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Sunday, 14 August 2016

Egypt reaches USD 12 bn IMF staff-level agreement

We have an agreement: Egypt and the International Monetary Fund have reached a staff-level agreement on a three-year extended fund facility (EFF) worth USD 12 bn, the IMF’s mission chief to Egypt, Chris Jarvis, said. The “agreement is subject to approval by the IMF’s Executive Board, which is expected to consider Egypt’s request in the coming weeks,” according to the IMF’s official press release.

“Egypt is a strong country with great potential but it has some problems that need to be fixed urgently,” the statement reads. “The program aims to improve the functioning of the foreign exchange markets, bring down the budget deficit and government debt, and to raise growth and create jobs, especially for women and young people. It also aims to strengthen the social safety net to protect the vulnerable during the process of adjustment.”

“The government’s fiscal policy will be anchored to placing public debt on a clearly declining path … general government debt is expected to decline from about 98% in 15/16 to about 88% of GDP in 2018/19… Budgetary savings that come from other measures will be partially spent on social protection: including specifically food subsidies and targeted social transfers…The CBE monetary and exchange rate policy will aim to improve the functioning of the foreign exchange market, increase foreign reserves, and bring down inflation to single digits during the program. Moving to a flexible exchange rate regime will strengthen competitiveness, support exports and tourism and attract foreign direct investment… significantly improve Egypt’s ratings in Doing Business and Global Competitiveness.”

“We at the IMF are ready to partner with Egypt in this program. We will also encourage other multilateral agencies and countries to support Egypt. We have talked to our colleagues in the World Bank and the African Development Bank and they are willing to help. It would also be very helpful for Egypt’s bilateral partners to step forward at this critical time.”

So, what does a “staff-level” agreement really mean? It means that members of the IMF technical staff and the negotiating officials from Egypt — led by Finance Minister Amr El-Garhy and including CBE Governor Tarek Amer — have reached an agreement on the proposed economic reform programme as well as the funding package that could be provided. It doesn’t mean that Egypt is certain to receive IMF funding, however. The agreement has to be approved by the House of Representatives as well as the IMF Executive Board.

This particular agreement is different: An EFF is a lending facility (IMF definition or Reuters definition) to help members with balance of payments problems that need an adjustment period longer than that provided for under stand-by arrangements (SBA, the type of agreements we reached with the IMF in 2011 and 2012). “A country requesting an extended fund facility outlines its objectives and policies for the period of the arrangement, usually about three years, and each year presents a detailed statement of the measures it plans over the next 12 months.” In other words, if we don’t stick to the economic plan, the IMF has the power to halt the funding within the three years. SBAs, in contrast, allow countries “to draw on a specified amount of credit for a specified time, usually one to two years, provided that its economic policies conform to the terms set out in the agreement.”

We’ll be swimming in IMF “roz” soon enough, no? Not necessarily, even if the IMF Executive Board and House of Representatives approve the agreements. There is recent precedent that staff-level agreements between the IMF and Egypt don’t translate to actual funding. In June 2011, Egypt reached a staff level agreement on a 12-month SBA for USD 3 bn in funding. Another 22-month SBA agreement was reached in November 2012 for USD 4.8 bn. In both cases, when it came to implementing economic reforms, the government got cold feet, and this time we’ll have to decide on reform measures every year for the next three years — and we haven’t even passed VAT legislation yet.

What’s different this time? The wolves are at the door. The gun is at our head. Choose your metaphor, but we either way: We have a history of (only) performing under pressure.

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