On 11 August, the International Monetary Fund (IMF) announced that it had reached an initial agreement with Egypt to lend the country $12bn over a three-year period, joining Iraq, Tunisia, and Jordan in taking money from the Washington-based fund. Egypt’s programme is likely to see the government of President Abdel Fattah Al-Sisi move toward a more flexible exchange rate, rebuild foreign-currency reserves, and cut spending.
Experts believe the government might not be able to achieve its targeted goals due to current circumstances. Daily News Egypt asked a number of experts about the loan and about how the government could achieve the most benefits from it while avoiding potential bad consequences.
Given the government’s bad history of meeting its own goals and fulfilling its promises, what would happen if it failed to obtain the full loan over the next three years? What is the worst-case scenario? And what other options would the government have if this happens? Experts see that the solutions are few and far between, yet difficult to apply.
Attracting investment through reform, transparency only ways to complete IMF loan programme: expert
While Egypt’s government seeks its $12bn loan from the International Monetary Fund (IMF), it also developed a plan to work through the current poor economic conditions. The plan includes more austerity measures and legislative reforms that primarily aim to fix the budget deficit.
But how could the loan help the Egyptian economy? And how should the government spend the loan to achieve its goals with minimum negative side effects for the poor?
Aliaa Mamdouh, a former economist at CI Capital Investment Bank, said the loan is very important for Egypt given the current situation, adding that the IMF accepted the proposal to provide a loan because of the government’s programme that aims to reform the economy.
Fixing the budget deficit, increasing foreign cash reserves, decreasing the unemployment rate, achieving a targeted GDP growth rate, and reducing the inflation rate is what the government should focus on through its programme to achieve the maximum benefits of the loan, explained Mamdouh.
She believes those targets would be tangible if the government planned to spend the loan on reform programmes, which would create economic and investment projects. The reforms should attract investors who would generate more investments, thus providing jobs, Mamdouh said.
The economist said that this loan grants Egypt a certificate of trust, which indicates that the reforms the government is seeking to implement should develop the country. The certificate should increase Egypt’s credit rating in the short term, and attract investors in the medium and long terms, she noted. She added that more donors may give Egypt more funds if the government completes its programme that was accepted by the IMF.
Mamdouh said that, according to the poor experience with which the government has been providing investors and specialists, it’s hard to believe that it could be successful and complete the three-year extended fund facility (EFF) of SDR 8.5966bn (equivalent to about $12bn).
There’s no transparency regarding what the government has done with its past loans and grants from Saudi Arabia, the UAE and Kuwait, Mamdouh said, adding that if the government spends all the money on subsidies and bridges the gap in the budget deficit it would be a waste—just as the Gulf countries’ money was.
She said the IMF does not care about how long the reforms will take as long as the government is working on them, which is doubtful.
The loan must be used to develop the road network, infrastructure and find financial solutions to problems that stopped foreign direct investments from entering Egypt, coinciding with reforms in the investment climate, Mamdouh said.
From another viewpoint, Mohamed Fared Khamis, head of the Egyptian Federation of investors said this loan is the only way for the government to develop the current economic conditions, so the federation is accepting of the loan.
Khamis, the founder of Oriental Weavers, one of the biggest companies in the Egyptian market, said that the loan would only be effective if it coincided with central reforms in the investment climate. Without reforms, the loan would not change the poor economic situation, he noted.
Worst-case scenario: government’s failure to obtain full IMF loan may lead to bankruptcy, say experts
No one can be certain that the Egyptian government will successfully apply its reform programme accurately and develop the country with the $12bn loan provided by the International Monetary Fund (IMF). On the other hand, there are no other obvious solutions and the government has not suggested any other ways for the country to reform the economy.
But what if the government did not succeed in obtaining the three-year extended fund facility, what would happen then? What are the consequences and is there any other solution?
Daily News Egypt asked Amira El-Fekki, a professor of economics at Cairo University, about the worst-case scenario with the IMF loan. She said if the government failed to get the full loan that means it would not be able to achieve the targeted GDP growth rate. She added that prices would get higher due to the lack of production, Egypt’s credit rating would fall, no foreign investment would enter the market, and Egypt might not be able to repay its loans, which unfortunately may lead to bankruptcy.
She believes that the government has no other options but to apply drastic structural reforms, adding that they should fix problems that prevent investments from entering the market. The government should also focus on how to eliminate the obstacles to investment, she noted.
El-Fekki stated that in order to develop its economy, Egypt must apply an actual free-market economy, adding that government protection on local industries has resulted in an abundance of old-fashioned and overpriced products. Investors did not develop their factories with the understanding that there would be competition with other products, she noted.
The professor said that the government must know that investors would not put their money in a country where there are economic and sovereign restrictions. It should focus also on how to restore tourism as the only source available for foreign currency, El-Fekki noted.
Aliaa Mamdouh, a former economist at CI Capital Investment Bank, said the IMF would not put a stop to the loan unless it feels the government is not serious about reforming the country.
She believes that irresponsible decisions, such as applying the capital gains tax then cancelling it due to private sector pressures, would be one of the top reasons for the IMF to stop the loan. The government must stop fluctuations in its decisions, she stated.
She concluded that the government must study every decision wisely, adding that it must understand that the economy would not get better so long as the rate of investment does not increase.
IMF loan may negatively affect political stability, solution is to protect the poorer classes: expert
When the government asked the International Monetary Fund (IMF) for a $12bn loan, it prepared a programme to be applied. According to the government headed by Sherif Ismail, the programme aims to reform the poor economic conditions in the country. But in order to gain the three-year extended fund facility (EFF) of 8.5966bn SDRs (equivalent to about $12bn), the programme must be applied carefully—if the application of any of these reforms is found lacking, this could freeze the loan.
Omar El-Shenety, CEO of Multiples Group, said that the government would face difficult challenges that may affect the loan’s segments. He said that in order to receive the full loan, Egypt must obtain a total of $21bn which leaves an additional $9bn for the government to borrow.
He said that Gulf countries may help Egypt with loans and grants; however, the government needs to borrow through a bond offering and other international agencies. If the government cannot reach the targeted number for the programme, the IMF would stop the loan, he noted.
El-Shenety said that the greatest challenge is to calm the effects and repercussions of the austerity measures to be applied in accordance with the programme’s targets—from cutting subsidies to the rise in the inflation rate due to currency floating. Prices would increase, which could lead to poverty—especially for the poorer classes—political instability, and possibly public demonstrations, which could also stop the IMF loan, he stated.
The CEO believes that parliament would accept the loan regardless of its side effects and the votes against the loan would not be heard, adding that government’s programme was accepted a few months ago—the same programme that the IMF also accepted. Some classes cannot accept becoming poorer; they may cause problems for the government if they decided to demonstrate against the loan or even call for a presidential election.
To prevent that from happening, the government should provide more subsidy programmes for the poorer classes such as the karama and takaful (dignity and solidarity) programme applied by the Ministry of Social Solidarity to address poverty in governorates across Egypt, he said.
El-Shenety sees that developing a safety net for the poor is a must if the government is to maintain political stability; however, this cannot be done without taking another look and revising the procedures that would be conducted following the loan and the implementation of the programme.
The loan’s social, economic, and political effects could be dangerous, he said.