Egypt’s $12 Billion IMF Talks: A Guide to What to Expect

Egypt's $12B IMF Loan Talks: What We Can Expect
  • Central bank likely to deliver on promise of flexible currency
  • More taxes, subsidy cuts could be needed to achieve targets

Egyptian officials are holding talks in Cairo with the International Monetary Fund over a loan to help finance the government’s economic program. Egypt is seeking $12 billion over three years.

QuickTake Egypt’s Revolution

The most-populous Arab country has had a tumultuous relationship with the IMF since the 2011 uprising that ousted Hosni Mubarak, turning down two initial loan accords. Some of the topics likely to be discussed -- new taxes, cuts to power subsidies, for example -- will be controversial in a country where many accuse the IMF of imposing harsh conditions in exchange for financial aid, a charge the fund denies.

At stake is reviving an economy battered by years of unrest, a dollar shortage and a widening budget deficit. The government said the IMF talks are based on its program. Following are key steps Egyptian authorities may take, based on interviews with economists at HSBC Holdings Plc, CI Capital, Arqaam Capital and Emirates NBD.

Exchange Rate

The central bank has kept the official exchange-rate unchanged at 8.88 pounds per dollar since a more than 10 percent devaluation in March. It will likely allow the currency to weaken again, with forecasts ranging between 9.5 pounds to 11 pounds to a dollar by the end of the year.

Policy makers will also seek to deliver on a pledge to adopt a more flexible exchange mechanism, said Reham ElDesoki, senior economist at Dubai-based investment bank Arqaam Capital.

“I expect that the pound will be allowed to fluctuate within a wide trading band, for a while at least, until the market gets used to the notion of an unfixed exchange rate,” she said. Foreign reserves may increase to more than $20 billion through the current fiscal year that ends in June, from $17.5 billion now, she said.

Monetary Policy

Economists, including Mohamed Abu Basha of EFG-Hermes, expect the central bank to raise interest rates again this year. Policy makers have already increased borrowing costs by 2.5 percentage points, pushing the yields on the 10-year government bonds to 17.6 percent, the highest level since Bloomberg started tracking the data in 2005.

The bank will also probably cut government lending to reduce liquidity and fight inflation, according to Hany Farahat, senior economist at CI Capital Holding, a unit of Commercial International Bank.

“The IMF will most likely push the central bank to slow the accommodation of fiscal needs,” he said. “In general, this program will discipline Egypt’s economic policy making and encourage adoption of more sound practices.”

Authorities plan to tap international bond markets this year and has approached banks to submit proposals to advise on the potential sale. Officials have said the government plans to raise between $3 billion to $5 billion in the fiscal year ending June 30.

Fiscal Policy

“Fiscal and monetary reform need to take place in tandem,” said Simon Williams, HSBC Holdings Plc’s chief economist for central and eastern Europe, the Middle East and North Africa. “Egypt won’t be able to bring its current-account deficit in check if it doesn’t re-balance the budget. That means subsidy reform, closer control of salaries and more effective engagement with the private sector and donor agencies on capital projects.”

The government plans to introduce value-added taxation, cut electricity subsidies, and curb wage increases. It will start taxing capital gains in the stock exchange next year, Deputy Finance Minister Amr El Monayer said in an interview on Sunday. Authorities are also studying measures to broaden the tax base and improve settlement practices.

The target: cut the budget deficit to as low as 8 percent of gross domestic product by the 2018-2019 fiscal year from about 11.5 percent last year. ElDesoki of Arqaam Capital said more measures could be needed to bolster revenue to achieve that level, including possibly raising the tax rate on the highest earners and increasing fees for government services.

Subsidies

President Abdel-Fattah El-Sisi, the general who led the ouster of his Islamist predecessor in 2013, slashed energy subsidies soon after he was elected in a landslide vote, a step that previous governments had avoided for fear of stoking unrest.

Yet the benefits still account for 22 percent of government spending in the current fiscal year. The government aims to end electricity subsidies by 2019, officials have said. Fuel subsidies should be slashed “if the political situation allows it,” ElDesoki said.

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