Watching Egypt's negotiation with the IMF for a proposed $4.8bn loan has been like watching a daytime soap opera. New characters are added to the main plot while old characters fade into the background, but the storyline remains largely unchanged. Every episode introduces a bit of new drama with no resolution of the main conflicts and little forward progress on the main storyline. And most episodes leave you slightly curious and puzzled about what will happen next. This week's episode is no different. This week's new character is Essam El-Haddad, a top aide to President Mohammed Morsi; he enters the storyline by blaming the IMF for delaying Egypt's loan agreement. Mr El-Haddad says that questions on when the deal would be signed should be directed to the IMF, complaining "there's always something coming up," to the Financial Times while in London last week, reported on 9 June 2013.
At the same time, Prime Minister Hesham Qandil seems to be saying something different: that Egypt and the IMF are in agreement. He was quoted as saying that "there are no differences between the two sides on the procedures to be adopted, but rather on the timing of their application." This is according to a 3 June 2013 article by Egypt Independent quoting the Prime Minister's comments from the state-run news agency MENA.
Enter into the scene recently appointed Minister of Planning and International Cooperation, Amr Darrag. He says that Egypt will sign the loan agreement in about three weeks, by the end of June, according to a report by Ahram Online quoting the Minister on 6 June 2013 to the state-run news agency MENA.
Meanwhile, what is the IMF saying? Gerry Rice, Director of the Communications Department at the IMF said in a briefing on 6 June 2013 at the IMF that "We're making good progress in our technical discussions with the Egyptian authorities, and we look forward to the resolution of the remaining technical issues, which would enable us to conclude the negotiations successfully."
The plot thickens and the dramatic music plays. We gasp and go to a short commercial break. But wait a minute. Haven't we seen this episode before? No. It is in fact a new episode, but just the same storyline. What is different in this episode is that some of our characters have changed, and although it seems like they are saying the same things as in the past, there are slight differences. And it is those differences that give us some insight to what to expect next as the drama unfolds.
In the last episode in April, the IMF said something similar but a little different. Masood Ahmed, Director of the Middle East and Central Asia Department also reported "good progress" on the ongoing negotiations. After two weeks of the IMF team working in Egypt, discussions continued on the sidelines of the annual meetings of the IMF and the World Bank. Then, Mr Ahmed said that "Those discussions are both to try and make sure that we have a complete and full set of data to start with and there are still some areas in which we are trying to [do this]—the authorities are making sure that the data that they have is the most recent and then we will look at that."
So, what we know from this week's episode is that the authorities negotiating on behalf of Egypt have been able to produce current and reliable data and that discussions are moving forward on technical issues. We do not know the degree to which differences on the technical issues remain. Despite the Prime Minister's statement about agreement on the issues, and simple disagreements on timing, the IMF is not clearly saying the same thing as the Prime Minister.
What we would hope to see in the next episode is the IMF saying that there is a ‘staff-level agreement' or using similar language. This would mean that indeed there is an agreement on all of the technical issues. Timing is not a trivial issue. How soon changes are made to cuts in government spending, particularly for subsidies, and increases in revenues through higher taxes make all the difference in the world on the financial health of the Egyptian economy and the ability to service the debt of this $4.8bn loan.
Egypt and the IMF had reached a staff-level agreement in November 2012. At that point, the IMF as a lender was satisfied with Egypt as a credible borrower. The economic programme presented to the IMF at that time was sound enough for the lender to believe that this was a good loan to make and that it was a good plan to aid Egypt in its economic recovery. That is not the case now. This week's episode shows us that we are closer to that goal, but that we are not quite there yet.
In the meantime, our characters face two obstacles in reaching their goal of a resolution to this protracted negotiation, one old and one new. As was true in November 2012, there isn't broad-based political consensus for taking the loan. Opposition political leaders, such as Mohammed ElBaradei, have been outspoken about the government's need to seek political compromise to win broad support for the loan.
Technically, since President Morsi was elected and since the IMF's ‘client' is the government of Egypt, and not the people of Egypt, the IMF could make the loan if there is a staff-level agreement even if there isn't broad support. But more than likely, the IMF's executive board, with its largest voting quota held by the US, will not be too keen to do so. The IMF takes quite seriously reputational risk from making loans to governments that do not have the support of the citizens and businesses that will ultimately be responsible for repayment. The organisation has suffered from doing so in the past and it is working hard to avoid more damage to its reputation from making such loans.
Which brings us to our new plot twist behind the scenes. Just this month, the IMF released a statement, an Ex Post Evaluation of Exceptional Access under the 2010 Stand-by Arrangement with Greece. In this statement, the IMF reviews the successes and failures of its efforts to aid Greece after the financial crisis and it has strong implications for the IMF's current feelings about lending to distressed nations, such as Egypt. Critically, it highlights that in the case of Greece, the IMF overestimated the "depth of ownership" of the recovery programme and the "capacity to implement structural reforms".
What this tells us is that more than likely, after the episode where the IMF says that a staff-level agreement has been reached, we cannot expect to see the episode where the loan is signed until we see the one about more broad-based political support for the loan, and the one about more credibility for the capacity to implement the necessary reforms. Many IMF statements in the past have indicated that the organisation has reservations about the current government's ability to implement needed reforms.
So, while Mr Darrag has told us that we can expect to see the loan signed by end of June, we have seen this in previous episodes, and it's not likely true. And while the Prime Minister has assured us that there is agreement but not on the timing, he is probably revealing some of the plot. Mr El-Haddad's comments that something always comes up might actually be quite close to the plot. Things have changed for the IMF. And things have changed for Egypt. The current economic plan on offer has not convinced the international lender in the current circumstances to loan Egypt the money as it had in November 2012. We will have to tune in next week to see what happens next.
