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IMF Managing Director Christine
Lagarde with Egypt's President
Mohammed Morsi. Lagarde visited
Cairo for a day of meetings —
the first step in a process that
requires a great deal of negotiations,
both internally and with the
“lender of last resort.”
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Egyptian president Mohammed Morsi has
pledged to turn the country’s economy around, and he’s formally asked the International
Monetary Fund for a $4.8 billion loan. In response,
IMF Managing Director Christine Lagarde visited Cairo for a day of
meetings — the first step in a process that requires a great deal of
negotiations, both internally and with the “lender of last resort.”
Egypt reportedly hopes to sign an agreement with
the IMF within two or three months that would provide a loan with a
1.1 percent interest rate, a 39-month grace period and a five-year repayment
period.
An IMF team comprising
experts in fiscal, monetary and financial issues will visit the country in
early September to evaluate its macroeconomic needs and see how the financial
institution might best be able to help. The experts will meet not only with
their counterparts in the Egyptian government — central bank officials and
finance ministers mostly — but also with business leaders, trade union
representatives and other civil society representatives.
They’ll also meet with government
authorities to discuss Egypt’s economic objectives. Lagarde noted the “strategy
and ambition for Egypt’s economic and social future” but did not elaborate on
what that vision was.
The national budget typically provides
some clues. But Egypt’s 2012-2013 budget was passed under the interim
government by a military-appointed Cabinet and gives Morsi little room for new
initiatives: 80 percent of the budget is already earmarked for public salaries,
debt repayments, and food and energy subsidies.
After meeting with authorities,
the IMF team will draft an agreement for submission to the executive
board — a body of 24 people who represent the 187 members of
the IMF that gives the green light for financial assistance.
The lending
institution would not specify a time frame for awarding a loan, saying it
depends on how negotiations go and how quickly Egyptian authorities and
the IMF can agree on a reform package.
IMF puts conditions on its loans
— certain economic policies for example — but these are based on national
priorities and get worked out with the government before the loan is awarded.
That’s not always an easy feat in a
disunited country. Previous domestic negotiations stalled, victim to political
bickering between Egypt’s cabinet and parliament, according to Al Arabiya. A $3.2 billion agreement with the IMF broke
down in the spring and was never signed.
Analysts believe the current
administration will be more able to see talks through and achieve agreement
internally and with the IMF. The IMF has already provided
“considerable technical assistance” at the request of the new administration,
according to a press release.
Economic support can’t come soon
enough: gross domestic product growth fell from 5 percent in 2010 to
2 percent in 2011, its lowest level in nearly a decade, and 25 percent of
Egyptian youths are currently unemployed, as Devex reported.
Central bank reserves plummeted from
$36 billion at the beginning of 2011 to less than $15 billion today, so low
Egypt may be unable to import basics like wheat and oil. The budget deficit may be as high as $20 billion.
Although the Islamic
Development Bank agreed to a billion dollar loan in June to help with fuel and food
imports, other donors are likely to follow afterIMF approves a financial
support package. AnIMF loan doesn’t really mean anything in terms of risk or
return on investment, but donors often view it as a rubber stamp, and are more
willing to put their own money on the line.
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