Published: November 22, 2012
A US$4.8bn agreement with the IMF should set Egypt on the path to growth, providing long-term instability can be avoided.
Egypt and the IMF have agreed a US$4.8bn loan deal. The arrangement was a prerequisite for opening up a number of external financing options, which reportedly, including the IMF loan, equate to US$14.5bn. Although the identity of these sources has not been disclosed, it is know that Qatar, Saudi Arabia, the European Union and the US have all offered assistance.
The money comes with conditions. The country will have to reduce its budget deficit to 8.5% of GDP in FY2012/13, from 11% at the end of the fiscal year in June 2012. Andreas Bauer, head of the IMF technical team that negotiated the deal, elucidated how this will be achieved:
“The [government] plans to reduce wasteful expenditures, including by reforming energy subsidies and better targeting them to vulnerable groups,” he said. “At the same time authorities intend to raise revenues through tax reforms and by broadening general sales tax to become a fully fledged value-added tax.”
The government will also look to gradually reform its programme of energy subsidies, which accounts for a 20% of the country’s budget. Egypt’s markets reacted broadly positively. The cost of insuring government debt against default dropped slightly, and the country’s five-year credit default swaps were 0.20 basis percentage points tighter. The Egyptian pound remained steady against the US dollar at 6.10.
In recent days, however, events have transpired that could put the loan in jeopardy. President Mohamed Morsi, of the Muslim Brotherhood party, has issued a decree that places his rulings above judicial review. Although he has since emphasised that this is a short-term measure, and one that will cover only sovereign matters, it has led to mass civil unrest. James Fallon, Middle East analyst for Control Risks, believes the IMF will be concerned about the long-term implications of these events.
“I think it’s likely that current events will fizzle over some sort of public compromise,” he tells EMEA Finance. “Morsi will essentially maintain hold over the transition process. One potential concern of the IMF would be sustained instability. If the IMF deems this to be a serious issue in terms of Egypt’s ability to move towards a stable system of governance in the long term, then I think they could reconsider or tacitly delay things to get more clarity.”