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Egypt interim govt faces tough task selling IMF reforms

In return for the $3.2 billion IMF accord, Egypt is expected to cut its budget deficit: a condition some officials say affects the country's sovereignty

 

Source: Reuters, Wednesday 29 Feb 2012

Egypt's interim government will have to muster all its skills of persuasion to sell austerity measures to a country weary after a year of political and economic strife, if details emerging on Cairo's planned deal with the IMF are anything to go by.

Egypt wants the $3.2 billion IMF accord to help it head off a looming crisis. But in return the IMF wants Egypt to cut its budget deficit.

"The IMF agreement has conditions that Egypt is expected to fulfill for the money to come," said an Egyptian official who has been closely following the talks. "One of them is reducing the country's budget deficit."

The official, who asked not to be named because he is not authorised to speak to the media, added that "those conditions have political consequences" and this is why officials have said in the past that IMF conditions affect Egypt's sovereignty.

The IMF has asked Egypt to draw up an economic reform plan with benchmarks and targets, sell the plan to the country's political forces, and line up aid pledges from other donors.

The unelected administration will be proposing the related measures as it steers the country through the contentious process of drafting a new constitution and holding a presidential election by the end of June.

The government announced this month it had approved a plan that would run for the length of the 18-month IMF programme and would sign an accord in March. But so far it has not released the plan for public debate as promised, and the IMF has said tersely that talks are still underway.

Few details have been released on the plan's austerity measures, but on 10 February Finance Minister Mumtaz El-Saeed was quoted as saying it includes changing Egypt's 10 per cent sales tax to a value-added tax (VAT) and directing energy subsidies to those who most need it.

New taxes and fewer subsidies are never popular, and the government has long tried unsuccessfully to enact similar measures. The sales tax was introduced as part of an earlier IMF programme in 1991 as the first step toward a VAT, and Youssef Boutros-Ghali, finance minister under Mubarak, had argued for a switchover to VAT throughout his seven years in office.

The now-reviled Boutros-Ghali also tried to tackle energy subsidies, which are eating up an ever-increasing share of the state budget as consumption grows.

As recently as late 2010 he sought a rationing system for subsidised liquid petroleum gas (LPG) sold in canisters for household cooking. Energy subsidies, especially for diesel, LPG and fuel for industry, make up almost 20 per cent of the budget.

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The Egyptian uprising was driven in part by economic grievances, and a year later strikes by workers demanding higher pay and better contracts continue to break out daily.

"How will you reduce subsidies when people are complaining about inflation, unemployment and inequality? It will be a hot potato in terms of the politics," said Raza Agha, an economist at the Royal Bank of Scotland.

The IMF has demanded that any accord have broad political support within Egypt, especially from the Muslim Brotherhood, which won nearly half the seats in the new parliament. The Brotherhood so far has rejected an accord except as a last resort, but analysts say it may have no choice but to go along.

A big question is whether Egypt has the resources to get through the presidential vote before a financial crisis hits.

The country has been spending $2 billion a month of its foreign reserves since October to prop up its currency. Reserves, less than half of what they were before the uprising, now stand at a worryingly low $16 billion, including $4 billion in gold bullion the government would be loath to draw down.

"If they carry on at the current rate, their reserves would nearly all be exhausted by then," said Said Hirsh of Capital Economics. "Then they would be at tipping point, which means you could get a totally disorderly devaluation."

This would boost inflation, prompt the government to raise interest rates to support the currency, reduce asset values and push borrowing costs up in an already weak economy, he added.

Even if it gets internal backing for the plan, the IMF has said Egypt must line up funds from foreign lenders to plug a funding gap the government estimates at $11 billion over the 18-month programme, meaning it would still have find about $8 billion from donors other than the IMF.

Egypt has asked the World Bank for $1 billion, the European Union for $660 million and $500 million each from the African Development Bank and the Arab Monetary Fund.

The country seems to be counting on help from Gulf states for the rest, but the finance minister was quoted last week as saying the fate of that aid was unclear. Saudi Arabia had pledged last year to provide up to $3 billion in budget support.

Prime Minister Kamal El-Ganzouri has said Gulf countries wanted an IMF agreement before they lend money to Egypt. Analysts say they also may not be comfortable sending funds until they see what kind of government emerges in July.

As a backup, Egypt is studying other ways to fund its budget shortfall, including selling certificates of deposits and land to Egyptians living abroad and issuing Islamic sukuk bonds.

The danger is that many of these are one-off measures that don't reduce the budget deficit in the long term, analysts say.

 

As a backup, Egypt is studying other ways to fund its budget shortfall, including selling certificates of deposits and land to Egyptians living abroad and issuing Islamic sukuk bonds.

The danger is that many of these are one-off measures that don't reduce the budget deficit in the long term, analysts say.

 

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Dented economy haunts Egypt a year after revolt

Worrying figures suggest Egypt's ruling military and future government will have to make some tough, potentially unpopular decisions in the coming months

 

AFP, Friday 10 Feb 2012

 

 

A year after Egypt overthrew Hosni Mubarak, the poor condition of the once-growing economy of the Arab world's most populous nation poses a threat to its restive transition to democracy.

That was highlighted on Friday, when ratings house Standard & Poor's downgraded Egypt for the second time since November over concerns about political stability and plunging currency reserves.

 

With an estimated growth rate of one to two per cent -- compared with five to seven per cent in past years -- the government is looking to the International Monetary Fund and donors to fend off a possible social explosion.

 

"One year after the revolution, the economy is in a state of anarchy, out of control," said Salah Goda, the director of the Economic Research Centre in Cairo.

 

Key earnings from tourism fell by 30 per cent, a shortfall of $4 billion, according to official figures that some tour operators believe are rather rosy.

 

As ratings agencies steadily degrade it, investors no longer jostle to buy into Egypt, which has a workforce sometimes cheaper than China's and a market of 82 million people.

 

On Friday, S&P cut its long-term ratings from B+ to B, saying "external financing risks have risen significantly, with foreign direct investment having declined sharply and net portfolio flows also having turned negative."

 

At the centre of economic concerns is the melting away of foreign currency reserves, which dropped by more than half in a year, from $36 billion in January 2011 to $16.3 billion.

 

Coupled with a deficit of 8.7 per cent of GDP -- more than 10 per cent, according to some economists -- there are doubts that Egypt can maintain its costly subsidy system.

 

The subsidies cover such essentials as bread, cooking oil and gas. Removing the subsidies raises fears of a social explosion in a country where 40 per cent of the population lives on just $2 or less a day.

 

In January, rumours of fuel shortages led to long queues of cars at petrol stations across the country, reflecting the general nervousness.

 

Reforming the system, whether under pressure from the sagging economy or international donors, could place the military-appointed caretaker cabinet in a dangerous position.

 

"Changing the policy of subsidies on food, petrol or butane gas can lead to political disaster," said Hamdi Abdelazim, an economist at the Sadat Academy for Management Sciences.

 

Depreciating public finances "will weigh on the government's ability to ask for credit from international and domestic funders," said economic analyst Zeinab Abdelrahman.

 

After initially turning it down, Cairo decided to ask for an IMF loan of $3.2 billion and an additional $1 billion from the World Bank.

 

But amid growing dissent against military rule, an official campaign against civil society groups, including American ones, might affect these loans.

 

World Bank chief Robert Zoellick said he expected "tensions" as Egypt requests aid from the international lender which, in turn, would demand progress on governance and democracy.

 

"They're reaching out to us, to try to see about financial support," Zoellick said recently.

 

"But if we do provide initial financial support to the government in general, we will want... to make sure it's transparent, that it relates to some of the changes that people were calling for or a broader social accountability. And there'll be tensions with that."

 

Even if these funds come through, they would represent less than half of the $10-$12 billion needed to keep the economy afloat, according to government figures.

 

Funds from Arab donors had been expected to help fill the gap, but Prime Minister Kamal El-Ganzouri has acknowledged that most of the funds never materialised.

 

Some Egyptians also fear that European generosity may also be curbed to help save the eurozone.

 

And the almost monthly outbreaks of deadly protests amid the confused political atmosphere do not encourage international financial backing.

 

That concern was echoed by S&P's announcement that its outlook for Egypt remains negative, reflecting "our view of the likelihood of a downgrade either if the government fails to stem the decline in reserves, or an uncertain policy environment and weak institutions emerge from the ongoing political transition."