by AMR ADLY/ pic by AFP
EGYPT has reached a staff-level agreement with the International Monetary Fund (IMF) over a standby loan of US$5.2 billion (RM22.1 billion). This comes after less than a month of the approval by the IMF’s executive board of a US$2.8 billion emergency financial assistance to meet the country’s urgent balance of payments needs stemming from the outbreak of the coronavirus pandemic.
As critical as I was of the first IMF deal in 2016, this time, the Egyptian government was right to approach IMF. The latest funding is not likely to come at a high social cost since the government has already implemented many of the austerity measures that are usually required.
The IMF’s goal is to support the previous agreement, rather than impose a new set of tough conditions.
The significance of the new standby agreement is best understood in the context of the 2016 deal. Back then, the IMF’s intervention was crucial to stabilise Egypt’s economy, which was facing major financial imbalances in the wake of the turmoil that hit the country after the political upheaval of 2011/13.
The IMF’s US$12 billion assistance helped rebuild depleted foreign reserves, addressing the imbalance of payments and unifying the exchange-rate regime. It was also critical to securing Egypt’s borrowing on international markets.
Between 2016 and 2019, the economy started showing strong signs of recovery in terms of growth, employment and macroeconomic stability — albeit at a very high social cost that resulted in higher poverty rates.
The current crisis reveals that the recovery has been fragile. The pandemic has put pressure on the country’s crucial foreign-earning sectors, like tourism and hydrocarbon exports.
There has also been an outflow of hot money. The sharp decline in international oil prices promises future decreases in workers’ remittances, especially from the Gulf. Egypt’s foreign reserves have been steadily declining: By the end of April, they had reached the lowest level since January 2018.
In this context, turning to the IMF makes eminent sense. IMF is getting itself involved once again in Egypt as part of its longer-term engagement to stabilise the country’s finances.
But the new funding doesn’t address the social impact of the pandemic and the measures taken to counter it. Despite the economic contraction, the government seems determined to maintain the macroeconomic discipline it achieved under the 2016 programme.
For instance, although international energy prices have plunged, the government raised local fuel prices with the aim of halving the fuel-subsidy bill. Similarly, it imposed a new tax on public-sector employees to boast its revenues. Overall, the government has refrained from deficit-financing as a means for mitigating the impact on the economy.
This monetarist stance is meant to keep up the country’s good record for foreign creditors. The IMF’s renewed involvement will help as an extra guarantee of the government’s commitment to macroeconomic discipline, allowing it to keep borrowing on international markets.
But while these financial concerns may be well warranted, the government also needs to prioritise the mitigation of the pandemic’s social impact. Increased spending is necessary in areas like public health and food subsidies for vulnerable populations amid rising unemployment and deteriorating real incomes.
The IMF’s support for Egypt should tolerate government measures in this direction, even if they result in a larger deficit in the short term.
The current economic circumstances, as dismal as they are, may also offer an opportunity for correcting some flawed policies. To start with, Egypt clearly needs to reduce its reliance on flows of hot money to boost its reserves. This has been demonstrated in the past couple of months, as the flight has caused a sudden drop in foreign reserves.
Another area that requires reform is the country’s monetary policy. The informally managed floating system of the past year — where the central bank intervened to defend the pound in coordination with the biggest banks (the largest two of which are state-owned) by fixing a range for the pound against the US dollar — has clearly reached its limit.
The depreciation of the pound over the past two weeks might actually indicate an already ongoing shift in monetary policy in the direction of more liberalisation in anticipation of the deal with the IMF.
Yet, allowing the pound to depreciate and the inflationary forces it might unleash will require governmental intervention, mainly through subsidising basic foodstuffs and unemployment compensation. Otherwise, more pain will be inflicted on an already suffering population.
The new IMF deal can serve as a right step in enhancing the sustainability of the Egyptian economy. But if it doesn’t take into account the country’s real economy and the social aspects of the pandemic, there is a risk that the stabilisation efforts — by the Fund and the government — will be derailed. — Bloomberg
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.