Egypt has formally requested a $4.8 billion loan from the International Monetary Fund, up from the $3.2 billion that had been discussed since last year.
A loan package would add credibility to economic reforms needed to restore investor confidence. The IMF loan should be signed by the end of November, or the beginning of December and will probably cover 5 years at an interest rate of 1.1%, the Egyptian prime minister Hisham Kandil told reporters today.
It offers some reassurance to investors that Egypt’s meeting with the IMF delegation has been fruitful. But there is a long way to go.
The nation’s economy has been crippled by 18 months of political turmoil in the wake of last year’s popular uprising against former president Hosni Mubarak. The country’s balance of payment problems have worsened – the balance of payments deficit doubled to $11.2 billion in the first nine months of 2011-2012 compared to a shortfall of $5.5 billion a year earlier.
Foreign investors have fled and are reluctant to return partly because of fears that a sharp currency devaluation could wipe out any returns . Foreign direct investment fell to a meagre $218 million in the nine months that ended in March compared with $2.1 billion a year earlier.
Foreign reserves have also fallen to well under half the levels seen before last year’s uprising, plummeting to $14.42 billion at the end of July, from $36 billion at the end of 2010.
The crisis has left local banks taking on much of the short-term and other lending to the state and the government has also borrowed directly from the central bank. State borrowing costs reached their highest in well over a decade in late June.
Time is running out for Egypt. Rebel Economy interviewed half a dozen economists and came up with the following (chronological) list of what needs to be done to revive Egypt’s economy.
1) IMF loan to be rubber stamped:
Egypt needs to get some stability on the balance of payments front or it will eventually face a major crisis. Securing a loan with the International Monetary Fund would encourage foreign investment inflows and provide the seal of approval for the direction of economic policies as well. It is looking like this may happen by the end of this year.
2) Devaluation of the Egyptian pound:
Some economists say this needs to happen either right after the IMF deal or simultaneously. Investors and economists have repeatedly called for a devaluation to ease pressure on reserves. The central bank has helped limit the pound’s fall to 4% since the beginning of the uprising last year, but the currency is expected to fall 9% in the coming year– to a historic low.
As long as there is a managed devaluation, rather than disorderly, the costs of devaluation should be manageable. Higher inflation as a result of devaluation should be moderate given that the economy is weak and global commodity prices are likely to fall. Plus increased costs of subsidies after devaluation should be partly offset by higher revenues from energy exports and the Suez Canal, meaning the impact on public finances will probably be limited.
3) Reforming Public Finances:
Restructuring the budget to cut the deficit. At the moment, Egypt’s draft budget shows the deficit is projected to rise 12.5% to 135 billion Egyptian pounds ($22.26 billion) in the fiscal year that began on July 1 even though the government is already struggling to deal with its current shortfall. It must have a plan to limit wasteful consumption spending (i.e., inefficient subsidies) so that spending can shift to urgent priorities: targeted social support, education and health spending, public infrastructural projects and incentives to mobilize growth and employment in the private sector.
4) A Wholesale Reform of the Public Sector:
Egypt’s out-dated bureaucracy will keep holding the economy back until a really tough reformer begins to tackle problems, including drawing a line under Mubarak era corruption trials that have dragged on since last year. The new government is made up of a group of technocrats with little political experience. There are tens of regulators in Egypt that are charged with keeping tabs on various sectors of the economy (stock market, telecoms, electricity etc), yet all seem to ignore one another and are largely toothless. The Illicit Gains Authority, which is attempting to tackle high profile embezzlement and investigation the wealth of the former regime, appears to be making a string of public announcements without acting upon them. A reformer needs to be brought in who has vision, ambition and charisma to persuade others to accept the difficult decisions that will have to be made.
5) Focus on Private Sector:
Embracing a proactive plan to provide support to the private sector, particularly small and medium enterprises to ensure credit availability and structure a broad umbrella of institutional support. This will ease existing hurdles of setting up a business and ensure the success of the new operation. Earlier this month the World Bank approved $200 million for SMEs, a tidy sum considering the sector represents almost 90% of enterprises in Egypt and provides the main bulk of private sector employment.
5) Education and Employment:
For Egypt, a skilled workforce will be key. Egypt has one of the highest illiteracy rates in the Arab world. Boosting literacy rates alone could increase GDP growth a percentage point or two in the medium to long term. Unemployment in Egypt hit 12.6% in the second quarter, against 11.8% a year earlier – equivalent to 3.4 million out of work. But that data doesn’t include the large informal economy which evades taxes, engages in monopolistic and cartel behaviour. That in turn raises prices, prevents growth and makes it difficult for the government to know how many people are unemployed, a key metric for public policy. There is a need to formalize this sector, which is predicted to be worth around $248 billion, according to Hernando de Soto, the Peruvian economist who was hired by the Egyptian government in 2011 to legalize the informal sector.
6) Boost Trade Relations:
Egypt must widen the scope of trade relations to increase access to markets that would boost exports and attract investment. The emphasis should be on building trade agreements, particularly with the US, but also tap emerging markets that are likely to lead global growth going forward. So Egypt could look to Africa and widen trade relations with Arab neighbours. President Mohammed Morsi plans to visit China at the end of this month to promote trade ties between the two countries. China has been among the only big economies to continue investing in Egypt post-revolution, while others like the US have scaled back.
7) Central Bank Policy:
The central bank should ensure more flexibility in managing the exchange rate. It should also limit the monetary policy to prevent expensive fiscal spending to continue. Finally the CBE should focus on reforms that increase competition and fight monopolistic practices that have unduly increased inflationary pressures and the cost of living while threatening the competitiveness of exports.