Egypt: Taking matters into its own hands

With its recently passed budget for the 2011-12 fiscal year, Egypt has established a revised set of ambitious targets for tackling its public expenditures. Having rebuffed aid offers from several international organisations and countries, the move is a sign that the country will steer clear of a rising budget deficit on its own accord.

Passed on June 22, the budget set public spending at LE490.6bn ($82.2bn), down 4.65% from the LE514.5bn ($86.2bn) forecast in its draft released earlier in the month. The final budget also cut the deficit for the year from LE170bn ($28.5bn) to LE134.3bn ($22.5bn). This is still 8.6% of GDP but is down from the 9.5% expected in the 2010-11 fiscal year and a significant drop from the 10.9% forecast in the draft budget.

In response, Fitch Ratings approved of the country’s lowered budget deficit in early July, saying it sends a strong signal to the international community at a politically precarious time. The ratings agency affirmed Egypt’s “BB” long-term foreign currency Issuer Default Rating on June 28 and assigned it a Negative Outlook, removing it from Rating Watch Negative.

For several months, it seemed as if Egypt would be happy to accept monetary aid from the International Monetary Fund (IMF) and the World Bank to meet what was expected to be an 11% budget deficit. In mid-May, for example, the IMF announced that Egypt was looking for $10bn-12bn in financing from international lenders up to mid-2012. In late June the finance minister, Samir Radwan, confirmed this, saying that he expected to make up the deficit through the local markets, grants and funds from friendly countries and international organisations.

Also in early June Egypt said it was prepared to accept a $3bn loan from the IMF, which was to be given over the next 12 months to promote the economy and, in particular, to help decrease the country’s deficit. But in an abrupt turnaround at the end of the month, the country said it no longer needed the loan, partially as a result of popular pressure, according to sources quotes by the BBC.

The military council also declined to accept $4.5bn in funding from the World Bank that was to have been made available over the next 24 months, with $1bn to be used in fiscal year 2010-11 and another $1bn to be used in fiscal year 2011-12.

Egypt has also decided against tapping the international bond market for the time being, given that yields on 10-year Egyptian Eurobonds have dropped to 5.7% from over 7% in late January. Its last Eurobond, issued almost a year before former President Hosni Mubarak was ousted in February, was oversubscribed and the government had been planning to repeat this success with another long-term issue. However, it could be November or December before Egypt attempts to make use of the international markets again.

Instead, Egypt is now looking to accept aid from countries closer to home, such as Qatar and Saudi Arabia, both of which Radwan said have pledged to provide Egypt with about $500m for budgetary support. Another $2bn from the US to forgive debt and guarantee infrastructure bonds, plus $10bn investment from Qatar for infrastructure, are also expected to be forthcoming.

Egyptians appear to be divided over whether to accept monetary aid from the likes of the IMF and Western countries such as the US, as they fear the strings that have traditionally been attached to such funding could compromise the country’s political transformation. It is as yet unclear what “strings” could be attached to funding from Arab Gulf countries, however.

Ratna Sahay, the deputy director of the Middle East and Central Asia Department of the IMF, said on the organisation’s website that the IMF would be willing to help Egypt if it came back with requests for funding or assistance in the future.

“The Fund would work with the authorities to assess the situation at the time of any future request,” Sahay said. “Any arrangement would seek to support an economic programme that is fully owned by the government, and one that would help achieve the goals of the authorities and Egyptian people. Generally speaking, if the authorities anticipate that there might be a need to borrow externally, it is always better for any country to request an IMF arrangement at an early stage when economic challenges are less daunting.”

This last part is key to Egypt’s short-term economic prosperity, as international investors typically look to IMF-backed funding arrangements as an indicator of economic performance. Going it alone, with some help from its neighbours, could backfire if Egypt’s budget deficit for 2011-12 turns out to be higher than expected.

Still, with parliamentary elections scheduled for September and presidential elections set to be held after that, demonstrating political security is also a key component of a stable economy. Radwan, the finance minister, said in June he expects the growth rate for the 2010-11 fiscal year to be 2.6%, with GDP expansion for 2011-12 of between 3% and 3.5%. If Egypt can do this without international assistance, and can carry off successful elections and transfer of power in the autumn, it should be able to bring back international investors soon thereafter.