Egyptian officials started talks in Cairo with the International Monetary Fund (IMF) ahead reaching an agreement over a loan to help finance the government’s economic program. Egypt is seeking $12 billion over three years.
The Egyptian economy has been struggling as it faced one of its harshest downfall in its history. It suffered from a shortage of foreign currency due to the withdrawal of tourism and foreign investments which were among the main sources of foreign currency. Moreover, the shortage of foreign currency has led to an unprecedented rise in the dollar exchange rate relative to the Egypt’s currency. The Central bank of Egypt(CBE) has devalued the Egyptian pound last March with amid speculation of another devaluation in the coming period.
Since the 2011 January Revolution that ousted Mubarak’s regime, the IMF relation with Egypt has tempestuous as the IMF has turned down two initial loan accords.
According to Bloomberg, some of the major topics likely to be discussed are: new taxes, cuts to power subsidies, are expected to be” controversial in a country where many accuse the IMF of imposing harsh conditions in exchange for financial aid, a charge the fund denies,” reported Bloomberg.
In this context, there are following key steps the Egyptian authorities may take, based on interviews with economists at HSBC Holdings Plc, CI Capital, Arqaam Capital and Emirates NBD, reported Bloomberg.
The first step is allowing more flexible exchange rate mechanism. In fact, the central bank has kept the official exchange rate unchanged at 8.88 pounds per dollar since a more than 10 %devaluation in March.
As a result, strict policies regarding exchange rates will likely allow the currency to weaken again, with forecasts ranging from 9.5 pounds to 11 pounds to a dollar by the end of the year.
In this context, Reham ElDesoki, senior economist at Dubai-based investment bank Arqaam Capital said that the policy makers will also seek to deliver on a pledge to adopt a more flexible exchange mechanism.
She said,“I expect that the pound will be allowed to fluctuate within a wide trading band, for a while at least, until the market gets used to the notion of an unfixed exchange rate,” she said.
She also expected that the Foreign reserves may increase to more than $20 billion through the current fiscal year that ends in June, from $17.5 billion now.
Second the monetary policy, economists as Mohamed Abu Basha of EFG-Hermes believe that the CBE will increase the interests rates are expected again this year.
“Policy makers have already increased borrowing costs by 2.5 percentage points, pushing the yields on the 10-year government bonds to 17.6 percent,” which is reported by Bloomberg as the as the highest level since it started tracking the data in 2005.
In addition,Hany Farahat, senior economist at CI Capital Holding, a unit of Commercial International Bank expects that the bank will also probably cut government lending to reduce liquidity and fight inflation.
“The IMF will most likely push the central bank to slow the accommodation of fiscal needs,” he said. “In general, this program will discipline Egypt’s economic policy making and encourage adoption of more sound practices.”
According to Bloomberg, authorities plan to tap international bond markets this year and has approached banks to submit proposals to advise on the potential sale. Officials have said the government plans to raise between $3 billion to $5 billion in the fiscal year ending June 30.
Third, an expected Fiscal reform should be on the move to meet the IMF standards. Simon Williams, HSBC Holdings Plc’s chief economist for central and eastern Europe, the Middle East and North Africa said,” Fiscal and monetary reform need to take place in tandem.”
He said, “Egypt won’t be able to bring its current account deficit in check if it doesn’t re-balance the budget. That means subsidy reform, closer control of salaries and more effective engagement with the private sector and donor agencies on capital projects.”
In fact, the Egyptian government plans to introduce value-added taxation, cut electricity subsidies, and curb wage increases. In addition, Deputy Finance Minister Amr El Monayer said in an interview on Sunday that the government will start taxing capital gains on the stock exchange next year .
Moreover, there are speculations that the authorities are also studying measures to broaden the tax base and improve settlement practices.
The target: cut the budget deficit to as low as 8 %of gross domestic product by the 2018-2019 fiscal year from about 11.5 percent last year. ElDesoki of Arqaam Capital said more measures could be needed to bolster revenue to achieve that level, including possibly raising the tax rate on the highest earners and increasing fees for government services, reported Bloomberg.
The fourth is cutting off the subsidies which started during the al-Sisi reign. Abdel-Fattah al-Sisi, the general who led a military coup in 2013 that ousted Egypt’s first democratically elected president, slashed energy subsidies soon after he was elected in a landslide vote, a step that previous governments didn’t dare to implement for fear of public unrest.
Yet the benefits still account for 22 % of government spending in the current fiscal year, according to Bloomberg. The government aims to end electricity subsidies by 2019, officials have said. Fuel subsidies should be slashed “if the political situation allows it,” ElDesoki said.
In fact, al-Sisi started to prepare the public for such measures as he warned the Egyptians of hard days. At a leadership conference, al-Sisi told young people that the “Egyptians love their country and are able to face hardship.”