Under negotiation: IMF loans engender both hope and uncertainty

The government’s attempts to meet Egypt’s budgetary shortfalls have comprised three broad strands: the sale of government bonds in the domestic market, securing sovereign grants from friendly nations, and attempting to secure a financing package through the IMF, which could help open the door to additional developmental aid from international financing organisations. While Egypt has met with considerable success in its pursuit of the first two initiatives, the third has proved to be more problematic.

NEW DEAL: The negotiations surrounding the potential IMF loan, which are currently stalled, have continued for over two years, starting with the arrival of an IMF fact-finding mission in Cairo in April 2011. By June 2011 the IMF had formulated a 12-month, $3bn financing package that was announced as a condition-free, low-interest offer. However, by late July the interim rulers of the country, the Supreme Council of the Armed Forces (SCAF), had decided to reject the proposed assistance programme, arguing that it was a decision to be made by an elected parliament. The decision was not surprising, given the popular criticism of previous IMF structural adjustment programmes since the 1980s that have focused on austerity measures and macroeconomic policies, and which targeted inflation, privatisation of public sector entities and market liberalisation, but which garnered little popular support.

ALTERNATIVES: Because of this, Egypt has preferred to seek private investment rather than accrue external debt. The last loan disbursement was in 1993, and since then the IMF has provided mainly consultation and technical assistance. The privatisation question presents a mixed picture: while the government’s divestments of some of the largest state banks during the Hosni Mubarak era has been largely welcomed as revitalising a bloated sector, privatisation of some state-owned factories has led to layoffs and civil discontent. As the debate over IMF intervention rumbled on, the Salafi Nour Party, which alongside the Muslim Brotherhood’s Freedom and Justice Party was a big winner in the nation’s first post-uprising parliamentary elections, criticised the government’s plans to seek funding from international financial institutions. The party also suggested borrowing from European banks that lend in accordance with sharia – an unlikely path in the context of Egypt’s falling credit rating.

SECOND THOUGHTS: In the context of a more challenging economic backdrop, SCAF reversed its earlier decision and in early 2012 requested the IMF once again consider financing the government’s economic programme. Even the previously obdurate Nour Party showed itself more amenable to the idea of international funding, despite the fact that the loan repayment terms included interest, prohibited under sharia law.

Negotiations resumed and by late November 2012 the IMF had arrived at a 22-month, stand-by agreement loan for $4.8bn. However, unlike the initial offer, the new proposal came with conditions. Although neither party has revealed detailed criteria, it is thought that the Egyptian government was requested to meet a number of broad economic requirements beyond the IMF’s public stipulation that the agreement must achieve a consensus across the political spectrum.

Chief amongst these is that the government address the issue of subsidies, which currently consume around 28% of the state budget and account for over 10% of GDP. It is also thought that the IMF has requested substantial reform of the tax system, such as a transition to a value-added tax (VAT) mechanism on sales and purchases and a system of progressive income taxation rather than the current flat rate system.

However, despite public declarations from both the Egyptian authorities and the IMF that progress on a loan agreement was being made, the following months saw no conclusion to the process. Masood Ahmed, director of the IMF’s Middle East and Asia department, visited Egypt twice in early 2013 and in April the IMF sent a second fact-finding mission. However, once again nothing materialised and the removal of the president from office has made the likelihood even more remote.