Egypt: Agreement on IMF loan is likely to lead to short-term pain but long-term gains
This month, Egypt struck a preliminary deal for a USD 12 billion IMF loan programme, which will be disbursed over 3 years. The agreement is subject to approval by the IMF’s Executive Board, which is expected to consider Egypt’s request in the coming weeks. According to international press, approval will immediately release a USD 2.5 billion tranche.
However, a condition for approval is securing USD 5-6 billion in bilateral financing for the first year. Gulf countries, notably the United Arab Emirates and Saudi Arabia, are expected to come forward with this financing. In return for the loans, Egypt will need to push through some structural reforms.
Anticipated moves are likely to include a further devaluation of the overvalued pound after it was already devaluated by 14% in March 2016 in the biggest devaluation since 2003.
Other priorities will be: bringing down the budget deficit (expected at -11.5% of GDP in 2016), putting government debt on a sustainable path (estimated at 98% of GDP in 2016), tackling the rather difficult business environment (Egypt ranks 131st out of 189 countries in the Ease of Doing Business 2016 ranking) and raising growth (forecasted to be at 3.3% in 2016 compared to 5.1% in 2010).
Also bringing down inflation (around 14% in June 2016) to single digits while creating jobs, especially for young people of whom an estimated 35% is unemployed, will be a main concern.
Impact on country risk
The IMF loan should restore confidence in Egypt´s economy, which has been ailing since the Arab Spring in 2011. However, the loan comprises a programme with structural reforms that are likely to be painful, particularly in the short term.
Reforms are expected to bring higher inflation, tighter monetary and fiscal policy and – as a consequence – weaker domestic demand. Cutting subsidies and increasing inflation (especially of food) can also trigger political unrest. Nevertheless, structural reforms will bode well for Egypt ´s economy in the medium term.
Devaluation will strengthen competitiveness, support exports, attract foreign direct investments and foster growth and jobs. The IMF loan could also help lowering borrowing costs to finance the fiscal and current account deficits.
In addition, it will boost the low level of foreign exchange reserves. Indeed, in July reserves dropped to the lowest level in 16 months, well below the recommended threshold of 3 months of import cover, after authorities repaid about USD 2 billion in debt to Qatar and the Paris Club.
It should be noted that Egypt already reached 2 agreements with the IMF in the past 5 years. However, the agreements never made it to the IMF board due to a lack of political will to implement reforms and fear for rising social tensions.
However, this time commitment from the authorities appears to be stronger. Some progress has already been made in fiscal reforms that were being delayed as they risk popular backlash.
This is illustrated by the hiked electricity prices by 20-40%, plans to end fuel subsidies within 3 years and the approval of a VAT of 13% as of September.
Country risk analyst Jolyn Debuysscher, Credendo Group
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