CAIRO: As formal talks resumed between Egypt and the International Monetary Fund (IMF), economists said the $3.2 billion financial support package needs to be propped by clear policies in order to lift the economy.
"The Fund does not plan on imposing any conditions" on a loan to Egypt, IMF regional director Masood Ahmed was quoted by local media as saying. "All we want is a two-year reform program that is approved by all political forces and that succeeds in reducing the budget deficit," he told Al-Masry Al-Youm.
Monette Doss, senior analyst at Prime Group, told Daily News Egypt that the loan on its own “is definitely not going to be enough.”
“What we really need are clear policies — without these policies, aid packages are just a short-term fix,” she added.
Ahmed stressed that "energy subsidies and tax irregularities" are among Egypt’s key woes, Reuters reported.
Fitch Ratings said in a statement Tuesday that the IMF request is “only a first step.” The agency downgraded Egypt to ‘BB-‘ in December following a sharp decline in foreign reserves since October, which “further weakened the sovereign external balance sheet.”
Fitch’s negative outlook also cited ongoing instability and unclear policies.
“Egypt’s request for a $3.2 billion IMF standby facility is encouraging, although IMF assistance on this scale would only have a meaningful impact on the country’s finances if it catalyzed additional international support,” Tuesday’s statement read.
Magda Kandil, executive director of the Egyptian Center for Economic Studies, said the effect of the IMF package is not in its value, but rather the role that it will play in helping Egypt acquire funds from more donors.
“This has been the plan all along. We missed the opportunity earlier and none of the packages we had been waiting on are coming,” she said.
According to Fitch, “If granted, the [IMF] facility’s most positive impact would be to reassure international investors that Egypt is implementing clear and sustainable fiscal and economic policies, an essential platform for kick-starting renewed foreign investment.
“This in turn could stabilize — or even ease — borrowing costs until the transfer of power from the military council, due in June.”
In September, the Group of Eight (G8) pledged about $80 billion in financing to Egypt, Morocco, Tunisia, and Jordan over the next two years. Alaa Ezz, secretary general of the Egyptian Federation of Industries, previously told DNE that the G8 commitments come in the form of stimulus packages and are awaiting project proposals from Egypt.
Ezz argued that the G8 package would be better for Egypt because it would be directed to funding local projects, vital for the country’s development, thus creating more jobs.
Kandil said IMF talks with Egypt will take time as they develop a strategy to articulate the government’s vision and to help them proceed with fiscal consolidation while creating the right kind of policies.
Sooner than later
Egypt’s negotiations with the IMF are expected to take two to three months, the IMF’s Ahmed told Reuters on Tuesday. Egypt said it wants the aid as soon as possible to help it to plug budget and balance of payments deficits.
Much of Egypt’s foreign as well local investments have dried up over the past year. Foreign reserves have fallen an average of $2 billion a month, reaching $18.1 billion at the end of December and putting the currency at risk of further decline.
“We will definitely have a problem if our reserves continue declining at this rate,” said Doss.
Mahmoud Nasr, financial advisor to Field Marshal Mohamed Hussein Tantawi, head of the ruling military council, previously said that when reserves reach $10 billion, the country would only be able to pay for two months’ worth of imports.
A similar IMF assistance package was rejected in June. “Talks between the Egyptian government and the IMF mission began in Cairo Monday, seven months after the country’s military council turned down $5.2 billion of assistance from the IMF and World Bank, reflecting its reluctance to take on large new external debt and its preference to rely on domestic funding to finance the budget deficit,” Fitch Ratings said.
“…this decision was a factor in keeping FX reserves under pressure in the second half of 2011,” it added.
The administration’s reluctance over the past months is believed to be a reflection of the country’s lack of economic clarity, Doss said. “The IMF is also postponing the loan’s decision over the next two to three months until the government takes a clear stance on hot issues like banking policies, tourism and FDI,” she added.
With a budget deficit expected at LE 144 billion, the government has recently made some revisions to curb spending, but experts say the economy will continue to stagger until there is a clear transition to civilian rule.
When the army council assumed power after the ouster of Hosni Mubarak in February, they promised a six-month transition. However, as the January 25 anniversary approaches, the political transition is still marked by uncertainty as well as worsening relations between the Supreme Council of the Armed Forces (SCAF) and activists.
“It’s obvious that the public has too much resentment towards the SCAF. If the public was satisfied, then institutions like the IMF wouldn’t have a problem, but that is not the case,” said Doss.
She added that the IMF may want to wait and see the kind of economic policies debated by the first parliament since Mubarak, which is expected to hold its first session on January 23.
The IMF’s Ahmed met Tuesday with members of the Muslim Brotherhood’s Freedom and Justice Party which won a majority of the seats.