As protestors march on the presidential palace, will President Mursi’s seizure of new powers affect massive new external funding agreements, including the vital IMF stand-by loan?
The Egyptian government says that the political unrest shaking the country after President Mohammed Mursi seized more power should not affect Egypt’s negotiations with the International Monetary Fund (IMF) for a $4.8 bn loan.
Foreign minister Mohammed Kamel Amr said in Berlin after meetings on November 29th with German Foreign Minister Guido Westerwelle that Mursi’s move to grant himself near-autocratic powers (Political Series p. 19482), at least until a new constitution is adopted and parliamentary elections are held, was a domestic issue.
Minister of Planning Ashraf El Arabi also said the political situation would not delay the approval process and that he expected the first tranche of the loan to be disbursed shortly after the board’s ratification.
The IMF deal was agreed at staff level on November 20th but still needs IMF executive board approval – the Board is expected to vote on the deal on December 19th. The deal is a 22-month stand-by arrangement in the amount of about $4.8 bn (335 % of Egypt’s quota in the IMF) to support the government’s economic programme through fiscal year 2013/14 according to an IMF press release.
The government has already begun implementing the first phase of fiscal reforms described by the IMF as ‘main pillars’ of its agreement: reducing ‘wasteful expenditures’ on energy subsidies and boosting revenue. On November 25th, three days after the controversial decree was announced, the subsidy on octane 95 fuel, (from £E2.75 to above £E5) was lifted. While this measure is only expected to generate savings of £E100m ($16.3m), in the longer term, the budget aims to reduce spending on energy subsidies by more than £E30 bn ($5 bn) to £E70 bn ($11.4 bn) a year – an estimate considered to be optimistic by some economists. It also introduced a new tax bracket for high earners – 22 % for annual incomes between £E1 m ($163 ,000) and £E10 m ($1.63 m). An increase in sales tax, the introduction of VAT, as well as property and telecommunications taxes are set to follow.
Necessary Political Clout
The bulk of economic reforms and spending cuts are expected to be ‘back-loaded’ with measures generating the most savings implemented after a constitution is finalized and a new parliament is elected, said Al Arabiya. One reason is that the presence of an elected parliament and functioning government institutions would facilitate implementation of IMF reforms – some of which are likely to meet with popular resistance.
“The recent escalation in political confrontation may pose risks to the proposed timetable, and cause slippage in [IMF] board approval and possibly reform implementation,’ Barclays Capital said in a note. Capital Economics, a research consultancy, echoed that warning.
When the IMF board meets, its members will need to ensure that the economic outlook for the country has not changed and, perhaps more to the point, that the government is capable of successfully implementing its reform programme. It needs to be convinced that the government has the political clout to carry unpopular reforms through.
IMF spokesperson Wafa Amr said the Fund will also be looking for assurances from other donors – such as the United States, the EU and international financing institutions- that their share of financing will also be forthcoming.
Traditionally, IMF approval opens the doors to funding from other donors too – agreed in principle or likely to follow.
The EU, for example, approved a €5bn ($6.4 bn) financial aid package on November 14th made up of €2bn from the European Investment Bank (EIB), €2bn from the European Bank for Reconstruction and Development and €1bn from EU countries.