The Economist: Egypt reaches a deal with the IMF
“EGYPT is a strong country with great potential but it has some problems that need to be fixed urgently.” So says Chris Jarvis, the IMF’s mission chief for Egypt, who has just wrapped up a visit to Cairo. On August 11th Mr Jarvis agreed to let the fund lend Egypt $12 billion over three years, pending approval by its executive board. The IMF loan is likely to be followed by money from the World Bank and African Development Bank. In return, Egypt has promised a number of reforms.
The IMF lifeline is yet another opportunity for the government of Abdel-Fattah al-Sisi, Egypt’s president, to turn around the struggling economy, which has been propped up in recent years by over $25 billion in cash injections from Gulf states. Much of that money has financed Egypt’s huge budget and current-account deficits—almost 12% and 7% of GDP, respectively—and propped up an overvalued currency. It has not, however, led to reforms that might place the Egyptian economy on a more solid footing.
The IMF deal is meant to change that. So far everyone is making the right noises. “The government recognises the need for quick implementation of economic reforms,” says Mr Jarvis. “Harsh” economic measures are coming, warns Mr Sisi. But his government has talked a good game in the past, only to back away from reforms. A plan to end fuel subsidies, beginning with a cut in 2014, was halted last year. Tax rates have been raised, but then quickly lowered. Efforts to tame an overbearing bureaucracy that discourages investment have come to naught. The IMF expects the government to do more in these areas.
Egyptian officials fear that some reforms will increase inflation, already in double digits, leading to unrest. The central bank, for example, has stopped short of bridging the gap between the black-market and official exchange rates, presumably because a weaker Egyptian pound might exacerbate rising food prices. Egypt imports many staples, such as wheat. But the pain
is already being felt. “Most importers are using black-market rates,” says Simon Kitchen of EFG Hermes, an investment bank. “Inflation is already there.” The IMF talks of moving to a “flexible exchange rate regime”, which is a polite way of saying that Egypt must devalue the pound.
Such a move would cheer investors, who along with tourists are a key source of hard currency. Both have been driven away by years of political upheaval and sporadic acts of terrorism. Egypt’s foreign reserves are running perilously low. As dollars flooded out of the country, the government tried to keep them in by imposing capital controls, such as limitations on bank withdrawals. These have made things worse. But the IMF’s money should allow the government to continue easing the restrictions.
Other reforms, such as a valued-added tax (VAT), which would raise much-needed revenue, are being considered by parliament. The VAT seems likely to pass, but not before politicians carve out all sorts of exceptions. Another measure, to reform the bloated civil service, has been met with objections and protests, despite the fact that it would not actually pare back the bureaucracy.
Bolder action is needed. The overall unemployment rate is above 12%—but over 40% for young people. The education system is broken, so much so that the jobless rate is actually higher for university graduates than for the near-illiterate. Creative thinking is discouraged, not least by the government’s propensity to lock up young people who speak their mind. Those who attempt to bring their ideas to the market are hobbled by a lack of capital and an abundance of red tape, which is selectively applied to favour an ossified elite. Corruption is still rampant.
To this point, Mr Sisi has made things worse by quashing civil society, neglecting reform and focusing on mega-projects that boost his image, but add little to the economy. He now has a chance to put Egypt on a different course. But will he take it?