Egypt: IMF Provides Funds and Costs Rise

The International Monetary Fund (IMF) will loan Egypt $4.8 billion so that Cairo can increase social spending and infrastructure investment while reducing its budget deficit from 11 percent to 8.5 percent in the 2013 – 2014 timeframe. The 22-month standby arrangement is expected to be signed around mid-December and the first of eight quarterly funding tranches will be delivered soon after. These funds will be provided at an interest rate of 1.06 percent in addition to other fees, which, I assume, are based on Egypt’s compliance with the conditions included in this agreement. These conditions call for Cairo to end subsidies on 95-octane gasoline and hike the country’s 10 percent sales tax – comparatively, Illinois has the highest sales tax in the United States at 11.5 percent. Egyptian citizens may not take kindly to this new rate which will increase prices for all goods and thus may spur higher inflation. Cairo also plans to create a new tax rate for high earners although the time and salary levels have not been disclosed – so I wouldn’t be surprised if this policy is never implemented – and broaden “the general sales tax to become a full-fledged value-added tax.”

Regardless of how this agreement will actually help its people, Egypt needs these funds to build its battered finances and rebuild investor confidence. Since the beginning of Arab Spring protests, the country’s foreign reserves have declined 50 percent, tourists have disappeared, and investment is nowhere to be found. The hope is that this agreement will spur investor confidence in the country and its government and help Cairo achieve its aggressive goals of raising international reserves from $15.5 billion to $19 billion by the end of the next fiscal year, increasing economic growth from 2.2 percent in 2011 to 3.8 percent through June 2013, and reducing the deficit from 11 percent to 8.5 percent of GDP in fiscal 2013/14. The IMF’s funds will be required to reach some of these goals especially since investors believe the Egyptian pound is overvalued and will wait until the currency declines before showing up with their cash filled suitcases.

Not everyone is happy with this impending agreement as activist groups have objected to a lack of transparency amid concerns that the IMF’s conditions will undermine Egypt’s economic independence. Their concerns have not been alleviated by statements from Cairo that it will be more careful in its subsidy expenditures and protect the poor – two seemingly contradictory statements. Activist concerns may be soothed if countries – not individual investors – start shipping money to Egypt; the IMF noted that Qatar and Saudi Arabia have already provided support and these countries, plus the European Union and United States, have pledged more funds. Regardless, Egypt will continue to depend on these funds since that country has no natural resources and its revenue-generating industries are unlikely to recover without stable security conditions and that is unlikely to happen anytime soon. Cairo, therefore, has no choice but to grit its teeth, accept the conditions, get the cash and impose more harsh conditions on its people.