Market analysis: IMF package would be Egypt’s reform anchor

An IMF agreement would be a crucial form of support for the Egyptian economy, in which has growth has slowed this year on a downturn in the tourism industry and a growing foreign exchange liquidity crunch.

Egypt's foreign reserves have plummeted as investors and tourists shunned the country following the 2011 uprising against the president at the time, Hosni Mubarak. Mosa'ab Elshamy / AP Photo
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The past week has been abuzz with reports that Egypt is set to sign a long-awaited IMF lending programme, which if true would be one of the most positive developments for the North African country’s outlook in many years.

Markets were clearly excited by the news, with the Egyptian stock market jumping 5 per cent higher the day after the reports were made public. Full details of a potential agreement are still unclear, however it is believed that the lending programme will be over three years and worth between US$10billion and $12bn.

On top of this, other bilateral lenders such as the World Bank would chip in with additional funding. When combined with a planned international bond sale later this year, this could result in an infusion of foreign capital of up to $20bn.

An IMF agreement would be a crucial form of support for the Egyptian economy, where growth has slowed this year on a downturn in the tourism industry and a growing foreign exchange liquidity crunch. The data is clear – since 2011 real GDP growth has averaged only 2.5 per cent, compared to 5 per cent in the previous decade. With an uncertain outlook, foreign investors have been reluctant about investing in longer-term FDI projects or even shorter-term treasury bills, meaning the central bank has been forced to run down foreign currency reserves and introduce capital controls.

In this respect, an IMF agreement will strengthen Egypt’s outlook as it would act as a major infusion of capital, but more importantly, it would provide a key reform anchor. These lending programmes generally come with performance targets that need to be met, which should bolster investor confidence about the direction of economic policy in the years ahead.

An IMF agreement for Egypt would also highlight the organisation’s growing influence across the entire Mena region. Once concluded, it would be the region’s fifth active programme in place, and represent 25 per cent of the fund’s current financial arrangements across the entire world. Iraq, Tunisia and Morocco already have lending programmes in place, while Jordan is expected to have its new loan arrangement concluded by the end of this month.

Clearly, many of the economies across this region are facing similar obstacles – concerns over security are dampening tourist inflows; weak confidence is undermining investment; unemployment is rising as growth settles on a low trajectory; and anaemic foreign capital inflows put downside pressure on exchange rates. The fact that Iraq has now signed three IMF agreements since last year highlights that this is not simply a trend taking place in Mena’s oil importers, but also holds for some of the region’s markets with abundant hydrocarbon wealth.

Not all of the IMF lending programmes are the same, however, and the distinction between them provides some useful clues about the challenges confronting these economies. Most of the fund’s lending traditionally comes in the form of stand-by arrangements, which are meant to address short-term balance of payments needs and come with strict programme targets.

In contrast, Tunisia and Jordan have now secured extended fund facilities which have longer tenors and are meant to help countries pursue more fundamental structural reform agendas. This compares with Morocco’s precautionary liquidity line (PLL), which is only offered to economies with sound macro fundamentals and an actual track record of pursuing a reform agenda. This is the third PLL Morocco has signed, although it has not actually drawn on any of the financing.

While the IMF’s involvement in the region is symptomatic of a lack of foreign capital inflows and weak economic growth momentum, the organisation’s growing footprint should be seen as a positive development. Most importantly, the fund’s lending acts as a policy anchor, committing authorities to pursuing strategies that are ultimately aimed at restoring stability in the short term, and improving competitiveness over the longer term.

Global surveys such as the World Bank’s Ease of Doing Business consistently show that many of these economies have failed to make progress at improving their investment climates, with some actually moving backwards in recent years. As a result, the IMF’s assistance – in the form of both aid and technical assistance – is now critical to ensure the region is eventually able to wean itself off foreign aid and multilateral assistance, and attract the private sector investment necessary to boost growth potential in the years ahead.

Jean-Paul Pigat is senior economist for global markets and treasury at Emirates NBD.

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