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IMF lifeline, a test for Morsy - Daily News Egypt

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IMF lifeline, a test for Morsy

For many Egyptians, life was tough under the former regime of President Hosni Mubarak. Now it's even tougher and things are likely to get worse before they get better

Shahira Amin

For many Egyptians, life was tough under the former regime of President Hosni Mubarak. Now it’s even tougher and things are likely to get worse before they get better, warn the analysts.

Over year and a half after the popular uprising that toppled Mubarak, the economy is in a shambles. Unemployment has shot up to 12 per cent as labour strikes continue across the country. In the freer post- revolution environment, workers feel they can now express their demands for better work conditions, higher wages and benefits. The shaky security situation in the country and the political turmoil during the transitional period have driven away both foreign investors and tourists. While tourism is starting to recover, foreign currency reserves have plummeted to $14 billion which is below half the end of 2010 level. Dwindling reserves signal trouble ahead for Egypt, which imports 60 percent of its food supplies. The government’s move to increase the salaries of public sector employees, in an attempt to avert strikes, has put a further strain on the government budget at a time when state coffers are already emptying out. Faced with a burgeoning budget deficit, Egypt has been anxiously waiting for the fulfillment of aid promises pledged by wealthy countries after the January 2011 mass uprising.

It is in this atmosphere of doom and gloom that IMF Managing Director Christine Lagarde visited Cairo last week. The visit, at the invitation of the Egyptian government, has raised hopes that the international lending body will provide Egypt with what observers claim is a “desperately needed rescue package to resuscitate the country’s ailing economy.” Reports that an IMF team will visit Egypt early next month to discuss the terms of a $4.8 billion loan sought by Egypt, and perhaps even finalise the deal, have in recent days stirred a great deal of controversy, raising concerns that the January 25 revolution has failed to realise one of its core objectives;  reduced dependency on foreign powers.

Acknowledging it’s a desperate measure that Egypt must do “to get out of the current rut,” supporters of the IMF loan describe it as “a turning point that will bring about a reversal in economic fortunes.” In a press conference with Lagarde last week, Prime Minister Hisham Qandil told journalists that “support from the IMF for Egypt’s economy will send a positive message to foreign investors that the economy is back on track.”  Analysts meanwhile say the loan will also encourage donors to provide the needed revenues and help bridge the financing gap. It would also send a message to local investors that “the government is serious about tackling unemployment, creating jobs and curbing inflation, steps they say would put Egypt on the path to achieving macroeconomic stability. Last but by no means least, they remind us that the loan has a very low of 1.2 percent interest rate. This stands in contrast to the high 16 percent interest rate the government is currently paying on its domestic borrowings.

That’s the view of those looking at the half-full bottle. But there’s another side to the story: Critics argue that the IMF loan would only complicate matters further, plunging the economy into deeper economic turmoil, at least in the short term. In an interview broadcast on the independent Dream channel on Tuesday, prominent journalist Saad Hagrass criticised Qandil’s government by saying it was adopting “the same failed policies of the ousted regime by depending heavily on foreign borrowing rather than looking for alternative sources of revenues.”  He reminded viewers that “loans never come without conditionality”. He also called for more transparency to improve people’s trust in the new government which he insisted must provide citizens with a clear explanation of why the loan was needed at this time, what its terms are and, most importantly, how it will be repaid.

Indeed the loan, if disbursed, will be conditional on the implementation of a series of structural reforms that would “put the economy on the right track” according to the experts. But they do not deny either that the reforms will be painful for the already weary average Egyptian citizen. At the top of these reforms is rationalisation of food and energy subsidies and tax reforms.

Egypt spends around ten per cent of its GDP on subsidies which are known to be “inefficient” as they fail to reach those who need them most, the poorest in society. While there’s broad consensus among policymakers on the need to reform the country’s subsidy scheme, there’s no clear-cut plan for a more effective system that would guarantee benefits for the poor without putting a strain on the budget. In the face of soaring global energy costs, the government has pledged $16 billion to subsidise energy this year.  “Any adjustments of the subsidy programme would need to be fully explained to citizens before the changes occur in the hope that once they learn about the benefits, they would be more receptive to the idea of change,” advised Hagrass.

Meanwhile, broadening the tax base is not a new idea. It’s been floating around since the start of the year when Minister of Finance Momtaz El-Said advised  small and medium-sized businesses to register for taxation. He also promised incentives for those who come forward on their own accord. El-Said has acknowledged that “to address some of the budgetary shortcomings, Egypt needs to improve its tax collection.”  Tax evasion is not uncommon in Egypt and by remaining in the informal sector, the majority of SMEs continue to escape tax payment. “Offering incentives to small and medium sized enterprises would encourage them to register and would help resolve the problem” El-Said has been quoted by El-Shorfa English language website as saying. However, there are concerns that at a time when prices are steadily increasing, owners of small businesses may not be able to afford the taxes and may be driven to bankruptcy, warns the website.

In an interview with Reuters before his trip to China, President Mohamed Morsy, seeking to allay concerns, ruled out any new taxes.  He also denied rumours of an imminent currency devaluation that would trigger an increase in the prices of basic commodities like rice and sugar. Asked how he would tackle the budget deficit, Morsy replied that he would opt for “exports, foreign trade , investments and tourism”. Clearly, the President has chosen to tread a cautious path, opting for the more conservative, tried solutions over novel or radical measures.

Naturally, there’s no pleasing everyone. Morsy has been lambasted by some in the international media who criticised him for his ‘mediocre’ choices, reminding him that ‘desperate situations call for drastic measures.’  Sceptics at home are likewise unconvinced and social media networks like Facebook and Twitter are rife with posts questioning the President’s true intentions. The activists note that Islamist groups who last year criticised the interim government for requesting an earlier loan from the IM have revoked their statements. Indeed, both the Muslim Brotherhood’s Freedom and Justice Party FJP and the Salafist Al-Nour Party ,who had previously objected to such loans while insisting that “alternatives for raising revenues should first be explored”, are now back tracking by saying that Islamic Shari’a Law “permits the forbidden in critical cases.”

It is widely expected that the IMF loan deal will be approved in the coming months. It is also highly likely that the government will soon announce a devaluation of the Egyptian pound. If this happens it may be damaging, not necessarily to the economy but rather to the people’s trust in the new government. It is important that the government commit to delivering on the promises it makes and not renege on its pledges if it is hoping to gain public confidence. Hopefully the Muslim Brotherhood, the Islamist group from which Morsy hails, has by now learned from past mistakes when it lost scores of supporters for saying one thing and doing another. President Morsy may be trying to avert street protests for now, similar to those that were staged during Lagarde’s recent visit to Cairo, but if he fails to commit to his promises he stands to lose a lot more.


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