Will the IMF loan save Egypt?

Pros and cons of the in­ter­na­tional aid pack­age

Business monthly (Egypt) - - INSIDE - BY TAMER HAFEZ

In early 2015, the Egyp­tian govern­ment spent some LE 300 mil­lion on a splashy eco­nomic devel­op­ment con­fer­ence in Sharm el-Sheikh that aimed to win back the con­fi­dence of for­eign in­vestors. A few months later, Pres­i­dent Ab­del Fat­tah el-Sisi un­veiled a LE 64-bil­lion up­grade to the Suez Canal, which not only aimed to dra­mat­i­cally in­crease canal rev­enues (de­spite the pre­dic­tions of skep­ti­cal an­a­lysts who pointed to a de­cline in world­wide ship­ping traf­fic) but promised to trans­form the canal re­gion into a global ship­ping in­dus­try hub, at­tract­ing pri­vate de­vel­op­ers to the spe­cial new Suez Canal Eco­nomic Zone, where busi­nesses would en­joy all kinds of in­vest­ment in­cen­tives. How­ever, to date, the SCZone has at­tracted just one firm, China’s state-owned TEDA, a de­vel­oper that has been in talks with Egypt about the plan since be­fore the 2011 rev­o­lu­tion. De­spite the state’s high-pro­file ef­forts, new for­eign in­vest­ment to Egypt in fis­cal 2015/16 to­taled $112 mil­lion less than the year be­fore.

In re­cent months, with no cards left to play, Egypt finally went ahead with painful but long-awaited eco­nomic re­forms that had long been rec­om­mended by the In­ter­na­tional Mon­e­tary Fund. With a new value-added tax and a free-float­ing, much de­val­ued pound, Egypt hopes to send a strong mes­sage to for­eign in­vestors by finally gain­ing IMF ap­proval for a three-year ex­tended fund fa­cil­ity worth $12 bil­lion, the largest such loan to a MENA coun­try. “This loan gives for­eign in­vestors the right mes­sage and as­sur­ances that we are com­mit­ted to re­forms, and that th­ese re­forms are the right ones,” said fi­nance min­is­ter Amr el-Garhy at a Novem­ber

press con­fer­ence. While both the IMF and the govern­ment have taken pains to por­tray the re­cent aus­ter­ity mea­sures as 100-per­cent Egypt’s idea, it’s broadly ac­cepted that the IMF con­di­tioned the money on pulling the trig­ger on po­lit­i­cally sen­si­tive mea­sures like sub­sidy cuts and de­val­u­a­tion of the cur­rency. “The IMF will heav­ily in­flu­ence the govern­ment’s eco­nomic poli­cies in the com­ing pe­riod,” says Sherif el Di­wany, for­mer head of Egyp­tian Cen­ter for Eco­nomic Stud­ies.

The IMF’s pre­scrip­tion for heal­ing Egypt’s econ­omy—which has suf­fered deeply in the wake of the po­lit­i­cal tur­moil that be­gan in 2011—cen­ters on cut­ting bloated govern­ment costs and in­creas­ing rev­enue. In Septem­ber, a new 13-per­cent VAT re­placed Egypt’s old 10-per­cent gen­eral sales tax. Then there was the Cen­tral Bank’s sur­prise de­ci­sion to al­low the be­lea­guered pound, which had sunk to record lows against the dol­lar on the forex black mar­ket, to trade at mar­ket rates. In just one day af­ter the Nov. 3 float, the cur­rency plum­meted 73 per­cent—from LE 8.8 to the dol­lar to more than LE 15. Not coin­ci­den­tally, the fol­low­ing day, the govern­ment hiked fuel prices by 30 to 47 per­cent. A month later, for the sec­ond time in 2016, Egypt sharply hiked cus­toms du­ties on some 320 cat­e­gories of goods deemed “non-es­sen­tial,”—in­clud­ing cos­met­ics, re­frig­er­a­tors and elec­tric shavers—in an at­tempt to en­cour­age do­mes­tic pro­duc­tion and curb a bal­loon­ing trade deficit. This only added to the anx­i­ety of Egyp­tian con­sumers, who were al­ready fac­ing dou­ble-digit in­fla­tion.

In the wake of all this, some an­a­lysts and lo­cal of­fi­cials have opened fire on the IMF, ar­gu­ing that such aus­ter­ity poli­cies which will lead Egypt to ruin, es­sen­tially throw­ing out the baby with the bath­wa­ter by oblit­er­at­ing lo­cal pur­chas­ing power. How­ever, for­mer Min­is­ter of Fi­nance Ahmed Galal— who ar­gued against a pro­posed $4.8 bil­lion IMF loan dur­ing his ten­ure in 2013 be­cause he be­lieved the aus­ter­ity mea­sures it pre­scribed would ul­ti­mately keep the lo­cal econ­omy from flour­ish­ing—points out that the IMF is sim­ply an in­ter­na­tional lend­ing agency fo­cused on macroe­co­nomic sta­bil­ity; it’s the state’s job to pro­vide a so­cial safety net, to “come up with an agenda to achieve so­cial jus­tice and pro­tec­tion in ad­di­tion to eco­nomic growth.”

Price in­creases are hit­ting all walks of life, but, as al­ways, the poor will feel the im­pact the hard­est. “Low-in­come, and now mid­dle-in­come in­di­vid­u­als are the ones who are pay­ing the price for such fast-paced re­forms,” says Mo­hamed Reda, CEO of Solid Cap­i­tal, which is work­ing on a re­port for a lo­cal res­tau­rant chain on lo­cal con­sumer pat­terns. Trade Eco­nomics, a web­site, pre­dicts that in­fla­tion could pass 20 per­cent by mid-2017. “For the first half of 2017, the ex­pec­ta­tion is for in­fla­tion to be over 20 per­cent,” agrees Amr el Alfy, global head of re­search at Mubasher Fi­nan­cial Ser­vices.

Busi­nesses will have to weigh how much of th­ese cost hikes they can pass on to their cus­tomers with­out risk­ing a sub­stan­tial drop in sales. “My costs have gone up by 100 per­cent on the back of re­cent ‘re­forms’ end­ing with the float­ing of the pound,” grum­bles Ahmed Zaghloul, the CEO of Oc­to­ber Pharma, which, like many lo­cal firms, de­pends on im­ported raw and semi-fin­ished ma­te­ri­als to pro­duce medicines, mainly for the lo­cal mar­ket. Some an­a­lysts be­lieve the govern­ment’s strat­egy may in­deed be a boon to lo­cal in­dus­try, as man­u­fac­tur­ers are driven to use cheaper in­puts from lo­cal sup­pli­ers as the cost of im­ports sky­rock­ets. “We might ac­tu­ally see higher de­mand for lo­cal prod­ucts as im­ports be­come too ex­pen­sive,” says Alfy.

He be­lieves that the ad­verse eco­nomic im­pact of higher prices, though painful, will be tem­po­rary. “A short­term drop in con­sump­tion will not be a ma­jor de­ter­rent,” says Alfy. This sen­ti­ment was echoed by, Philippe Le Houérou of the In­ter­na­tional Fi­nance Corp., who vis­ited Egypt midDe­cem­ber for the first time to sign three fi­nanc­ing agree­ments to sup­port lo­cal en­ter­prises, in­clud­ing $20 mil­lion to de­vel­oper Has­san Al­lam Hold­ing plus $10 mil­lion for Al­ge­bra Ven­tures and $2 mil­lion for Flat6Labs, out­fits that en­cour­age lo­cal star­tups. “Egypt has tremen­dous long-term po­ten­tial, given its large work­force, strate­gic lo­ca­tion and well-es­tab­lished man­u­fac­tur­ing sec­tor,” Le Houérou told re­porters dur­ing his visit. “The coun­try's re­cently an­nounced eco­nomic re­forms will help it cap­i­tal­ize on that prom­ise by breath­ing new life into the pri­vate sec­tor, which can drive in­no­va­tion and employment and cre­ate last­ing op­por­tu­ni­ties for all Egyp­tians.”


Mainly, the idea of the IMF loan is that it’s a sig­nal to po­ten­tial in­vestors that Egypt is se­ri­ous about mak­ing eco­nomic re­forms. “The govern­ment for the past five years has con­sis­tently failed to pass mean­ing­ful re­forms due to so­ci­etal pres­sure and weak po­lit­i­cal will,” says Ihab el De­souky, head of the Eco­nomics depart­ment at the Sa­dat Academy for Man­age­ment Sci­ences. He cites Egypt’s re­cent for­eign cur­rency and com­modi­ties short­ages as some of the un­for­tu­nate con­se­quences of such dither­ing. “With the IMF pro­gram, the govern­ment is a stu­dent and the IMF is the teacher. And the stu­dent needs to fol­low the in­struc­tions of his in­struc­tor,” says De­souky, adding, “This is a good thing.” Un­con­di­tional aid such as the as­sis­tance Egypt re­ceived from the Gulf in re­cent years only en­cour­aged the govern­ment to kick the can fur­ther down the road with­out solv­ing any of its fun­da­men­tal prob­lems.

And of course, the $12 bil­lion will at least pro­vide some more wig­gle room. Ac­cord­ing to the fi­nance min­is­ter, the first tranches of IMF cash will go di­rectly

to the na­tional trea­sury to sup­port Egypt’s for­eign re­serves, which stood at around $23 bil­lion by the end of Novem­ber—up from a crit­i­cal level of $15.5 bil­lion at the end of July but still well be­low the $36 bil­lion of the pre2011 era. In in­ter­views with lo­cal me­dia, CBE Gov­er­nor Tarek Amer stressed that the money would not be spent de­fend­ing the pound in or­der to pre­vent de­val­u­a­tion and run­away in­fla­tion, as it was in re­cent years. "In­ter­vene? No. Ab­so­lutely not. This is his­tory. There will be no in­ter­ven­tion,” Amer told state-owned Al Ahram in De­cem­ber. In an in­ter­view with En­ter­prise, an on­line busi­ness news round-up, the CBE gov­er­nor said: “We want this new­born child to start stand­ing on its own feet and sup­port­ing it­self.”

How­ever, some worry about how Egypt will man­age when the time comes to re­pay the IMF loan, which will be paid back over 10 years at an in­ter­est rate of be­tween 1.55 and 1.65 per­cent. Egypt has also bor­rowed an ad­di­tional $7 bil­lion from other in­ter­na­tional sources such as the World Bank and the African Devel­op­ment Bank as part of the over­all in­ter­na­tional fi­nan­cial aid pro­gram. This should bring Egypt’s to­tal for­eign debt to around $75 bil­lion, up from $39.8 bil­lion at the start of 2016. “This is an un­prece­dented level of for­eign debt,” says Adly. “The govern­ment doesn’t re­ally ad­dress the ele­phant in the room, which is from where will this money be paid back, with in­ter­est? We are now in a loop where we’re tak­ing out new loans to pay for old loans.” On top of its gen­eral for­eign debt, Egypt is also im­mi­nently plan­ning to bor­row $25 bil­lion from Rus­sia to build a nu­clear power plant.

Mo­hamed Zakaria, a mem­ber of par­lia­ment, adds that Egypt needs to do a lot more to make its busi­ness cli­mate at­trac­tive to in­ter­na­tional in­vestors than “pass laws and re­stric­tions that in­crease the cost of do­ing busi­ness in Egypt.” He notes that Egypt was ranked a lack­lus­ter 122nd out of 190 coun­tries in the World Bank’s lat­est Do­ing Busi­ness Re­port. “En­cour­ag­ing ex­ist­ing and po­ten­tial in­vestors, at home or abroad, doesn’t hap­pen just be­cause we have a lot of for­eign cur­rency re­serves in the Cen­tral Bank,” says Zakaria, who men­tions that Egypt needs to im­prove busi­ness pro­ce­dures per­tain­ing to things like pay­ing taxes, en­forc­ing con­tracts and trad­ing across borders.

So far, the govern­ment hasn’t launched any com­pre­hen­sive plan to pro­tect the poor from rising prices in the wake of re­cent mea­sures. Hany Helmy, chair­man of Al Shorouk Se­cu­ri­ties, says that the govern­ment could have done much to re­as­sure Egyp­tians and the busi­ness com­mu­nity fol­low­ing the slew of re­cent re­forms by sim­ply pre­sent­ing some con­tin­gency plans. “Hav­ing any sort of solid ground is vi­tal for po­ten­tial in­vestors, and they are def­i­nitely ea­ger to come given how fa­vor­ably the stock ex­change re­acted to the news,” says Helmy, who none­the­less cau­tions that the health of the stock mar­ket is not nec­es­sar­ily in­dica­tive of longer-term in­vest­ment en­thu­si­asm or the health of the over­all econ­omy.

Khaled Ab­del Fat­tah, a fi­nance pro­fes­sor at Ain Shams Uni­ver­sity, raises the dark ex­am­ple of Ar­gentina’s eco­nomic col­lapse at the turn of the 21st cen­tury, which many blamed the IMF for help­ing set off the cri­sis. “I am wor­ried be­cause I am see­ing sim­i­lar­i­ties be­tween what is hap­pen­ing now in Egypt and what hap­pened in Ar­gentina,” says Ab­del Fat­tah. The South Amer­i­can coun­try’s pub­lic debt grew enor­mously dur­ing the 1990s, but the IMF kept lend­ing it money and ex­tend­ing its pay­ment sched­ules. A 2004 re­port by the In­de­pen­dent Eval­u­a­tion Of­fice of the IMF crit­i­cized the in­ter­na­tional lender for sup­port­ing Ar­gentina's ex­change rate pol­icy that pegged the peso to the dol­lar for too long—which caused its debt to bal­loon out of con­trol and ul­ti­mately forced the govern­ment to de­clare the largest sov­er­eign debt de­fault in his­tory in early 2002. De­spite con­cerns raised by oth­ers, for now, Egypt’s for­eign debt is still at a rel­a­tively rea­son­able level, ar­gues Alfy. “Egypt’s debt is al­most equal to its GDP, but only about 15 per­cent of that debt is in for­eign cur­rency,” he ex­plains.

An­a­lysts say much de­pends ef­forts to pro­mote in­vest­ment in Egypt that com­ple­ments the IMF loan, which of­fi­cials hope to do with a pro­posed new com­pre­hen­sive in­vest­ment law, for ex­am­ple. “Right now Egypt is set for mas­sive eco­nomic growth,” says Pas­sant Fahmy, a re­tired banker who lec­tures on eco­nomics in lo­cal uni­ver­si­ties point­ing to pos­i­tives like the 2015 dis­cov­ery of a “su­per­giant” nat­u­ral gas field off Egypt’s Mediter­ranean coast and “the fact that Egypt’s ex­ports are cheaper than they have ever been.” She says: “The govern­ment now has a very sim­ple task: cre­ate what in­vestors per­ceive as a busi­ness­friendly environment.”

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