorded an average external debt of 27 per cent of GDP during 2013,” the ministry said. Mohamed Farid, chairman and CEO at Dcode Economic and Financial Consulting, does not see eye to eye with critics either. “The measures taken by the government and the CBE are ones that they would have done anyway with or without an agreement with the IMF,” he pointed out, explaining that public debt had been out of control and there had been a need to resolve the acute foreign exchange shortage. “With no reserves to use to intervene, the only way out was to float the currency,” he said. Egypt has so far been covering its budget deficit by borrowing extensively from the domestic market. “Why should the government borrow at interest rates of up to 18 per cent and above when it can borrow at better terms and at two per cent,” Farid asked. “External borrowing was a wise, less costly decision.” The IMF funding will be repaid after a 4.5-year grace period, the Ministry of Finance said. The funding's interest and service fees stand at 1.55-1.65 per cent, it added. The whole financing package will be paid off within 10 years in 12 equal instalments. “Over the programme period general government debt is expected to decline from about 98 per cent of GDP in 2015-16 to about 88 per cent of GDP in 2018-19,” the IMF said. “Domestic debt was a disaster,” Farid said of the earlier situation and in support of the international loan. Government borrowing had been crowding out the private sector, he added. Under the assumption that the economy will improve and foreign exchange generating activities will pick up, the value of the Egyptian pound could appreciate, which means that repaying the loans will become less costly, Farid said. With the anticipated growth in the economy, the size of the international debt to GDP will also diminish. The government's economic reform programme targets GDP growth of 5.5 per cent by fiscal year 2018-19. It currently stands at around four per cent. While the government's reform programme may tackle the deficit and public debt, it will have a tougher task dealing with the social repercussions of the reforms. The depreciation in the value of the pound coupled with the energy, subsidies cuts is expected to fuel inflation. The pound was trading at around LE15 to the dollar this week. Inflation currently stands at around 14 per cent. Observers expect it to increase to anywhere between 18 and 30 per cent on the back of the recent measures. The lower estimates are attributed to the fact that many goods are already factoring in the depressed value of the pound as it was trading on the black market prior to the floatation. However, observers have said that essential items such as food have been being imported at the lower dollar rate, which means their prices will now increase, and this is without taking into account increases because of the fuel subsidies cuts. A study by the Egyptian Centre for Economic and Social Rights (ECESR), an NGO, entitled “From the 1990s to Now: The IMF Loan Exacerbating the Crisis” questions the reforms. “The absence of an economic strategy, usually put down to incompetence or neglect, can be viewed in this framework as a deliberate attempt to force the Egyptian people to accept their abandonment by the state without calling its legitimacy into question,” the study said. The government has said that the structural and financial reforms are much needed and will allow for greater spending on infrastructure and improving education, health services and social protection. Asaad Allam, the World Bank country director for Egypt, Yemen and Djibouti, speaking this week at the Egyptian Centre for Economic Studies (ECES), an NGO, said the best way to fight poverty and inequality was to “grow and invest.” Without growth, there could be no redistribution, he said. Alongside growth, governments should be investing in human capital through education, health coverage and nutrition. And governments should also insure the most vulnerable against shocks. He pointed to policies that could help to reduce poverty. These include progressive taxation, keeping inflation low, openness to trade and investment to spur growth, and the promotion of entrepreneurship. With the IMF agreement now sealed and unlocking much-needed foreign investment inflows, “it is still within the hands of the government to revive the country's economy,” said a note by Pharos Holding. “Steering the economy to stability depends on the efforts of the finance, investment, tourism and industry ministries. Then the exchange rate will follow.”
