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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About the author
Jennifer Brookland
Jennifer Brookland is a former Devex global development reporter based in Washington, D.C. She has worked as a humanitarian reporter for the United Nations and as an investigative journalist for News21. Jennifer holds a bachelor's in foreign service from Georgetown University and a master's in journalism from Columbia University and in international law and diplomacy from the Fletcher School. She also served for four years as an Air Force officer.