Egypt Turmoil Puts IMF Cash at Risk as Mursi Halts Tax Rises
Mohamed Mursi’s focus on defusing a resurgent protest movement in Egypt is starting to derail his plans for rescuing the economy with a $4.8 billion International Monetary Fund loan.
Mursi’s decision to hold a Dec. 15 referendum on a new constitution has polarized the country and sparked rival demonstrations, most recently last night, that have sometimes turned violent. Egypt’s government said yesterday it asked the IMF to delay next week’s meeting to approve the loan, probably until January. As protests escalated, Mursi suspended a raft of tax increases aimed at meeting IMF concerns about the region’s biggest budget deficit.
With foreign reserves near an eight-year low after last year’s uprising against Hosni Mubarak, and an economy that’s barely outpacing population growth, Egypt is pinning hopes on IMF support to help kick-start investment and output. Getting the money may require the kind of unpopular revenue-raising measures that will be hard to enact for a leader facing a growing public backlash.
“The fact that they rolled out reforms and then went back on them shows that they’re incapable of enforcing this,” said Mona Mansour, chief economist at Cairo-based investment bank CI Capital Holdings. “It’s really bad timing, while people are as agitated as they are right now.”
Egypt’s benchmark stock index has fallen 5 percent and spreads over U.S. debt have widened 53 basis points, or 0.53 of a percentage point, since Nov. 22, when Mursi issued a decree placing his decisions above the law and shielding the panel writing the new constitution from judicial challenges. The Egyptian pound, subject to a managed float, has slid 1.1 percent in the same period, compared with a 1 percent loss in the year to that date.
Egypt decided to delay the IMF loan approval “to give more time for social dialogue” and to emphasize that IMF-backed proposals won’t hurt the poorest Egyptians, Finance Minister Momtaz el-Saieed said in a phone interview yesterday.
If there are “significant delays” in the political transition and approval of an IMF program, “economic and financial pressures are likely to mount and Egypt’s ratings could come under renewed pressure,” Fitch Ratings said today. It ranks Egypt four levels below investment grade.
The president halted tax increases on items including cigarettes within hours of their announcement, the official Middle East News Agency said. He was briefed in the early hours of Dec. 10 on the “anger and surprise” the proposals had generated, presidential spokesman Yasser Ali said.
The government aims to cut the budget deficit to 8.5 percent of gross domestic product by 2014, from 11 percent last fiscal year.
The target, which has the IMF’s approval, is achievable “in theory,” but difficult in the current political environment, said Said Hirsh, head of economics at Maplecroft, a risk-advisory company based in Bath, U.K.
“The problem is when such reforms are introduced alongside major political changes that have been devised without the views of the wider political spectrum,” he said in an e-mailed response to questions. The government’s recent actions “have definitely reduced its ability to implement fiscal reforms.”
Opposition groups say the constitutional referendum should be halted because the text was drafted by an Islamist-dominated panel that ignored other views. Hamdeen Sabahi, one of the opposition movement’s leaders, also attacked Mursi’s economic plans, saying on a television program that IMF-backed policies will “address the budget deficit at the expense of the poor” who will “get nothing” from the program.
“We’re against price increases,” said Kariman Saeed, a 40-year-old housewife, over the din of anti-Mursi chants outside the presidential palace in Cairo. “The people are suffering and can barely eke out an existence as it is.”
The government says its proposals are essential to stop the budget deficit from ballooning, and has emphasized the importance of IMF loans as a benchmark that will lure investors to the country. Egypt suffered capital flight and a slump in tourism after the uprising against Mubarak early last year and the political uncertainty that followed.
Even if an IMF deal does go through, Mursi’s U-turn on taxes suggests it will be hard for his government to stay on the program, said Raza Agha, chief regional economist for VTB Capital Plc in London. IMF loans typically set conditions for the disbursement of each tranche of cash. Egyptian officials have said their economic program is “homegrown.”
Achieving “targets and reform measures in the current political environment will be extremely difficult,” Agha said by e-mail. “This could well threaten the program itself.”
Egypt may also be forced to devalue the pound, according to some economists. Foreign-exchange reserves are down to $15 billion, from $36 billion at the end of 2010.
“There is a growing risk of a disorderly adjustment” to the currency in the absence of IMF loans, Neil Shearing, chief emerging-market economist at Capital Economics in London, said in an e-mailed report yesterday.
“Without an improvement in the political environment, this stability may not last for long,” Shearing said.
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