Egypt has decided to refrain from external borrowing, for the moment. Niveen Wahish gauges reactions The Higher Council of the Armed Forces (HCAF) this week gave its stamp of approval for the 2011/12 budget. At LE515 billion, this is the largest budget yet in Egypt's history. The budget would have been LE35 billion larger had not the government made a last-minute decision to tighten the budget. In the final budget, the deficit is around LE135 billion, down from a previous proposal of LE170 billion. The decision according to a Ministry of Finance (MF) statement comes in response to social dialogue and consultations with the HCAF. Having a smaller deficit, the statement said, meant that for the moment, Egypt no longer needs to borrow from the International Monetary Fund (IMF) nor the World Bank. This piece of news was music to the ears of many including AUC professor of finance Doha Abdelhamid who was against borrowing from international financial institutions such as the IMF in the first place. The government announcement that it would not be needing to borrow externally had come as a surprise to many, seeing that only two weeks before it said that, it had reached a 12-month stand-by agreement with the IMF for a $3 billion loan. It was also awaiting approval of the IMF board of directors to cash the first instalment. Following the government announcement, an IMF spokesman said: "The IMF continues to maintain a close policy dialogue with the authorities and remains committed to helping the authorities achieve their objectives of maintaining social cohesion and preserving macroeconomic stability, as well as moving Egypt's economy on a path that leads to high and more inclusive medium-term growth and employment." Magda Kandil, executive director of the Egyptian Centre for Economic Studies, finds it positive that the government has been able to narrow the deficit for 2011/12 but questioned why the government had not done that before the negotiation process with the IMF. "If we had been able to tighten the budget, why did not we do it from the start, regardless of the financing sources?" she asked. Kandil is perplexed by the fact that after weeks of negotiations after which it was announced that the IMF loan was being given to Egypt on concessional terms and free of conditionality, and is supportive of what the government wants to do with the budget, that the deal was called off without clarifications. She finds the reasons mentioned by the government that it does not need the support not convincing seeing that the deficit is still huge. The $3 billion from the IMF, though not a huge amount, would have helped, she believes. The MF statement had said that the current deficit can be provided for through the domestic market and some grants and aid. But Kandil does not approve of increased borrowing from the domestic market which she finds more expensive. The IMF loan, at 1.5 per cent interest rate, would have been cheaper than domestic borrowing, she said. Not only that, but she believes domestic borrowing by issuing treasury bills and bonds is more damaging to the economy because it crowds out the private sector. "It chokes off liquidity, increases the cost for the private sector, and gives banks a good incentive not to lend to the private sector and instead lend to the government which is risk free," she said. Abdelhamid is not a strong supporter of domestic borrowing either. Instead, she would rather see revenues improve out of the economy's recovered performance. More domestic investments are needed to generate growth, and taxation must be progressive. "The five per cent included in this year's budget is peanuts," she said, pointing out that in England, progressive taxation reaches up to 50 per cent. She also suggests that any fees levied on government services should increase. If someone wants, for example, to issue a birth certificate, they can pay higher to get it on the same day. "That would keep the service cheap for the poor, yet affordable for the better off," she noted. But what Kandil laments is that the huge announcement which followed the negotiations with the IMF indicated that this was a well thought out process and that the usual concerns about borrowing from the IMF were not there. In fact, she said that the agreement also involved a compromise on part of the IMF who were not dealing with this arrangement the usual way, but knew this was a special moment for Egypt where they needed to act unconventionally. The retraction of the government on its decision after this lengthy process, in Kandil's opinion, reflects the bigger problem of inconsistency and lack of credibility in government policy. "This leaves a negative impression locally and internationally on how economic policy is done, and questions whether there is a coherent policy to drive it," she said. In Kandil's opinion, although the IMF loan was not huge per se, it would have been the catalyst to attracting other grants and loans from the international community. "It was a signal to the international community that there is something right at the end of the tunnel; it would have added to the credibility of the government because it would act like the seal of approval by an international financial institution," she said. Not having the IMF on board will mean investors and creditors will continue to be hesitant and doubtful about the government's policies. And it may cause a domino effect whereby other international institutions may be reluctant to lend Egypt. Many donors had expressed their willingness to extend a helping hand to Egypt as part of a package of multilateral assistance. Already, Reuters reported that a World Bank spokesperson said that "if there is no IMF programme, we will have to take stock." The World Bank had announced late May that it would make available for Egypt some $4.5 billion over the upcoming two years. Kandil warned against reverting to Eurobonds for financing now that the agreement with the IMF has been put off. International creditors may have been willing to lend Egypt with IMF on its side, but without the IMF and with the deterioration in Egypt's credit rating, she said that the cost of borrowing would be very expensive. "Until Egypt's sources of foreign currency are on track, we should not risk added external burden," she said, pointing out that although Egypt's reserves remain in good shape, they have been deteriorating. But Abdelhamid is not a strong believer of the support the agreement with the IMF would have given Egypt. "The mere fact that Egypt reverted to the IMF for help is an indicator that it is in financial trouble and is in need of immediate funding as a buoyancy measure. Regardless of having signed with the IMF or not, the cost of borrowing on the international market would have been high." Neither does she believe that the agreement was free of any conditionality. "They [the government] would not have cancelled the loan if they had the justification for it," she said. However, some observers believe that the government has changed its mind on the loan because of public opinion against foreign borrowing. If the government had retreated for fear of social discontent would be another major concern to Kandil. "Is the country being run by rational dialogue or reaction to contain anger on the street?" she questioned, adding that the move [to retract their decision] reflects failure in the political and decision-making process that is not to the advantage of the government. Abdelhamid agrees with Kandil on the lack of clarity on government policy. She finds that the government has revealed a lack of any type of planning, be it short, medium or long term. They need to have a clear plan with a time frame in place on how they will facilitate investment and reinstate security, she stressed. This is something that not only they will be held accountable for, but it will give investors a clear vision of where they are going. That plan should reveal how their policies will all fit together to promote investment, growth and better social services.
