IMF deal critical for Egypt, say economists

Egypt needs a quick agreement with the International Monetary Fund in order to avert a currency crisis after the depletion of more than half its foreign currency reserves, economists and analysts say.

Reserves plunged to $16.4bn at the end of January, a drop of 53 per cent over the same time last year, leaving the country with only 3.1 months of import cover, barely above the critical level of three months.

Political turmoil since the popular uprising which ousted Hosni Mubarak as president last February has severely impaired the economy, sending tourists and investors fleeing and depriving the country of crucial sources of foreign revenue.

So far the central bank has been able to ward off a significant drop in the value of the Egyptian pound, which has declined by less than 4 per cent against the dollar, but interventions to defend the currency have contributed to the erosion to reserves.

Having turned down an IMF loan last year after the country’s ruling military council said it did not want to leave a legacy of debt, Egypt returned to the IMF last month. It is now discussing a $3.2bn facility over 18 months.

“It’s very serious,” said Mohamed Abu Basha, economist at EFG-Hermes, the regional investment bank. “A deal with the IMF is the main hope to avoid a strong weakening of the pound. If there is a deal it will be more like controlled weakening or a depreciation and not a10-20 per cent devaluation.”

Egypt shed $1.7bn of its reserves in January as it serviced its Paris Club debt and met interest payments due on global notes issued in 2007 – both of which are obligations which have to be met twice a year, in January and June. Foreigners exiting the treasury bill market also accounted for $625m in transfers, according to a note by Beltone Financial, an investment bank.

“As the level of reserves deteriorates it will make it much harder for the central bank to sustain its exchange rate stance of defending the pound,” said Alia Moubayed, senior economist at Barclay’s Capital. “An IMF deal is very critical. It will help only to the extent that it is accompanied by a strong programme of economic and fiscal reform to gain the credibility of investors locally and internationally.”

The deal was needed “yesterday”, she said.

Once sealed, an IMF agreement should help Egypt obtain credit from other donors, including from oil-rich Arab neighbours in the Gulf. Momtaz Saieed, the finance minister, said in remarks reported over the weekend that Egypt needed funding of $11bn to support reforms in the next “few years”.

“An IMF deal will not in itself be enough, it will have to encourage a huge amount of inflows from public and private donors,” said Farouk Soussa, chief Middle East economist at Citi.

He said, however, that Egypt was still “far away” from a deal because assurances that the country would adhere to an economic programme would need the support of various political actors, from the ruling military council to the Islamist parties which dominate parliament.

He pointed to the recent government campaign against NGOs which resulted in the launch of criminal proceedings against 43 workers in civil groups, including 19 US citizens.

“It means the political environment is increasingly unpredictable,” he said. “I think the IMF will be less enthusiastic about lending.”

Robert Zoellick, the World Bank chief was quoted as saying last week that he expected “tensions” in negotiations with Egypt about financial support. Cairo has asked the bank for $1bn in budget support.

“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,” said Mr Zoellick.

Negotiations over a World Bank loan to Egypt foundered last year over demands for transparency.

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