The Elusive IMF Loan

Many investors, politicians, and Egyptian citizens are hoping for a speedy agreement concerning the proposed $4.8 billion IMF loan to Egypt. Investors and businessmen believe that the loan will provide the short term economic stability needed to shore up investment. The Egyptian government sorely needs the financing for cash-strapped sectors of the economy. Egyptian citizens, view the loan as a litmus test for the ability of the government to provide the minimum level of economic security for its citizens. Despite months of negotiations, the Egyptian government and the IMF appear no closer to reaching an agreement over the loan. Meanwhile, political turmoil threatens future progress, and the economic situation in the country continues to deteriorate. An increasingly weary IMF and constantly changing government are unlikely to arrive at an agreement over the loan anytime in the near future.  

Lending History
Before delving too deeply into the current IMF loan negotiations, it is important to look back at Egypt’s relationship with the IMF. Egypt officially became an IMF member in 1945, but the country did not begin receiving financial support from the IMF until the 1980s. Since the 80s, the IMF has supported four of Egypt’s economic programs with potential funds totaling roughly $1.1558 billion. Interestingly enough, Egypt only withdrew approximately $421.3 million of the potential funds that the IMF made available to disburse. Former President Hosni Mubarak was weary of accumulating too much foreign debt and instead opted to raise a good deal of funding from investors.

The last economic program that the IMF agreed to finance was from 1996-98; however, Egypt elected not to draw any funds for this program. As a result, the last loan disbursement from the IMF was in 1993, and all consequent interaction with the IMF since 1993 has been in the forms of policy consultation and technical assistance. To put these numbers in perspective, Egypt is currently seeking to acquire their first loan in twenty years, and the loan in question is roughly eleven times the total funds Egypt has withdrawn from the IMF since the 1980s. 

Negotiations for the current loan began approximately two years ago when a fact-finding team visited Egypt in April of 2011. By June, the IMF had outlined a 12-month, $3 billion financing package to Egypt that was intended to mark the beginning of financial support to the Middle East and North Africa region in the hope that economic support would facilitate democratic transition. In late July, the Egyptian government decided to refuse the proposed financial assistance, forcing the IMF to issue a formal statement saying, “[Egyptian] authorities see no immediate need for financial arrangement from the IMF.”

In early 2012, Egypt’s transitional government, led by the Supreme Council of Armed Forces (SCAF), requested that the IMF reconsider financing their economic program. Masood Ahmed, director of the Middle East and Central Asia department, visited Cairo shortly thereafter and jumpstarted the loan negotiations. By late November negotiations had progressed rapidly, and the IMF arrived at a staff-level agreement on a 22-month, stand-by arrangement loan for $4.8 billion. This laid the foundation for the loan, which the IMF and Egypt are still debating to this day. Commenting on the proposed loan, Andreas Bauer, Division Chief in the Middle East and Central Asia Department, explained “fiscal reforms are a key pillar under the program. The [Egyptian] authorities plan to reduce wasteful expenditures, including by reforming energy subsidies and better targeting them to vulnerable groups.”

Shortly after the staff-level agreement over the loan in November of 2012, the ostensible progress of this round of loan negotiations began to disintegrate. For reasons never explicitly mentioned by the IMF nor Egyptian authorities, the loan deal did not materialize. Masood Ahmed visited Egypt twice in 2013, and the IMF dispatched a fact-finding mission to the country in April; however, the visits did not produce any tangible results. The last official IMF statement regarding the loan was on April 21 of 2013 in which they noted that “the authorities and IMF staff have made further progress in their discussions in Washington this weekend,” but did not elaborate on what that progress entailed.

Political Economy or Pure Economics
Some analysts believed that political developments towards the end of 2012 were responsible for the failure to produce a loan agreement. Among the most significant political developments during this time period was Egyptian president Mohamed Morsi’s controversial presidential decree in November of 2012. The decree granted unchecked powers to the executive branch and sparked widespread public outrage. While he did not specifically mention to what degree political events affect negotiations, IMF director Masood Ahmed acknowledged that the IMF takes political instability into consideration. In a televised interview, Ahmed said, “The big challenge for Egyptians, [and] the big challenge for the IMF in supporting them is to try to find a way of working where you can develop some type of economic strategy that covers the next couple of years and provides markers and a framework; but also an economic strategy that is likely to be implemented after a change in government, which may happen in a few weeks.”

Other analysts, like Angus Blair, founder of Signet Institute in Cairo, were less convinced that political events play a major role in the IMF negotiations. Yet it is difficult to deny that the IMF’s considers the fluid political situation in Egypt when determining an economic strategy for the country.  Blair explained:
“Political events are a secondary issue in the negotiations over the IMF loan, but they      interfere in discussions, an example being that Egypt is on its fifth finance minister since the uprising. Consequently, the IMF has to both work with a new interlocutor and have discussions             continue against a weak economy and lack of sufficient economic reform.”
Whether political events are a secondary issue or not, it is likely that political turmoil and a constantly changing government are factors considered by the IMF. At the very least, dealing with five different finance ministers since January of 2011 is far from the most effective means of conducting negotiations over a $4.8 billion loan.

An Unsustainable Economy
So if the political situation is not necessarily a primary issue for the IMF, then it is reasonable to assume that the economic situation in the country is responsible for the lack of progress in the negotiations. Eamonn Gearon, professor of North African history and politics at John Hopkins School of Advanced International Studies, was not optimistic about the state of Egypt’s economy. “If Mubarak’s ouster was an act of a revolution, under Morsi the Egyptian economy is undergoing an evolution. Unfortunately, it is a slow journey, full of missteps and wrong directions, and its path may not yet be heading in the right direction,” explained the North Africa expert. Gearon’s choice of the word “evolution” does a good job highlighting that the current economic situation in Cairo is much more the result of a process than a spontaneous creation. In the same light, Blair considers “poor sentiment built up over a few years in the management in the private sector to be a major internal problem facing Egypt’s economy.”

Unsustainable subsidies and debt represent two pressing economic problems impeding a deal over the IMF loan. Egypt’s current subsidies are simply put too high for any healthy economy to sustain. During a lecture at the New America Foundation, Gearon noted, “in 2011, 26% of all government spending [in Egypt] was on subsidies.” The most worrisome of these subsidies are those that go to fuel and bread. The big picture problem is that the demand for subsidized fuel and bread has far exceeded the governments supply of available cash. The smaller picture problem with these subsidies in particular concerns their functionality. Ever sector of the Egyptian population, whether they be the wealthy elite or the marginalized poor, has the same access to subsidized fuel and bread.

The IMF wants Egypt to drastically cut these subsidies, but the Egyptian population may not be ready for the economic shock that such austerity measures would cause. With respect to subsidies, Gearon explains, “Both sides should know that subsidies have to be reduced before they can be gotten rid of, and they can only safely be reduced gradually.” He continued, “A good first step would be the introduction of means-tested assistance for bread and fuel, rather than a nationwide subsidies, handed out regardless of needs.” Such a means-tested assistance would assure that subsidized fuel and bread was available for poorer citizens while wealthier citizens would pay a higher price for less subsidized products.

The second economic predicament facing Egypt is its debt; however, it is important to distinguish between internal and external debt. As of this April, Egypt’s internal debt had reached an alarming $200 billion, forcing Standard & Poor’s to lower the credit ratings of many local banks. Egypt’s internal debt plays a major role in the loan negotiations because foreign lenders consider this type of debt an indication of a country’s ability to repay their loan. “It is important to note that foreign debt in Egypt is relatively low, with most of the country’s debt being in its own currency. This debt is increasing, however, as Egypt receives more financial aid from Qatar, Libya, and Turkey,” explained Blair.

In addition to the problems posed by internal debt, Egypt’s external debt has swelled to approximately $43 billion as the country accepted billions of dollars in loans from Qatar, Libya and Turkey.  Commenting on the Morsi administration’s handling of the loan, Eamonn Gearon said, “accepting handouts from Qatar and Libya must not be mistaken for economic policy.” These foreign loans may also make it more difficult for Egypt to obtain favorable terms from the IMF. Blair explains, “Qatar imposed interest on its loan to Egypt. Given that Egypt accepted conditionality from Qatar, it underpins the IMF in setting its own conditionality in discussions with Egypt.”

It’s About to Get Hot
To say that negotiations have had to contend with a great deal of political and social drama would be an understatement. Summer is in full swing in Egypt, and the summer months promise heat waves, power outages and water shortages. Egyptian authorities are worried about how the Renaissance Dam in Ethiopia will affect the flow and volume of Nile water in Egypt. On the political spectrum, the Supreme Constitutional Court ruled that the Constitutional Assembly and the Shura Council were formed by unconstitutional laws. The Tamarod (Arabic for rebellion) campaign recently announced that they surpassed their goal of 15 million signatures supporting the removal of President Mohamed Morsi from power. The campaign also planned popular protests on June 30, the date marking one year since President Morsi assumed office, to call for early presidential elections. If economic, social and political issues were not enough, holy month of Ramadan will begin in a couple of weeks—further disrupting the normal pace of life in Egypt.

Egypt faces a host of economic problems in the midst of a very unstable political situation; however, fixing Egypt’s economy and acquiring the IMF loan is not completely hopeless. “The economic problems in Egypt are surmountable, but it boils down to a matter of will and competent people,” explains Blair. Fixing the economic problems in Egypt will not only require a willingness on the part of competent people but also a good deal of cash. Analysts like Blair do not believe that $4.8 billion from the IMF is enough to solve Egypt’s increased economic problems. The IMF has not ruled out increasing the loan, but such a scenario is difficult to predict given that the two sides have not been able to agree over the original $4.8 billion loan. Egypt and the IMF may still yet be able to arrive at agreement, but the path to the loan is likely to be longer and more difficult than Egyptians had hoped for.

By Robert Mogielnicki


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