What will $12 billion IMF loan cost Egypt?

CAIRO — On July 28, Egyptian Finance Minister Amr El Garhy announced that Egypt would seek a $21 billion loan package to fill the budget’s financing gap. Of this amount, $12 billion would be in the form of a loan from the International Monetary Fund — Egypt is in the final stages of negotiations to borrow the money — and the rest would come from two loans from the World Bank and the African Development Bank, as well as a bond sale and other loans from funding bodies and countries that the Finance Ministry has yet to announce.

Ahmed Kouchouk, ‎vice minister of finance for fiscal policies and institutional reform, has made press statements that the financing program Egypt is negotiating with the IMF would reach $12 billion in three years and would support the foreign exchange reserves held by the Central Bank of Egypt. The loan would also allow additional financing to reduce the budget deficit and pay for projects that would contribute to lowering the deficit and inflation.

The IMF mission arrived July 30 at Cairo International Airport to start official negotiations with Egypt on the $12 billion loan.

Egypt’s economy suffers from increased accumulated debts. Egyptian Prime Minister Sherif Ismail told parliament in March that the servicing of public debt constitutes 30% of public spending.

Meanwhile, Egypt’s domestic debt has reached about 2.25 trillion Egyptian pounds ($253 billion), while its foreign debt reached $53 billion, raising doubts about Egypt’s ability to borrow.

Medhat Nafei, professor of economics at Misr International University, told Al-Monitor that several factors will determine whether the IMF approves the loan, such as reducing the budget deficit, lifting fuel subsidies, forcing the domestic currency to depreciate, reforming the taxation system, and limiting national projects that are eating liquidity and replacing them with projects that would have short-term economic outcomes.

Nafei said that Egypt has already started satisfying a number of these conditions, such as gradually lifting fuel subsidies, depreciating the Egyptian pound over the past few years, and, in terms of tax reform, the submission to parliament of the value added tax bill.

“The government wants to portray that these economic steps come from within, as part of efforts at economic reform, yet they are triggered by the IMF reform program,” Nafei told Al-Monitor.

Nevertheless, the Egyptian Finance Ministry issued a statement July 31 assuring that the IMF has imposed no conditionality to approve Egypt’s reform program and that the IMF is offering a loan to help fund the government’s budget. The government asserted that the reform it is discussing with the IMF mission is “100% Egyptian.”

Nafei said, “The loan is useful for Egypt as the current economic context underlines that there is a large gap that will only be filled by borrowing, especially as Egypt is suffering from large financing problems that cause its continuous budget deficit.”

He continued, “The foreign debt would not [normally] allow for new loans, especially since the interest rate is high. However, there is no alternative as the economic community in the government is lacking.”

“Perhaps the situation will improve as the IMF will propose economic programs that will have to be adopted in order for the loan to be approved. These programs are better than those proposed by the government anyway. The loan would also provide confidence for Egypt’s economy,” he added.

Hesham Ibrahim, professor of finance at Cairo University, said, “Borrowing such large amounts is very worrisome. There need to be some regulations on foreign loans.”

He added, “This loan completely contradicts the results of President [Abdel Fattah al-] Sisi’s meeting with Sahar Nasr, the minister of investment, last June on the conditions that should be present before taking out foreign loans.” 

In her meeting with the president, the minister of investment said there is agreement on how necessary it is to double-check Egypt's ability to repay before taking any loans and to evaluate the readiness of the ministry that will receive the loan to implement the financed project. She added that the economic consequences of the projects should be analyzed and the resulting developmental outcomes and social dimensions should be determined.

Ibrahim said, “No one knows where the next loan package would go. The state cannot afford all these loans. How will the country repay while there is a deficit in foreign exchange resources?” 

He said the reason for borrowing now is the depreciation of the Egyptian pound’s value relative to the US dollar. “You cannot solve this issue through borrowing. The problem has been there for three years now and repayment is usually done through borrowing and aid coming from Gulf states. Any received foreign exchange would be exhausted to plug the foreign exchange demand gap. Investment is the only way out, besides regulating imports and halting smuggling at customs.”

Ibrahim doubted that Egypt would get any help from the IMF, telling Al-Monitor, “The IMF will not approve a loan for a country that has unsound economic indicators such as Egypt. The service of public debt forms 30% [of public spending], which is a serious defect. The IMF will also refuse funding Egypt at a time when there is a 12% budget deficit.

“The IMF will only approve the loan once Egypt adopts a tough economic program, the disadvantages of which will only be endured by the poorer classes." he said, adding, “Egypt will not be able to sign an agreement with the IMF in 2016.”

Despite the many statements made by the Egyptian finance minister that Egypt will receive the first payment of the IMF loan two to three months after the negotiations end successfully, the indicators we see do not appear to back this up. However, a quick understanding could take place between Egypt and the IMF through which the latter may impose economic programs that protect its interests. The largest challenge, however, is to make use of the funds by investing them in projects with real economic yields.