IMF Support Would Aid Egypt Amid Political Uncertainties

IMF Support Would Aid Egypt Amid Political Uncertainties

Last Monday, the Egyptian government reversed its stance about incurring external debt and announced that it would seek IMF support. This comes at a critical time for Egypt (B2 review for downgrade) because the government’s bond sales and the country’s international reserves have come under renewed pressure in recent months. Timely support from the IMF would diminish such pressures and be credit positive. However, even with a swift and successful negotiation with the IMF, ongoing political uncertainties may temper investor confidence.

IMF Director of the Middle East and Central Asia Department, Masood Ahmed, indicated that the $3.2 billion program would involve “a two-year reform program to reduce the budget deficit.” Moreover, an IMF program may provide the signal to Saudi Arabia, the United Arab Emirates and Qatar to unlock some $7 billion in aid and grants, if not more, offered to Egypt. In addition, the World Bank has pledged $4.5 billion for a multi-year budgetary and balance of payments support program.

External financial support is particularly urgent because the ministry of finance revised its deficit target for the current fiscal year (end-June 2012) to 8.7% of GDP; the target has been revised upwards four times. Prior to the January 2011 revolution, the IMF had projected a 6.8% of GDP deficit for fiscal year 2011-12. Not only is the amount of debt issuance increasing, but so is the government’s dependence on domestic investors as foreign investors have largely sold off their government securities holdings. Consequently, the yield on one-year Treasury bills rose to 15.8% on 19 January from 10.6% when the Mubarak government collapsed in January 2011. Over the same period, the central bank’s foreign exchange reserves have declined by half to just $18 billion in December from $36 billion the previous January (see exhibit below).

Egypt One-Year Treasury Yield and Official Foreign Exchange Reserves

Continued hemorrhaging of official foreign exchange reserves would eventually lead to a currency and balance of payments crisis. These pressures are compelling the interim government to seek the IMF’s support.
However, Egyptian politics remain uncertain and could undermine an IMF program. Since the January 2011 revolution, the Supreme Council of the Armed Forces has reshuffled the interim government three times. Questions remain whether the civilian, interim government will have the full authority to negotiate successfully and implement an IMF program. Additionally, the announcement of renewed negotiations with the IMF comes one week before the newly elected parliament is to hold its first session. Another uncertainty is whether the Islamist parties, which will hold the majority of seats in the new parliament, will go along with an IMF program. Meanwhile, in view of Egypt’ shifting political landscape, implementation risks will be great during a multi-year program.