Egypt’s troubled path to securing an IMF loan

NEW YORK // Officials in the UAE have called for Egypt to seek a loan from the International Monetary Fund, which would help share the burden of stabilising its economy. Such a loan would also attract foreign investors and push Cairo to tackle crucial, but unpopular subsidy reforms.

Some observers say that massive Gulf aid gives Egypt an advantage in negotiations for a new IMF loan. But deep concerns within the US-influenced institution may delay a restarting of talks, which stalled in July.

Egypt has been negotiating for a $4.8 billion (Dh17.63bn) IMF loan since the overthrow of Hosni Mubarak in 2011.

Yet the deal has fallen through twice over terms that require Egypt to reform its huge subsidies programme.

Subsidies on food and energy account for a third of Egypt’s budget.

Economic reforms aside, the IMF may also want to be reassured by further moves towards a stable democracy.

“I do not think the IMF sees Egypt as a place it wants to take a reputational hit for,” said Bessma Momani, who served as a consultant to the IMF until recently and said she was familiar with the thinking of officials involved in its deliberations on Egypt.

Ms Momani, now a senior fellow at the Centre For International Governance and Innovation, said controls on political activity and the jailing of liberal activists “would make this a nightmare for the IMF in public relations terms”.

She said that Egypt’s president-elect Abdel Fattah El Sisi must garner more international legitimacy, which could be done through parliamentary elections scheduled for later this year. The outcome of the elections could alleviate concerns and show that the Egyptian people have bought into an IMF deal.

But tackling the problem of subsidies remains key, underlined by the interim prime minister Ibrahim Mahlab’s announcement that the government will exceed its energy subsidies budget by $9.8 billion in the fiscal year ending June 30.

Mr El Sisi has given few details about how he will tackle the problem, other than promising voters that reform will be gradual and telling the private sector that it must accept lower profit margins as he works to revive an economy in its worst slowdown in 20 years.

Cairo is apparently following through on this, announcing a proposal last week to raise taxes on investor profits by 10 per cent, a move that caused the Egyptian stock market to plunge.

Financial authorities reacted on Monday by raising the tax exemption on annual dividend earnings for individual investors resident in Egypt to 15,000 pounds (Dh7,715), up from 10,000 pounds earlier.

The taxation was, however, supported by the IMF's Egypt mission chief, Chris Jarvis, who told Bloomberg News that the taxes "are well targeted and fair", adding: "Solving Egypt's budget problems requires tax increases as well as subsidy cuts.

Ending subsidies might be politically explosive, but Cairo desperately needs to free up cash to stimulate the economy and spur job growth, economists say.

Between 13 and 25 per cent of Egyptians are unemployed, with the figure rising to 50 per cent among youth, who are entering the job market at a rate of one million people annually.

After the 2008 global recession and the ensuing unrest in Europe, the IMF “is arguably more nuanced today than it has ever been” on imposing austerity measures and “Egypt could potentially secure an IMF loan without…drastic scaling back of subsidies”, Max Reibman, a Gates scholar at Cambridge University wrote recently in a policy brief for the Carnegie Endowment for International Peace think tank.

Funds from the UAE, Saudi Arabia and Kuwait — who have together pledged more than $20bn to Egypt — put Egypt “in its most strategic position since early 2011” to negotiate with the IMF, Mr Reibman wrote.

The IMF loan would be only a fraction of the money given by the Gulf, and would have more strings attached, but it will be very difficult for Egypt to revive its economy for the long term without such engagement with international institutions.

The loan “would be an important signalling effect for international financial capital that Egypt is worth investing in and lending to”, Ms Momani said.

The IMF money “is a drop in the bucket for what Egypt needs, but it is a signalling effect that can push markets to respond positively to Egypt.”

International investors are still waiting to see whether Mr El Sisi’s economic policies are aimed at true reform that benefits the private sector and creates a stable economy for the long term. They want to see the political and security situations stabilise under his government.

“The Egyptian political transition is likely to be complete in 2014 but could result in a watered-down version of the pre-revolution regime, in our view,” according to a report last month by Bank of America Merrill Lynch: “This will likely weigh on growth and keep fiscal and external financing vulnerabilities high”.

Despite Egypt’s huge economic potential, the return of international investors is unlikely without coherent policies that address subsidies, corruption, unemployment and the military’s outsize role in the economy.

Mr El Sisi has signalled that economic reform and growth will be led by the Egyptian state and some analysts think he will rely primarily on close military advisers, which they say could prevent the overhaul needed to address deep-seated economic problems.

The military, for example, has launched a vocational training programme to create youth employment in military-run industries. But such schemes do little to unleash local entrepreneurship and attract foreign investment, and make only a modest dent in the enormous demand for jobs.

State employment “is not a practical solution”, said Mustafa Abdel Wadood, a partner with the Dubai-based Abraaj Group, at a recent talk in Washington. “You can look at it as a short-term measure but it comes back to bite you… the only way out of this is to encourage local and international private investment.”