An op­por­tu­nity for Egypt and the IMF

Financial Mirror (Cyprus) - - FRONT PAGE -

Egypt’s re­la­tion­ship with the IMF has long been rocky. Most no­tably, in 1977, when Egypt re­duced food sub­si­dies in ex­change for IMF fi­nanc­ing, ri­ots erupted in Egypt’s ma­jor cities, re­sult­ing in nearly 80 deaths and hun­dreds of in­juries. The deal had to be ter­mi­nated, and sub­si­dies re­in­stated. Sev­eral more deals have been dis­cussed since then, in­clud­ing in 2012; but most have gone off track or been aban­doned.

Against that back­ground, it is not sur­pris­ing that many Egyp­tians view the IMF as over­bear­ing, seek­ing to im­pose its will on coun­tries with­out suf­fi­cient re­gard for lo­cal con­di­tions. Some even view it as a tool of West­ern dom­i­na­tion. This per­cep­tion has caused past Egyp­tian gov­ern­ments not only to shy away from IMF sup­port, but also to de­lay the an­nual eco­nomic con­sul­ta­tions re­quired un­der the Fund’s Ar­ti­cles of Agree­ment.

But Egypt’s econ­omy is strug­gling, hav­ing been hit hard by both eco­nomic and non-eco­nomic shocks in the last few years. Se­cu­rity con­cerns, height­ened by the down­ing of a Rus­sian jet in Si­nai last Oc­to­ber, have pro­duced a sharp de­cline in tourism, a ma­jor rev­enue gen­er­a­tor. Re­mit­tances from Egyp­tians work­ing in the wealthy Gulf states, another key source of in­come, are be­ing un­der­mined by the de­cline in oil prices. Re­ceipts from the Suez Canal have been hit by to the slow­down in global growth and in­ter­na­tional trade. And for­eign di­rect in­vest­ment has de­clined, pend­ing, among other things, greater clar­i­fi­ca­tion of the re­forms that the govern­ment in­tends to pur­sue.

This would be a tough com­bi­na­tion of eco­nomic chal­lenges for any coun­try to ad­dress. But, for Egypt, which has been per­form­ing be­low eco­nomic po­ten­tial for decades, it has been par­tic­u­larly dif­fi­cult. In­deed, Egypt now faces large twin fis­cal and bal­ance-of-pay­ments deficits, ris­ing in­fla­tion, and re­duced eco­nomic growth. As a re­sult, its in­ter­na­tional re­serves and ex­change rate have come un­der pres­sure, de­spite as­sis­tance from wealthy coun­tries like Kuwait and, es­pe­cially, Saudi Ara­bia and the United Arab Emi­rates.

En­ter the IMF. The re­cent staff-level agree­ment with the Egyp­tian au­thor­i­ties is ex­pected to be fi­nalised in Septem­ber, upon Board ap­proval. On that ba­sis, Egypt is al­ready mak­ing plans to raise funds from other sources, in­clud­ing in­ter­na­tional bond mar­kets, to sup­port its re­forms.

The Fund’s in­volve­ment seems ap­pro­pri­ate. Af­ter all, the IMF was de­signed to help mem­ber coun­tries con­fronting pre­cisely the types of chal­lenges that Egypt faces. Specif­i­cally, it pro­vides fo­cused tech­ni­cal as­sis­tance in key ar­eas of eco­nomic and fi­nan­cial man­age­ment, while aid­ing in the de­sign of macroe­co­nomic frame­works for na­tional poli­cies. And its quickly dis­bursed fi­nan­cial as­sis­tance of­ten catal­y­ses other fi­nan­cial in­flows from pub­lic and pri­vate sources.

But, as his­tory shows, tak­ing ad­van­tage of what the IMF of­fers is not al­ways easy. Past ex­pe­ri­ence from many coun­tries in­di­cates that suc­cess depends on six key fac­tors.

The good news is that the re­cently agreed deal be­tween Egypt and the IMF seems to lay the ground­work for suc­cess (though the full de­tails have yet to be re­leased). For starters, Egyp­tian and IMF of­fi­cials are said to have placed sub­stan­tial em­pha­sis on a set of progrowth re­forms aimed at im­prov­ing sec­tors of Egypt’s econ­omy with sig­nif­i­cant untapped po­ten­tial.

More­over, the agree­ment is un­der­stood to in­clude fis­cal, mone­tary, and ex­change-rate mea­sures aimed at con­tain­ing fi­nan­cial im­bal­ances and en­sur­ing the pro­gramme’s medium-term vi­a­bil­ity. And, im­por­tantly, it pro­motes the strength­en­ing of so­cial-wel­fare pro­grams and safety nets – fea­tures that can do much to re­vive the IMF’s rep­u­ta­tion in Egypt and bol­ster trust among stake­hold­ers.

Of course, there is no way to guar­an­tee care­ful im­ple­men­ta­tion, com­pre­hen­sive com­mu­ni­ca­tion, or con­sis­tent ef­forts to re­in­force trust – all of which are vi­tal to en­able mid-course ad­just­ments that re­flect in­evitable changes in the do­mes­tic and ex­ter­nal eco­nomic en­vi­ron­ment. But, based on their re­cent in­ter­ac­tions, it seems that Egypt and the IMF have the po­ten­tial to over­come their le­gacy of testy re­la­tions.

A con­struc­tive re­la­tion­ship be­tween Egypt and the IMF would help at­tract more sup­port for the coun­try, both through ad­di­tional bi­lat­eral and mul­ti­lat­eral agree­ments and from do­mes­tic and for­eign in­vestors. Given the en­thu­si­asm showed at last year’s Egypt Eco­nomic Devel­op­ment Con­fer­ence in Sharm El Sheikh, which fo­cused on at­tract­ing in­vest­ment, it seems clear that Egypt’s prospects for eco­nomic and fi­nan­cial re­cov­ery are con­sid­er­able. As for the IMF, it is now in a bet­ter po­si­tion to demon­strate its ca­pa­bil­i­ties to help mem­ber coun­tries, thereby strength­en­ing both its cred­i­bil­ity and ef­fec­tive­ness.

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