Coming up short: A funding gap challenge emerges

The effort to secure international funding in the wake of the 2011 uprising has become one of the more salient economic issues for Egypt over the past year. The nation first turned to the IMF in May 2011, with Samir Radwan, then-finance minister, citing the social justice demands of the people in the wake of the revolution as the primary justification of its application to the body. A stand-by loan facility worth $3bn was quickly agreed based on the 2011/12 national budget forecast and an apparent agreement that the World Bank and African Development Bank would also assist Egypt in meeting its challenging fiscal situation.

OPPOSITION: The facility would have made Egypt the first country in the Middle East since the political upheavals of early 2011 to receive such funding, and formed part of a grander strategy of the IMF and World Bank to inject as much as $35bn and $6bn into the region, respectively. However, the IMF’s agreement with Egypt, with appeared to be a fait accompli in May 2011, quickly unravelled as public opposition to the deal grew over the following month. In the course of just a few weeks debt activism established itself as a subset of the revolutionary youth movement which was initially seen as the beneficiary of Egypt’s political transformation, with non-governmental organisations such as the Council of Revolutionary Trustees issuing public statements against foreign funding as a contradiction of “the principles of the Egyptian Revolution that called for freedom from all sorts of local and foreign pressure”.

Others argued that the transitional government that inked the deal with the IMF lacked political legitimacy as an unelected body, and that no funding agreements should be reached until the country’s political transformation was complete. In May the ruling military council which had assumed control of the country after the departure of the Mubarak administration announced its rejection of the loan offered by the IMF and also that being negotiated with the World Bank, with a council member telling the Egyptian press that five of the conditions attached to the financing proposition “went against the principles of national sovereignty”. As a result of the cancellation, the Ministry of Finance (MoF) was compelled to readjust the national budget for 2011/12, reducing the planned deficit from 11% to 8.6% of GDP by cutting allocations to some ministries while attempting to maintain government spending in areas connected to the principle of social equity, such as salary and pension increases.

In a statement on its website the MoF attributed its decision to turn down the IMF loan to “public debate and to consultations of the Supreme Council of the Armed Forces”. While the decision to refuse the loan satisfied those who had seen its acceptance as a betrayal of the revolutionary dictum that the IMF was a tool of imperialism, those on the opposing side of the argument saw it as a rejection of cheap and relatively condition-free funding that might have been usefully used to stimulate Egypt’s slowing economy.

THE ALTERNATIVES: Although Egypt retained the option of returning to the negotiating table with the IMF and the World Bank at a later date, its 2011 rejection of their funding deals left it with a greatly circumscribed array of foreign funding options. The answer, for many, lay with Egypt’s regional neighbours, many of which moved quickly to offer financial assistance. By mid-2011 Saudi Arabia had added $4bn in financial aid, Qatar had promised to invest in Egyptian developments to the tune of at least $10bn and the UAE had revealed the outline of a $3bn assistance package.

This regional lending and aid was not welcomed with the same degree of public hostility as the IMF and World Bank offerings, although some commentators drew attention to the opaque character of the arrangements and questioned what the undeclared conditions of such largesse might be. The lack of a transparent timetable and framework of conditions was also to prove problematic as more than a year after Egypt’s political uprising Qatar had transferred $500m into Egypt’s coffers but had yet to deliver on its investment promises, citing Egypt’s instability, while Saudi Arabia had gone no further than releasing an initial $500m urgent aid grant to the Central Bank of Egypt and delivering 48,000 tonnes of liquefied gas to the country in a bid to tackle its severe fuel shortage. Discussions with the UAE regarding its contribution, meanwhile, remained unresolved. In the absence of a coherent foreign funding programme, Egypt turned to its domestic market to meet its fiscal requirements.

However, while domestic banks were content to buy up the vast numbers of Treasury bills sold by the central bank on behalf of the MoF, the resultant yields of nearly 16% in early 2012 cost the national economy dearly. Worse still, in the eyes of many, was that the existence of such an attractive lending opportunity meant that liquidity in the banking system was delivered to the government at the expense of the private sector.

WHAT COMES NEXT: Although Egypt’s political transition continues in 2012, the successful completion of parliamentary and presidential elections has led to a hope in some circles that a government with a popular mandate can re-engage with the international financial community and secure a lending programme that will meet both Egypt’s fiscal needs and the social justice goals of its people. In late May 2012, the government signed a $1bn loan agreement with the Islamic Development Bank to finance food and energy imports, but the focus of the MoF with regard to securing funding appeared to have shifted back towards its erstwhile negotiating partners. Fresh IMF delegations to Cairo in January and March 2012 failed to reach an agreement with the government, but by July 2012 a previously wary Freedom and Justice Party, the largest bloc in the first post-Mubarak parliament and the party of Egypt’s newly elected president, was making more enthusiastic noises about the possibility of a deal. There would be “an understanding with the IMF in the coming period that would give a very strong signal that the reform programme is good”, an economic aide to President Mohamed Morsy told Bloomberg news agency. Also of interest to many observers was that the IMF’s managing director, Christine Lagarde, was one of the first to call to congratulate the new president, while an IMF public statement declared that “we look forward to working closely with the [Egyptian] authorities”.

From Egypt’s viewpoint, an IMF loan, and the further funding from other international lenders that a deal would make more feasible, would likely help to bring down borrowing costs – despite recent improvements, Treasury yields are still quite high, averaging 14.47% for nine-month bonds as of mid-September 2012.

For the lender’s part, any deal is dependent on broad political support, which the transitional governments, the military council, and the Freedom and Justice Party have hitherto been unable to achieve. Egypt’s political transition continues, however, and as stability returns to the political system many hope that the funding gap challenge can be resolved in the short term, rather than at greater cost to the economy in the long term.

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