Patrick Werr: If Egypt wants IMF deal, it needs to get serious about economic reform

When Egypt’s central bank devalued the pound on March 14, it prompted some economists to speculate that the government would soon approach the IMF for a loan agreement.

But unless there is a major change in thinking, such an accord seems more out of reach than ever.

The notion was that Egypt would take all the measures that the IMF normally requires for its support before making the request. Any Egyptian government is reluctant to be seen as taking dictates from an organisation widely viewed as a spearhead of imperial domination.

Yet an IMF agreement is attractive because not only would it provide Egypt with finance to help ease the agony as it takes painful measures to reform its economy, it would act as a certificate of approval to private investors that the government’s finances are under control.

An agreement would also potentially unlock finance from other important donors, including Egypt’s traditional backers, the Arabian Gulf countries, who have been reluctant to send more money until they are sure Egypt is fiscally sound.

Since the fall in the price of oil, GCC governments have been busy making great strides in reforming their own economies.

An IMF team quietly visited Cairo this month, and Reuters last week quoted an unnamed central bank official as saying the mission was helping Egypt chart out an exchange-rate policy as well as additional monetary measures. Bloomberg quoted an unnamed government official as saying that Egypt was seeking IMF financing, although the central bank’s governor Tarek Amer quickly denied it.

While the government might want one, an agreement still seems well out of reach. The IMF would want to make sure Egypt is getting its twin deficits under control: the budget deficit; and the balance of payments deficit.

Far from moving ahead, the government seems to be slipping behind on both.

When it introduced the budget for the fiscal year that began in July, the government said it would rely on the new, long-planned value-added tax (VAT) to keep the budget deficit under 9 per cent of GDP. With the fiscal year now three-quarters finished, there is little sign that the VAT, which had been expected to account for nearly 5 per cent of revenue, will be implemented any time soon. The government is similarly backtracking on plans to cut energy subsidies, which for years have accounted for about 20 per cent of all government spending, although in the past two years this figure has fallen with the decrease in global energy prices.

The government this month announced it was reducing the price at which it sells natural gas to steel and iron factories to US$4.50 per 1 million thermal units from $7. This brings the price back to where it was before the government raised energy prices in July 2014 as part of a plan to reduce the budget deficit.

The government in 2014 had also charted out a programme for eliminating subsidies on electricity completely by 2019. But this week the electricity minister was quoted as saying the ministry now wanted to delay this.

Even the currency devaluation on March 14, while a positive step, was not nearly enough to put much of a dent in the country’s balance of payments deficit. The central bank weakened the pound’s exchange rate to 8.95 to the dollar from the previous 7.83 and announced it was implementing a “flexible exchange rate”, a step the IMF had long been calling for.

But the central bank did little to reassure the market it was serious about flexibility. The fact it kept the rate at 8.95 indicated that far from seeking the real market-clearing price, it intended to defend the currency below 9 to the dollar. Two days later it actually strengthened the pound by several piasters at its regular currency sales to banks, despite the pound continuing to trade at a much weaker rate on the black market. As of Tuesday, a dollar on the black market cost 9.70 pounds, according to Reuters.

The central bank also announced with great fanfare last week that it was selling $1.5 billion to banks at the official rate, with the expectation on the street being that it was flooding the market with foreign currency. But in reality, the banks were required to deposit the dollars with the central bank for a year, meaning they were not actually reaching the market.

Before the devaluation, the pound was the most overvalued of major emerging currencies in terms of its real effective exchange rate, Reuters wrote. It was still among the most expensive even after the devaluation.

Unless the government uncharacteristically reverses course and implements serious reforms, there seems little chance of any agreement with the IMF.

Patrick Werr has worked as a financial writer in Egypt for 25 years.

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