Since the overthrow of autocratic leader Hosni Mubarak, investor confidence and economic growth in Egypt has been stymied. To relieve downward pressure on its currecny and cover government expenditures, Egypt has been borrowing from the local market at expensive rates. The country has also depleted its foreign reserves to the point that it can only afford about three months of imports. As a result, Eygpt has seen its bond yields increase to unsustainable levels - around 16 percent. These conditions have led many to assert that an injection of foreign funds is necessary to stabilize Egypt's economy.
Since June 2011, the IMF has been engaged with Egypt to negotiate a new loan. As of today, Egypt has formally requested $4.8 billion.
Negotiations with the interim government were unproductive. The IMF stipulated that there be broad political consensus on Egypt's economic plan before a loan would be approved - a comlex task for a post-revolutionary state. In February 2012, the first economic plan was rejected by the Muslim Brotherhood-led parliment. And in June, a Mubarak-appointed judge dissolved parliment. Political consensus was scarce.
However, since the election of the Muslim Brotherhood's presidental candidate, Mohamend Morsi, the IMF has begun to re-egage with Egypt. The IMF managing director, Christine Legarde, traveled to Egypt on August 22 to discuss the loan with President Morsi. It seems now that the IMF is willing to accept the democratically elected government as a "broad political consensus." Without a functional parliment, Morsi's new government might be the closest thing to consensus in Egypt. Given that Morsi was democratically elected, their is hope that he will push for a different set of arrangements with the IMF than his predecessor. In fact, there is some evidence this might happen. Abdallah Shehata, economic adviser to President Morsi, told an Egyptian paperthat "The new [economic] program will have more focus on social justice, it will be a fresh start for talks with the IMF."
However, the degree to which the economic plan tilts toward social justice will depend on negotiations. It seems the IMF plans to loan to Egypt through its Stand-By Arrangements (SBA), which means disbursements will be conditional on quantitative performance criteria. Therefore, the Morsi government will need to develop quantitative indicators for its social objectives that will be approved by the IMF technical team arriving in September. The other option is for the IMF Executive Board to waive the criteria for the SBA.
Either way, given the critical problems facing Egypt right now - namely, unemployment and security - it is time for the IMF to support a new economic plan.
This article was originally published the the New Rules website.
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