Christophe de Roquefeuil, AFP
Last updated: 7 January, 2013

Egypt mired in economic woes as IMF talks begin

A rising budget deficit, falling foreign exchange reserves and a sliding currency are adding to the woes of Egypt’s fragile government even as it battles a raft of political and social problems.

It is against this background that Cairo resumed talks on Monday with the International Monetary Fund for a $4.8 billion loan, which many see as a prerequisite for the country’s recovery.

Islamist President Mohamed Morsi has set a tough task for his government, headed by Prime Minister Hisham Qandil, which he fine-tuned in a Sunday reshuffle that saw the appointment of 10 new ministers including that of finance.

The government must “accelerate efforts to revive the economy and growth, attract investment, strengthen exports, promote tourism, create new jobs and improve public services,” Morsi said last month.

Egypt’s economic indicators however paint an “alarming picture”, said economist Ahmed el-Naggar of the Al-Ahram Centre for Studies.

“Previously tourism brought $13 billion every year, now it is around $8.8 billion.”

Egypt’s unemployment has grown to 12 percent in two years, he said, adding that official estimates are far less than the actual figures in a country where 40 percent of the population lives on $2 or less per day.

And the latest sign of concern is the fall in Egyptian pound which has dropped to around 6.4 pounds to the dollar, a record low.

The central bank has acknowledged that its foreign exchange reserves have reached a “critical minimum” level.

The reserves fell to $15 billion from $36 billion in two years and are enough to cover only three months of imports.

Egypt is reported to have extensively used its reserves to support the pound and to secure vital imports such as wheat and fuel.

Planning Minister Ashraf Abdel Fattah al-Arabi has declared in the media that the budget deficit could rise to 50 percent — 200 billion pounds ($31 billion) — in the fiscal year 2012-2013 “if strict economic measures are not implemented”.

Given the bleak economic scenario, securing the $4.8 billion IMF loan is now considered by many as essential to fuel a recovery.

The talks began anew on Monday in Cairo with Massod Ahmed, IMF representative for the Middle East and Central Asia.

Discussions will focus on “the most recent economic developments, their policy plans for addressing Egypt’s economic and financial challenges, and possible IMF support for Egypt in facing these challenges,” the Fund said on Sunday.

Finance Minister Al-Morsi al-Sayyed Hegazi, an academic specialising in Islamic finance, said during his inauguration that he is “ready to finalise consultations with the IMF to conclude such a loan”.

The IMF package is expected to unlock other international funding and support for undertaking difficult reforms in Egypt.

But the IMF programme is expected to come with austerity measures, especially a revision of costly state subsidies for fuel and/or several low priced food items.

Parliamentary elections scheduled in about two months could also influence the ability to carry out reforms amid fears of social tensions.

In December, Morsi suspended tax rises on a range of products, including alcohol and cigarettes, amid a dire political crisis “so as not to increase the burden on citizens.”

The tax hikes, also affecting steel, cement and other products, were part of budget efforts Egypt had agreed to make to secure the IMF loan.

“The next few months are going to be critical in terms of foreign exchange reserves and trying to turn around the foreign direct investments in Egypt,” said Angus Blair, head of the Signet Institute in Cairo.

“I would hope that the new finance minister might come with a more creative economic plan, but the issue is he will have to work in an environment which is very much limited.”

Aside from Egypt’s economic problems, the country was rocked by mass political protests in November after Morsi adopted extensive powers which he later repealed.

Tensions are still simmering, with the secular-leaning opposition calling for mass protests against the country’s new constitution adopted last month.