Renewed interest in aid from the fund has stirred new controversy, writes Niveen Wahish A technical team from the International Monetary Fund (IMF) is scheduled to arrive in Cairo early September to discuss extending $4.8 billion in financial support to Egypt. The delegation follows a visit by Christine Lagarde, managing director of the IMF last week, during which Egyptian authorities asked for the loan. The amount is $1.2 billion more than Egypt had contemplated borrowing in the past year and a half. The Egyptian government had first asked for IMF assistance of $3.2 billion in the spring of 2011, but the Supreme Council of the Armed Forces (SCAF), in charge of the country at the time, blocked the move. Later, the transitional government could not reach the needed consensus to approve the IMF loan. It is not clear whether this time will be any different. Not everybody was thrilled with Lagarde's visit. Many have criticised the fact that before the presidential elections, the president and the Freedom and Justice Party (FJP) he headed had not been particularly supportive of the loan. Yet the new government formed under his presidency is blessing the loan. But Mohamed Gouda, spokesperson and member of the economic committee of the FJP that held a parliamentary majority in the dissolved People's Assembly told Al-Ahram Weekly that the party has not changed its stance on the loan. He clarified that his party had neither approved nor disapproved the loan when the Kamal El-Ganzouri government requested it. "We did not have enough information on the agreement or the government's planned economic reforms to make a decision," he said, adding that at this time the party has neither approved nor disapproved the loan because negotiations have yet to begin from which the detail would emerge. He underlined that the FJP has nothing against cooperating with the IMF. "Egypt has the right to make the most of its quota in the IMF and to benefit of its technical and financial support." The $4.8 billion sum is equivalent to three times Egypt's quota. There is space to increase the amount of request, according one economist who preferred to remain anonymous, due to the financing gap in Egypt and the international reserves position. Egypt's budget deficit to GDP rose to 8.8 per cent during the period July-May 2011/2012, recording LE136.5 billion, according to the Ministry of Finance. This compares to LE112.6 billion during July-May 2010/2011. Meanwhile, hard currency reserves amounted to $14.4 billion at the end of July 2012, down from $36 billion in January 2011. The economist pointed out that the IMF recently approved loans to Jordan and Morocco of $2 billion and $6 billion respectively, which exceed in both cases the 300 per cent of quota limit. Nonetheless, Gouda believes there are criteria that must be met before taking the loan. He pointed out that the government must exhaust domestic alternatives for financing and commit itself to long-term structural reforms that fall in the framework of the president's programme regardless of the loan. He also emphasised that the loan must not be used to cover the budget deficit but must be invested in projects that create jobs and revenue to pay back the loan. He also said there must be complete disclosure of the loan details, to ensure consensus over the loan between all political forces. Reaching consensus over the loan will probably remain problematic. Although the Nour Party, which held 20 per cent of the seats in the disbanded People's Assembly, previously dismissed the loan as usurious, and thus against Islamic Sharia law, this week the party's spokesman said that the charges on the IMF loan are administrative fees, thus making the loan permissible under Islamic law. Others have stuck to their positions. One of the strong opponents of the loan is the Popular Campaign to Topple Egypt's Debt. Co-founder Noha El-Shoky wants to see all Egypt's indebtedness dating to the former regime written off. Taking on more debt is heading in the opposite direction. She said that before they could approve of a new loan, more transparency and a participatory approach is needed not only to find out the details of the loan, but more importantly to find out what the government's vision for the economy is. El-Shoky said that the IMF may have sat with members of civil society on previous visits, but it is not clear if and how their demands will be taken into account. She is worried that given there is currently no parliament, the government will go ahead and take the loan regardless of opposition. Meanwhile, Gouda said the FJP understands the importance of the loan for Egypt. They did not approve of it previously in part because they did not want a transitional government taking a decision that would affect Egypt in the long term, he said. Its economic reform plan had nothing new to offer but was a rehash of reform programmes implemented under the Mubarak regime, a point that El-Shoky reiterated also. One of the fears attached to the IMF loan is that it would come with harsh conditions that could harm the poor, whether in the form of reduced subsidies or a devalued currency. But Gouda said that the IMF has reassured the authorities that they do not impose conditions and that they will only help the government implement its own plan. In fact, he said that issues such as fuel subsidies must be tackled head on whether Egypt takes the loan or not. The anonymous economist expects the issue to be on the negotiating table, "to trim the waste and create fiscal space," pointing out that fuel subsidies mostly benefit those who are not in need, and yet occupy 20 per cent of government spending. The economist added that negotiations would most likely demand managing the exchange rate with a greater degree of flexibility to safeguard international reserves. "In the near term, this may amount to further gradual devaluation of the [Egyptian] pound. However, this course could be reversed if the loan with the IMF and the accompanying adjustment programme succeed in boosting confidence in the Egyptian economy and attracting investment and further support from the international community that will help regain the strength of the Egyptian pound as the economy starts its course to recovery." Gouda personally believes that the loan will be the "kiss of life" for Egypt's economy because it will be followed by funding from other countries as well. And it is at a much cheaper rate than what the government is paying now in domestic borrowing. The interest rate on the loan has been announced at 1.1 per cent. He added that the government's extensive borrowing is crowding out the private sector, making it more costly for them to borrow. Yields on nine-month treasury bills rose at an auction earlier this week to around 16 per cent. And being in hard currency, the loan will prop up the foreign reserves. And it is a message of reassurance to investors, he said. Gouda pointed out that even if Egypt does not take the loan, the government would remain chronically indebted to local banks. "With LE140 billion in budget deficit in the best scenarios, and a LE60 billion gap in needed investment, where can it get the money?" he asked. El-Shoky believes that the government's need for financing could be covered if better policies are implemented. "If foreign companies are required to reinvest their revenues domestically rather than repatriate them, Egypt's foreign reserves will not be depleted," she suggested. As for the stamp of confidence that the IMF loan would give Egypt, El-Shoky questioned what it is needed for. "To take more loans?" she exclaimed, adding that even the argument that the IMF loan would encourage foreign investors to enter Egypt again is not viable. "What has investment attracted in previous years done for us?" she questioned, pointing out that foreign direct investment has not benefited the public at large. She said there must be a strategic vision whereby certain investments are attracted and nurtured to grow Egypt's own industry, even if it requires protectionist measures. "Egypt must do what is best for it; everybody else is doing that." In fact, El-Shoky believes that to stop the depletion of foreign reserves, Egypt should take advantage of the "Odious Debt Doctrine" and immediately stop repaying its debt until they are re-audited. And where it is proven that the loans went to corrupt hands, were not put to proper use and the lender was aware of that, those debts should not be repaid. She pointed out that there are people in the European Parliament willing to help Egypt, but the request has to come from the Egyptian government. It has been requested that Egypt deposit the equivalent of the loan in Egyptian pounds as a standard procedure for borrowing from the IMF. Member countries have quota shares at the fund. The anonymous economist explained that those who are in need of foreign reserves, as in the case of Egypt, borrow from quota shares for countries that have shares in currencies that can be used in lending. In exchange, the borrowing country is required to deposit its currency in exchange for the amount borrowed in hard currency until it has a chance to pay back members who have offered their currencies for lending the amount borrowed in hard currencies. This way all shares at the fund remain in full, regardless of the currency used.
