With continuing uncertainty surrounding the timing and the content of the $4.8 billion IMF program, it has been suggested that in the meantime Egypt take a short-term emergency IMF loan to meet its immediate foreign exchange needs. However no sooner than the IMF offer was made, Finance Minister Hegazy and cabinet spokesman al-Hadidi rejected it out of hand, saying that Egypt was still focused on the larger loan based on the economic program the government had prepared and was now ready to discuss with the IMF. The smaller emergency loan was not in the cards.
The new loan being offered is under the IMF’s Rapid Credit Facility (RCF). The purpose of the RCF is to provide timely concessional financial assistance to IMF member countries facing an urgent balance of payments need. It does not require a full-fledged program with associated conditionality, either because the need for financing is temporary and limited, or because the country is unable to put together such a program because of domestic capacity or political constraints. A country can borrow up to 50 percent of its quota in the IMF in a year, which in the case of Egypt would amount to $750 million. The two most attractive features of the RCF are that the loan is disbursed upfront on approval and not in tranches as other IMF loans, and that it carries a zero interest rate. In the Middle East, Yemen is the only country to have requested and received a loan of $100 million under the RCF in April 2012. The purpose was to give the new government time to formulate an economic program that could be supported down the road by a larger IMF loan, and arrange additional financing from other donors.
So why would the IMF want to offer an RCF loan to Egypt in the current circumstances and why did Egypt turn down the offer? From the IMF’s point of view, one can think of at least three reasons. First, the IMF would want to be seen as fully engaged with Egypt and providing financial assistance immediately while the large program was being negotiated. Second, and closely related to the first point, the IMF probably felt that the policies contained in the Egyptian economic program, particularly relating to the fiscal component of the program, are not strong enough to achieve the objectives of the government and further detailed negotiations are needed and these will take time. Third, it may be that the IMF for good reasons wants to wait until after the parliamentary elections, whenever they are held, and have the new government endorse the program before it is implemented.
Why Egypt is rejecting an interest-free $750 million loan is a puzzle. It is free money after all. But the government has said very clearly that it will only discuss the larger loan and not be side tracked by the RCF. It is true that the urgency of reaching an agreement would be lessened and the negotiations on the large program could be prolonged if there is an RCF arrangement in place. The example of Yemen, where it has been over a year since the RCF loan was approved and there is still no new program, points to a long process in getting a new program in place. Second, while Egypt’s international reserves have continued to decline, at the end of February the Central Bank of Egypt still had $13.5 billion and the country has not yet reached the point where a $750 million injection would significantly affect the probability of a currency or balance of payments crisis. Third, it is not clear that the RCF loan will be able to unlock financing from bilateral donors and other financial institutions, who may still insist that their funding is conditional on a full-fledged IMF program and not an RCF arrangement. Finally, there may be an element of pride in Egypt’s decision to reject the RCF as it is an instrument essentially designed for low-income countries and not for countries that have emerging market status as Egypt does.
All and all it does seem to many that the IMF is stalling on the larger $4.8 billion program and offering some financial assistance in the meantime so as not to appear unhelpful to Egypt. For example, former Finance Minister Beblawi calls it a gesture of goodwill on the part of the IMF. But at the same time the Egyptians are right to insist on continuing negotiations for the larger program now rather than risk significant delays with an RCF substitute, particularly if it is unlikely to lead to additional official financing from the EU, the Gulf countries, and the World Bank.
Mohsin Khan is a senior fellow in the Rafik Hariri Center for the Middle Eastfocusing on the economic dimensions of transition in the Middle East and North Africa.
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