It has been more than three and a half years since the Arab Spring toppled the regime of Hosni Mubarak and more than a year since the Egyptian army deposed Mohamed Morsi and unleashed a bloody crackdown on the Muslim Brotherhood, and now Cairo is looking to turn the page and rejoin the global economy.
Egyptian authorities have invited the International Monetary Fund to come to the country and conduct a review of the economy, Egypt’s first since March 2010. The review is expected to pave the way for an IMF assistance package of upwards of $5 billion, according to Hisham Ramez, the governor of the Central Bank of Egypt. The IMF funds would replace billions in support that Egypt is repaying to Qatar, and help support the economic reform program of President Abdel Fattah al-Sisi and Prime Minister Ibrahim Mehleb.
“We are open for an IMF deal,” Ramez said in an interview on the sidelines of the annual meetings of the IMF and World Bank in Washington.
IMF members are supposed to allow annual economic reviews under Article IV of the Fund’s Articles of Agreement, but the turmoil of the 2011 revolution interrupted routine consultations and then Morsi’s government shunned the Fund in favor of Qatari money, which came with few policy strings attached.
Since Sisi won election as president this spring and appointed Mehleb as prime minister in June, however, Cairo has taken a sharp turn back toward policy orthodoxy.
In July, the government abruptly slashed fuel subsidies, boosting the price of gasoline by more than 70 percent overnight, to around 1.90 Egyptian pounds a liter (27 U.S. cents a liter, $1 a gallon). Subsidies for fuel, food and other basic staples eat up nearly a quarter of Egypt’s government budget, and economists and organizations like the IMF have long urged Cairo to dismantle them as part of a reform program, but governments have shied away from the issue even since former President Anwar Sadat triggered bloody riots in 1977 by announcing plans to raise the price of flour.
“These are changes we’d been hoping for for a very long time,” Ramez said. “We’re moving in the right direction.”
The July move is expected to reduce the government’s budget deficit by roughly 50 billion pounds, or just over $7 billion, in the fiscal year that began in July. As a proportion of gross domestic product, the government projects the deficit to fall to around 10 percent from 12 percent.
Although the move sparked some scattered protests, there has been no mass public outcry. “We explained to people effectively that you cannot really spend on health, you cannot really spend on education because of this big bill” for subsidies, Ramez said. “The people understand the reason behind it.”
The central bank hiked interest rates by 100 basis points in July, lifting its main policy rate to 9.75 percent, in a pre-emptive bid to contain inflation pressures stemming from the fuel-price hike. Inflation did rise to 11.5 percent in August from 8.2 percent in June, but the rate dipped to 11.1 percent in September. Ramez, who said the knock-on effect on prices has been less than the central bank expected, aims to get inflation back down into single digits “in a year’s time.”
In recent days the central bank has repaid $500 million in Qatari loans, and Ramez said the bank expects to repay the remaining $2.5 billion in loans when they come due on November 1. The move will dent the country’s reserves, which stood at $16.9 billion at the end of September, but Ramez expressed confidence that a rebound in foreign investment as well as IMF resources would shore up the country’s finances.
“We definitely know we can’t live on that,” he said of the Qatari loans. “We’ll depend on investments, on tourism, on business coming back as usual.”
The IMF predicts that Egypt’s economy will grow by 2.2 percent this year and 3.5 percent next, and sees inflation rising from 10.1 percent to 13.5 percent. Although the Fund welcomes the subsidy cuts, “clearly, more needs to be done to create an economic environment for growth and jobs going forward,” Thomas Helbling, chief of World Economic Studies Division, said at a news conference at the annual meetings.
Ramez said the government was moving to improve the investment climate with the signing in September of a new law to strengthen the certainty of contracts. He also cited last month’s sale of 64 billion pounds worth of bonds to domestic investors to finance an expansion of the Suez Canal as a sign of improved confidence.
“Egypt is open for investment,” the central banker said. “Egypt has proved that despite all that happened, it’s a stable country. It’s a cornerstone of the region.”