Securing an International Monetary Fund (IMF) loan would be credit positive for Egypt, according to a press statement released on Monday by Fitch Ratings. However, implementation risks are high and the country will continue to face several economic challenges, it stated.
Fitch Ratings believes that the requested economic development package worth $21bn, which the Egyptian government is aiming to obtain through several multinational sources, is still short of the country’s total financing needs for the next three years. The agency estimates that the needed amount would be closer to $10bn annually. However, a loan package would also likely stimulate some return of portfolio investment inflows.
Egypt aims to obtain the $21bn package over a three–year period, from the World Bank, the African Development Bank, the IMF, and international sovereign bond issuance.
An IMF delegation initiated a visit to Cairo on Saturday to discuss the terms of the loan following Egypt’s request for financial support. Egypt is seeking $12bn from the IMF alone, which will span the course of three years. If the loan is approved, the deal will be completed by September. Fitch said that seeking IMF support is politically contentious in Egypt, as opposition to the loan is expected. The agency added that instead of imposing policies, the government will focus on pursuing its own economic programme, which the IMF would support.
Meanwhile, Fitch noted that implementation risks remain, as the IMF’s policies are likely to include provisions to move to a more flexible exchange rate, wide-ranging fiscal measures, including implementation of value-added-tax, further subsidy reductions, and ongoing civil service reform.
“The IMF is likely to accommodate Egyptian concerns over too sharp a fiscal reduction of expenditure, given political risks, and the need for economic growth,” Fitch said. “Nevertheless, the Egyptian authorities could shy away from reforms at some stage during the three-year programme, if faced with popular opposition. Even if implementation proceeds on plan, Egypt faces a testing period of fiscal, monetary, and structural reform.”
Fitch pointed out that by supporting Egypt’s external finances, a deal would pave the way for further necessary currency devaluation. Further, the deal would also speed up fiscal reform and boost confidence in the economy.
Minister of Finance Amr El-Garhy said that the IMF loan is an acknowledgment of the Egyptian reforms programme, adding that the loan does not include any conditions.
El-Garhy denied the rumours circulating in the media about the IMF’s request for a tax adjustment and the lay-off of 2 million employees from the state administration system.
The minister stressed that the IMF loan will significantly contribute to bridging the state budget deficit, and help in controlling the price increases.
“The government is in constant touch with the parliament to explain the importance of the loan in funding the government’s economic reform programme,” El-Garhy said. “The government is not concerned about the high US dollar exchange rate in the informal market, due to the durability of the Egyptian economy and its ability to overcome the crises.”