The IMF is Back
International Monetary Fund (IMF) officials returned to Cairo yesterday. Discussions regarding a $4.8 billion debt-relief loan, halted last month when Egyptian President Morsi abruptly cancelled planned tax increases and other measures aimed at curbing a burgeoning budget deficit, have apparently resumed. Mr Morsi had clearly decided in December that the imposition of severe austerity measures would hardly be conducive to his priority of pushing through a controversial referendum to endorse a new constitution.
In the ensuing weeks, the atmosphere surrounding negotiations with the IMF has, if anything, become even more difficult. Loans from "Western" institutions are widely unpopular in post-Arab-Spring Egypt, and are especially difficult to contemplate for President Morsi's Islamist-inspired government. But bail-out money is now crucial - economists at HSBC warned yesterday that "if IMF funding is secured, things will be tough. If it is not, economic deterioration could be disorderly and painful".
Here's the litany of economic woes in Egypt as it re-negotiates with the IMF: growth is in free-fall, particularly in the private sector, as exports. new orders, and tourism have dropped (many hotels are empty; Nile cruises ceased over the Christmas high season); scarce foreign exchange reserves at the central bank are being depleted, as authorities fight to stem a run on the Egyptian pound (the currency has fallen over 10% since the Arab Spring uprising in February 2011, a decline which is accelerating in recent weeks); Egypt's annual budget deficit is most recently estimated at 10% of GDP, higher than even the worst positions in the Euro zone, and clearly unsustainable in the eyes of bond investors who have driven yields for even one-year financing instruments to above 14%; the country's current account deficit exceeds 3% of GDP, suggesting a looming, full-blown balance of payments crisis. On top of all this, as a condition of the IMF loan, austerity measures that raise taxes and lower or eliminate subsidies will be required, only adding to the domestic turmoil characterizing Egypt for nearly two years.
Here's this writer's advice to President Morsi: begin focusing a little less on transforming Egyptian society into an Islamic state, and a bit more on economic issues. Economic crises have a way of sweeping away political regimes of any bent.