Discussions on an International Monetary Fund (IMF) program for Egypt have been going on for almost three years without a deal being struck. The two sides came close to an agreement in June 2011 and then in late 2012, but each time the Egyptian government walked away from the table. As recently as August this year, senior government officials said an IMF program was “essential” for the country. Once again, there was a change in heart within a matter of weeks and formal negotiations with the IMF were not initiated.
Most observers have been advising the government of Prime Minister Hazem El-Beblawy that took power in July 2013 to re-open negotiations with the IMF to establish macroeconomic stability and initiate economic reforms to address the country’s major structural fault lines and weaknesses. This advice has been echoed by international financial institutions and donors, and furthermore the IMF at the highest level has made overtures to the government that it is ready and willing to support Egypt.
The standard line being taken by Egyptian Finance Minister Ahmed Galal is that Egypt has sufficient external financing available to it and does not need IMF assistance at this stage. Certainly the $12 billion plus in external assistance provided by Kuwait, Saudi Arabia, and the United Arab Emirates (UAE), has given Egypt breathing room by taking the pressure off the balance of payments and the exchange rate. However, it is interesting to note that recent press reports claim that both Saudi Arabia and the UAE have advised Egypt to negotiate a $2 billion arrangement with the IMF. This suggestion, although it comes from Egypt’s main financial benefactors, has also been rejected for the time being by Galal.
Why does the Beblawy government continue to shy away from an IMF program despite the views of most experts and the international community? There does not seem to be a rational economic reason for this position. An IMF program would bring the country financing, possibly as much as $5 billion, at very favorable terms and would further open up the flow of additional financing from the European Union and other financial institutions. Beyond the financing aspect, an IMF program would send a strong signal to investors and financial markets that the country had an economic plan that was endorsed by the international community.
There are two main reasons to explain Egypt’s reluctance to have an IMF program. The first reason, most often stated publically by Egyptian government representatives, is that the country does not need the financing an IMF program would generate, for now. However, if the press stories that the Gulf countries are also pushing for an IMF program are true, Egypt may well have to reconsider its position. Even if the Gulf money has no strings attached to it, one can argue that this is perhaps the best time for Egypt to negotiate a program with the IMF. Since the country has ample external financing available, it can deal with the IMF from a position of strength and negotiate a program with less austerity than was contained in the previous two programs negotiated by the Supreme Council of the Armed Forces (SCAF) and the Morsi governments. Finally, if money is not the object, a “precautionary” financing arrangement with the IMF could still be negotiated, as Morocco has done, whereby the financing would be available if and when Egypt needed it, provided it followed mutually-agreed policies.
The second reason, and one not openly admitted by Egyptian officials, is that the Beblawy government is just not ready to undertake the economic reforms that a typical IMF program would require, and that the country needs to put in place to generate high growth and create jobs. These reforms at a very minimum would cover the inefficient and expensive subsidy system, labor markets, public sector employment, complex business regulations, and state-owned enterprises. These are politically difficult reforms and it is now apparent that the current government is unwilling to take them on and would rather push them onto the next cabinet. Instead, the government has chosen the more populist path to garner the support of the population involving a fiscal stimulus, raising public sector minimum wages, and increasing imports of energy and other inputs to reduce shortages in the manufacturing sector. These measures, designed essentially to buy social peace, will at best create a short-run spurt in growth, and are to be largely financed by the loans and grants provided by the Gulf countries. This is not a sustainable strategy.
What is the likelihood of an IMF program in 2014? Given the record of the Beblawy government in this context, it is very unlikely that a program will be negotiated in the first half of 2014, or until a new elected government takes office. However, this strategy presupposes that additional Gulf financing will be forthcoming. Here the signals are mixed. For example, Sheikh Mansour bin-Zayed al-Nahyan, the deputy prime minister of UAE, has said that Arab support for Egypt was only temporary and the country had to find other solutions. Presumably, it was such thinking that led Saudi Arabia and UAE to urge Egypt to negotiate an IMF program. On the other hand, Kuwait is reported to be adding another $2 billion to its original pledge of $4 billion.
The fact is that the Egypt’s external financing gap will be large, possibly as much as $21 billion. The Egyptian government in 2014 will have to find ways to close this gap. Gulf money will be only part of the solution. The IMF can be another important part. By precluding the IMF option, the Beblawy government is leaving the task—and the political costs of reforms—to the next government. Ideally, it should open up negotiations in early 2014 and leave the next government with an IMF program in place. Not doing so will only bequeath the next elected government with a weak economy characterized by anemic 3 percent growth, double-digit inflation, unemployment at over 13 percent, a large budget deficit, and low and likely declining foreign exchange reserves.
It is a good bet that Egypt will have an IMF program in 2014 and it will be far better to reach an agreement on it earlier in the year rather than leave it to later. What is to be gained by the delay?
Mohsin Khan is a senior fellow in the Rafik Hariri Center for the Middle East focusing on the economic dimensions of transition in the Middle East and North Africa.
Image: Photo: Egypt Cabinet