News Analysis: IMF initial 12-bln-USD loan deal reflects confidence in Egypt's economy despite hardships

The initial agreement reached Thursday between the International Monetary Fund (IMF) and Egypt on a 12 billion U.S. dollar loan reflects confidence of world financial institutions in the Egyptian economy, said Egyptian economic experts.

Governor of the Central Bank of Egypt (CBE) Tarek Amer said in a joint press conference with the IMF delegation in Cairo that the three-year loan will be "part of a 21 billion dollar Egyptian economic program" that would boost the North African country's ailing economy.

TRUST CERTIFICATE

"The initial loan agreement enhances the confidence of the world business community to pump more investments into the veins of the Egyptian economy," said Fakhry al-Fiky, economic analyst and former assistant to IMF executive director, describing the move as "a positive step."

The Egyptian economy has been battling recession over the past five years due to political turmoil that led to the ouster of two presidents, shrinking the foreign currency reserves at the CBE from 36 billion dollars in early 2011 to 17.5 billion dollars as of end of May 2016.

The recent dollar hike in Egypt made it jump to be worth about 8.87 pounds in the official market and vary from 12 to 13 pounds in the black market, making the largest hike and the biggest exchange rate gap in the Egyptian modern history.

"The IMF loan deal is a trust certificate and a positive sign that may attract eyes of foreign businessmen and investors to Egypt, which is expected to gradually improve the value of the Egyptian pound, control the exchange rate in the black market and positively affect the Egyptian stock exchange market," Fiky told Xinhua.

The expert stressed that the three-year economic reform program focuses on the financial, economic and social dimensions while strengthening the safety net to protect the vulnerable during the process.

"If the program is professionally implemented, I believe the economic crisis Egypt is going through could be overcome within the three-year period of the program," Fiky expected.

BUDGET DEFICIT

The Egyptian government is currently struggling to reduce a budget deficit of over 35 billion dollars in the outgoing fiscal year 2015/2016, representing 11.2 percent of the country's gross domestic product.

The IMF mission led by Chris Jarvis visited Cairo from July 30 to Aug. 11 to discuss measures to support the Egyptian authorities' three-year economic reform program through its financial assistance.

"This agreement is subject to approval by the IMF's Executive Board, which is expected to consider Egypt's request in the coming weeks," Jarvis said in a statement Thursday.

"The program aims to improve the functioning of the foreign exchange markets, bring down the budget deficit and government debt, and to raise growth and create jobs, especially for women and young people," Jarvis said.

"With the implementation of the government reform program, together with the help of Egypt's friends, the Egyptian economy will return to its full potential," he added, describing Egypt as a strong country with great potential yet with some economic problems that need to be urgently fixed.

SUBSIDIES CUT, PRICE HIKE

The IMF official also referred to the implementation of a value-added tax after the recent Egyptian parliamentary approval, adding that the Egyptian government "will continue the program begun in 2014 to rationalize energy subsidies."

Egypt announced in April that it plans to cut fuel subsidies in the new budget by over 40 percent, reducing fuel subsidies in the 2016/2017 fiscal year's budget to 35 billion Egyptian pounds (about 4 billion U.S. dollars) compared to 60 billion pounds (about 6.76 billion dollars) in the outgoing fiscal year.

In mid-2014, the government made a similar move that angered many consumers as it raised fuel prices up to 78 percent and slashed natural gas subsidies of several industries, leading to price hikes in those fields ranging from 30 to 70 percent.

Amr Saleh, professor of political economy at Cairo-based Ain Shams University and former World Bank project officer, said that although cutting subsidies and imposing taxes as part of the reform program might be unwelcomed by the public, it is part of "necessary requirements" that need to be professionally applied in terms of the timing, the way and the targeted categories.

"They are corrective requirements to fix the structural problems. They are easy for a world institution to demand but require a courageous government to professionally implement while maintaining safety and protection for its citizens," the expert told Xinhua.

FOREIGN EXCHANGE

The recent unprecedented dollar hike and the declining foreign currency reserves negatively affected investors, businessmen and importers in the most populous Arab state, especially amid shortage in the country's main dollar resources including tourism, Suez Canal revenues and remittances of Egyptian expatriates.

"The IMF loan deal will definitely affect the foreign exchange rates and will improve the value of the Egyptian pound against the dollar, but this will not last forever, as the value of a local currency mainly depends on the powerfulness of economy," the political economy professor explained.

"The strength of economy is based on production and exportation," he added, citing that China and some Southeast Asian states are models for strong economies that rely on the power of production rather than interest-based projects related to stock markets, bank finances, bonds and others.

Saleh concluded that although borrowing is not favorable for any country, the IMF initial approval of the large loan to Egypt is "an international testification" to the credibility of the Egyptian government, the country's solvency, the improvement of its credit rating and the general healthiness of the Egyptian economy despite hardships. Endit