It’s back to the future: after snubbing the policy lender last June, Egypt is once again courting the IMF this week for a $3.2 billion loan – ostensibly for budget financing purposes.
Last year, the Egyptian authorities reached a staff-level agreement with the IMF for a 12-month, $3 billion stand-by arrangement, but changed tack after the ruling military regime said multilateral borrowing lacked democratic legitimacy pre-election. But this time, it’s different; Egypt needs cash – fast.
On Monday, Egypt’s planning and international cooperation minister, Faiza Abu el-Naga, announced that the government had asked the IMF for a $3.2 billion loan, to be disbursed over 18 months, with an agreement to be finalized by end-January.
Economic realities have forced the government’s hand: reserves have halved since the revolution to $18.3 billion; $63 billion of debt is due to mature in 2012 – which will force domestic banks to soak up yet-more debt, crowding out the public sector; tourism and FDI revenues, the main sources of hard currency, have vanished; and the budget deficit is projected at an uncomfortably high 8.7% of GDP.
“Conditions in Egypt have darkened considerably since June,” Said Hirsh, Middle East economist at London-based Capital Economics, told Emerging Markets.
In this context, a $3 billion loan from the IMF might help to eat into the fiscal deficit, but “Egypt needs substantially more resources to stop a balance-of-payments crisis,” said Hirsh, suggesting a double-digit figure is what’s needed to stem the rot.
“The country can delay a fiscal crisis by forcing banks to take on more debt, but without external support, a balance-of-payments crisis could take place in the next three to four months,” he added.
On the upside, the Muslim Brotherhood, the country’s strongest organized political force following the late-November parliamentary elections, has agreed that an IMF agreement is needed – as long as conditions attached to the loan are non-existent or light. This would mean allowing the Egyptian government to keep fiscal and monetary policy loose and to postpone structural reforms necessary for macro-economic adjustment.
Against this backdrop, Hirsh is doubtful that an agreement can be finalized.
“With presidential elections in June, it’s difficult to be positive about the ability of the political establishment to work with international institutions and the decision-making process is uncertain,” he said.
A balance-of-payments crisis following the erosion of foreign exchange reserves is a rare event in the Middle East, with the last such crisis taking place in Jordan in the late 1980s. But Hirsh reckons it’s now a distinct possibility in Egypt, unless an agreement is reached with the IMF – or a Gulf state rides to the country’s rescue.
In other words, underweight the Egypt pound, government bonds and stocks is likely to remain a consensus call.
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