IMF lifeline still far on horizon despite subsidy reforms
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By YASMINE SAMRA

CAIRO: During the Mohamed Morsi presidency, one of the many criticisms directed at him was that he failed to secure a loan from the IMF, which had conditioned any assistance on reducing subsidies that ate up a quarter of the state’s budget. One of the first actions in Sisi’s presidency was to revamp the subsidy system, leading some to speculate that IMF funds could be on the short-term horizon.

The Cairo Post spoke with Amr Hassanein, the Chairman of Middle East Rating and Investors Services (MERIS), who offered a less optimistic forecast of a possible cash injection from the international lending body.

“Egypt will not receive an IMF loan before the end of the current fiscal year [end of June 2015] after applying a 2nd phase of subsidy removal and fuel price hike,” he said.

IMF is anticipating the Cabinet’s 2nd step toward cutting energy and food subsidies ahead of the next FY, injecting new investment and national projects to stimulate Egypt’s faltering economy and providing jobs for the youth, he explained.

In the coming months, the fund will be monitoring the effect of these projects on the economy and employment rate along with the progress achieved to restore security and stability which requires reconciliation with the Muslim Brotherhood.

Egypt’s credit rating should be upgraded by international institutions such as Moody’s, Standard and Poor’s and Fitch Ratings which downgraded Egypt in the wake of the January 25 Revolution, to get the IMF loan.

In March 2013, Moody’s downgraded Egypt to Caa1 rating which indicated a very high credit risk, citing “Political unrest.”After six months, the credit-rating agency maintained a negative outlook for Egypt.

According to the report issued in October, political tensions have undermined the implementation of fiscal and economic reforms that could be credit-positive.

Last month, Fitch Ratings welcomed Sisi’s decision to cut subsidies, while the agency had affirmed Egypt’s long-term foreign and local currency issuer default ratings (IDR) at B- in June, but the outlooks were kept as “stable”.

“Tackling subsidies is a key to reduce Egypt’s budget deficit, which we estimate is at 12.1 percent of the GDP in 2013/14,” Fitch reported July 8.

The government took “serious steps” regarding the subsidy system, which represents a heavy burden on the state’s budget, Hassanein said, but added that stimulus investment packages, along with political stability are also required to secure any IMF loan.

Fuel prices in Egypt jumped between 40 to 78 percent for petrol, and 175 percent for natural gas overnight in early July.

The gradual removal of the price supports was intended to reduce the deficit which was reduced to 240 billion EGP, 10 percent of the GDP, down from 292 billion EGP in the initial budget proposal that was rejected by the presidency.

IMF welcomes fiscal reform

Masood Ahmed, director of the International Monetary Fund’s Middle East and Central Asia Department, told state-owned MENA in early August that “Egypt has applied hard and brave economic reforms in recent weeks,” adding that “if the fund’s program is applied in Egypt, it would give signals to international institutions that the situation is stable to carry out other programs.”

Egypt and IMF held sporadic negotiations for a $4.8 billion loan to support the economy since the January 25 Revolution in 2011. Rationing subsidy programs and implementing economic reforms were among the conditions set by the international body.

More than just oil prices

Inflation rates will probably soar due to the fuel price hike and the gradual removal of subsidies, Hassanein warned.

“With no investment projects launched to stimulate the economy, prices will surge as the cost of manufacturing, transportation went up due to the oil price hike and subsidy reform,” he said.

Private transportation fares jumped between 25 to 50 percent following the fuel price hike, adding new burdens to Egyptians suffering from food prices, which spiked in late June ahead of Ramadan, the Muslim month of fasting.

In an attempt to control inflation, which amounted to 8.2 percent by the end of June, the Central Bank of Egypt (CBE) raised the overnight deposit rate, overnight lending rate and the rate of the CBE’s main operation by 100 basis points each to 9.25 percent, 10.25 percent, and 9.75 percent respectively July 17.

The discount rate was also raised by 100 basis points to 9.75 percent, according to CBE’s official website.

“Raising the interest rate is a good step to reduce cash liquidity, but it is not enough to control the soaring inflation,” Hassanein said.

The government should inject stimulus investment packages in the market as soon as possible in conjunction with applying economic reforms to provide jobs in order to helping people cope with the price hikes.

“If such motivating investments are not launched immediately, the economy will face a sharp downturn and we will return to square one,” he warned.

As experts had predicted, monthly inflation soared by 3.3 percent during July, up from 0.9 percent in June, to hit its highest rate since May 2008 at 4.7 percent, CAPMAS announced in its statistical bulletin for July.

The report attributed the hike to the increasing demand on goods and services that coincided with the Cabinet’s decision to increase fuel, electricity and tobacco prices.The IMF has urged Egypt earlier to establish a social safety net to make sure that the poor and marginalized classes are not hurt while adopting such reforms, said the MERIS chairman.

Achieving social consensus and protecting the poor were among the IMF’s conditions when former administrations sought a loan from the international lender, he added.

“Egypt’s successive government postponed any reforms on the subsidy system which eats up almost 25 percent of Egypt’s budget citing political reasons, but thank God a decision to fully remove the subsidies within three to five years was finally taken by the Mahlab administration,” he added.

MERIS chairman reiterated that holding the Donor Conference, which the Saudi king called for, to shore up Egypt’s limping economy after Sisi’s inauguration is expected to bring in multibillion aid to launch some mega projects.

“The IMF loan is a certificate that could reinstate investors’ confidence in the country, which was hit by political upheaval and violence,” he said.

“The government should inject the stimulus investment package before the upcoming conference to send a message to the IMF that the country is on the right track of applying the required reforms.This explains why President Sisi urges local businessmen to donate,” he concluded.

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