Egypt-IMF: More Money, More Likely?

Egypt’s proposed deal with the International Monetary Fund has been in the “maybe” category for many months – but there were strong indications this week that the deal will be done.

The positive signs are from both sides. First, the IMF announced that its managing director, Christine Lagarde, would be visiting the country. Then Momtaz al Saeed, the finance minster, told reporters that the country would be looking for $4.8bn, up from the $3.2bn that had been mooted since last year.

There are other signs too: Qatar’s $2bn deposit at Egypt’s central bank announced this week, with the first tranche expected in days, confirms that wealthy Arab allies will back Cairo with their money; The World Bank is ready with a $200m loan, and the US is considering a $500m aid request from Egypt.

The political situation is volatile but president Mohamed Morsi’s assertion of authority over the military in his sacking (and then honouring) of two generals shows there is a credible civilian government in place. There is somebody for the Fund to talk to, and for Lagarde to meet.

But while the $4.8bn will help, it’s not going to be enough to drag Egypt out of its financial hole.

Said Hirsh, Middle East economist at Capital Economics, told beyondbrics that he reckons Egypt needs approximately $12bn to avert a balance of payments crisis. Foreign exchange reserves have plummeted over the past 18 months, to a level which is below the three-month imports cover that is regarded as being adequate.

“The visit of Lagarde suggests the IMF is more serious about a deal,” said Hirsh. “There is a credible government in place, and although there is a role for the military as a check on the government, it looks like it will not interfere with day to day affairs. The Qatar aid will also sit well with the IMF.”

So what sorts of reforms will the IMF be keen on? “[The Fund] will want to look at energy subsidies, which are at the moment about 16 per cent of Egypt’s budget,” said Hirsh.

In early trading on Thursday, the EGX30 index was up 0.8 per cent.

After such a long, drawn-out process – Egypt and the Fund were originally in talks more than a year ago before Cairo sent the IMF packing in June 2012 – credible moves to start negotiations will help boost confidence. But credible is the operative word. Cairo needs an IMF deal both for the cash involved and for the signal it will send to other sources of finance, including the markets. The actual sum is less significant, although the extra $1.6bn wouldn’t hurt.

FT