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Egypt Reaches IMF Loan Agreement for Up to $4.8 Billion

Egypt reached a preliminary agreement with an International Monetary Fund team for a loan of as much as $4.8 billion that officials say is necessary to support the ailing economy and attract more funding.

The “22-month standby arrangement” for the loan, which will carry an interest rate of about 1.06 percent, will be distributed in eight quarterly tranches if it is approved by the IMF’s board, Andreas Bauer, who headed the fund’s technical team to the country, told reporters today. Planning Minister Ashraf el-Arabi said the board will review the agreement next month.

Since last year’s uprising that ousted Hosni Mubarak, the economy of the Arab world’s most populous country has been battered. Foreign reserves have plunged by more than 50 percent while protests and unrest have stunted productivity and cut key revenue sources such as foreign investment and tourism.

“Although not unexpected, the news is positive -- in terms of the relief it will bring from the pressure on Egypt’s external and fiscal deficits, but also in terms of the confidence it suggests the IMF has in Egypt’s policy makers,” said Liz Martins, Dubai-based senior economist at HSBC Middle East Ltd.

Investor Confidence

“The deal has long been seen as a prerequisite for a turnaround in investor confidence and release of further funding,” said Martins. “Attention will now turn to the conditions of the deal, and the implications for fiscal and exchange-rate policy.”

The benchmark EGX 30 Index of stocks, which declined as much as 2.2 percent before the IMF agreement was announced, rallied to close down 0.1 percent at 5,409.89. The nation’s 5.75 percent dollar-denominated bonds due in April 2020 rose for the first time in three days, sending the yield eight basis points, or 0.08 of a percentage point, lower to 5.27 percent at 4:53 p.m. in Cairo, according to prices compiled by Bloomberg.

The IMF said in an e-mailed statement that the Egyptian authorities “plan to reduce wasteful expenditures, including by reforming energy subsidies and better targeting them to vulnerable groups.”

Tax Reform

The government also intends “to raise revenues through tax reforms, including by increasing the progressivity of income taxation and by broadening the general sales tax to become a full-fledged value-added tax,” the IMF said.

The resources generated will be used to boost social spending and infrastructure investment, and to gradually reduce the budget deficit from almost 11 percent in the last fiscal year that ended in June to 8.5 percent of gross domestic product in 2013-2014, it said.

“Monetary and exchange-rate policies will be geared toward ensuring declining inflation over the medium term, enhancing Egypt’s international competitiveness to stimulate trade and attract capital inflows, and increasing international reserves to protect against external shocks,” the fund said in its statement.

The Cabinet said today it targets raising international reserves to $19 billion by the end of the next fiscal year from the current level of $15.5 billion. It also said it plans to implement a flat corporate tax of 25 percent instead of the current two-tier system and to transition to a full implementation of VAT in 2014.

Averting Crisis

Today’s news about an agreement has “greatly reduced the risk of a balance of payments crisis in the country,” Capital Economics Ltd. said in an e-mailed research note. While “radical policy reforms are unlikely in the very near-term,” the “conditions attached to the IMF deal should ultimately pave the way for a return to strong growth in the medium-term,” it said, adding the board’s approval should be “straightforward,” and “disbursements can start from early 2013.”

Capital Economics said the IMF statement made little mention of the issue of currency devaluation. “The pound currently looks significantly overvalued and we estimate that it might need to fall by around 20 percent in order to restore competitiveness,” it said. “Private capital inflows are unlikely to return until the issue of currency devaluation is put to bed,” it said, adding it expects the pound may fall to as low as 7.5 per dollar by the end of next year.

The currency, subject to a managed float, retreated 0.1 percent today to 6.1053 a dollar, according to data compiled by Bloomberg, bringing its decline on the year to 1.2 percent.

Economic Targets

During the IMF’s visit to Egypt, the government unveiled an economic program that targets growth of 3.8 percent in the fiscal year through June 2013, from 2.2 percent last year, rising to 6.5 percent by 2015-2016 and 9.8 percent in 2021-2022.

Mona Mansour, chief economist at Cairo-based investment bank CI Capital Holdings, said such targets sounded very optimistic. “What matters is having in place an economic reform plan that is endorsed by the public and that has an implementable timeframe in order to receive money from the IMF,” she said.

The loan talks took place amid opposition from some activist groups who object to what they say is a lack of transparency in the process. They say they worry that the loan will come with stringent conditions and undermine Egypt’s economic independence. Egyptian and IMF officials say the country’s economic program is a homegrown one.

Mariam Fam in Cairo at Abdel Latif Wahba in Cairo at;

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