IMF Managing Director Christine Lagarde arrived in Cairo for a non-routine visit on Wednesday. The visit comes in the light of a sensitive economic situation in Egypt, for which the Islamic government can claim responsibility. The access to power enjoyed by the Muslim Brotherhood is accompanied by several question marks regarding its approach and management of the Egyptian economy.
Lagarde’s visit to President Mohammed Morsi, Prime Minister Hesham Kandil and a number of economic officials is particularly important, given that the IMF managing director is starting a new round of consultations with the government. The objective is to reach an agreement enabling Egypt to receive a $3.2 billion loan (reportedly requested to be increased to $4.8.billion) at an annual interest rate of 1.1%. The loan is divided into three installments; the first will be received by Egypt upon signature of the agreement by the IMF Board of Directors.
There are several indicators that an agreement will be reached, including Lagarde’s visit to Egypt, statements made by Egyptian officials welcoming the agreement (in particular, that of Finance Minister Mumtaz al-Saed) and the sharp decline in foreign currency reserves, which leaves the government no choice other than to borrow funds.
On the other hand, arguments given by officials about the pressing need for a material support didn’t prevent the opposition from objecting to Egypt being plagued by debt.
In this regard, it is necessary to recall the stage loan request and the path of negotiations. In June last year, four months after the Mubarak regime was ousted, Egyptian authorities requested a $3 billion in loan from the IMF, in light of the expected budget shortfall at that time. However, the request was rejected. Political observers say that the Muslim Brotherhood applied pressure so that the loan would fail, an effort that turned out to be an attempt to disrupt the government of Kamal al-Ganzouri. However, it didn’t take the Brotherhood long to reactivate the request and change its stance on it from “forbidden” to “permissible.”
The minister of finance said the country’s external debt to GDP ratio is 12% — a level considered acceptable, even if it were to jump to 30%. He added that the government was seeking to alleviate pressure on domestic liquidity in the light of increased domestic borrowing, and also to keep interest rates on government bonds down.
To those who oppose the loan or defend it, the economist Rashad Abdo, head of the Egyptian Forum for Economic and Strategic Studies, asked four questions that he considers important to make a neutral judgment. Is Egypt in need of this loan? Are the implications positive or negative? What changes would a normal citizen experience after Egypt receives the loan? Are loans useful to any economy in the world?
According to Abdo, the answers will be determined by the way the government deals with the borrowed funds.
If “the loan was being invested in production-oriented development projects that serve (the Islamic) religion and pay the benefits, it would be beneficial. But if it was used to close the budget deficit without producing gains, the people will pay the price for this step,” Abdo said.
In fact, Egypt needs this amount of money. Foreign exchange reserves allocated for the purchase of basic and strategic commodities have reached $12.5 billion. Despite claims by developing nations of being in the safe zone should they manage to buy these commodities three months in advance, “this condition requires $13 billion from Egypt, whereas we only have $14 billion, $1.5 billion of which is held up in deposits to Saudi Arabia and Qatar.”
Abdo refers to advantages that may be derived from the loan, should it be used to cover Egypt’s foreign exchange reserves: 30 billion EGP (Egyptian pounds) are supposed to be obtained in exchange for the dollars that will be deposited in the Central Bank. This will fill the deficit of more than 250 billion EGP, and encourage foreign investors. But these same advantages have many flaws. First, “the Central Bank (of Egypt) does not have $30 billion (worth of EGP). Thus, it will be forced to print currency as part of a program of quantitative easing, which will lead to real inflation, the price of which will be paid by the citizens.
“In the end, no state builds its economy on borrowing,” said Abdo, who does not seem optimistic about the performance of the government in the near future.
The negative ramifications of the loan are explained by researcher and economist Abdel Khaleq Farouk, beginning with its role in increasing foreign debt, putting the authorities under the tutelage of international institutions, and increasing pressure on low-income persons. Farouk cites the need to reduce subsidies on energy expenditure, social welfare networks and other programs.
Farouk expressed confidence that “the Egyptian economy does not need this loan, which is the result of the borrowing mentality inherited by the current system from the former regime. This mentality lacks creative ideas for restructuring the economic system, and gives priority to investment incentives over reconsidering (economic) policies.”
The economic expert supported his opinion by mentioning the “total rejection by (Egyptian) officials of the suggestions aimed at boosting the economy, such as reducing government spending, increasing the proceeds of the public treasury, following the progressive tax system and others.”
Tariq Omar, a writer for Open Democracy magazine, questions the impact of the negative IMF recommendations, since poverty rates have risen in conjunction with the launch of structural reforms on the basis of these recommendations. Figures indicate that one out of every five persons lived on $2 a day when the reforms started, whereas the proportion today is closer to 50%.
Will the loan see the light of day? Farouk says that there is no problem in lending Egypt money, since its economy is not collapsing and the amount is small, in line with policies which aim to take emerging countries in the direction of capitalism. According to Abdo, there remain many fears, which he summarizes by providing a “simplified” definition of the economy: The optimal investment of the available community resources.
The mentality of borrowing does not suggest that the Egyptian government is headed in that direction.
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