Last Thursday, the International Monetary Fund reached an agreement with Egypt, which includes providing a loan of $3 billion from the Fund over 46 months, and $1 billion from an affiliate fund, in addition to Egypt obtaining $5 billion in loans from international and regional creditors.
Why does Egypt need World Bank loans?
This emergency package comes after the deficit in the balance of payments worsened in 2021 due to the increase in the current account deficit to 4 billion dollars, compared to 2.80 billion dollars for the same period last year.
The deficit in the trade balance (import and export) is primarily responsible for this deficit, followed by the foreign investment sector, in addition to the deficit in the state’s general budget, which amounted to more than 450 billion Egyptian pounds for the fiscal year ending at the end of June this year.
Egypt’s need for this funding has become urgent after the central bank’s cash reserve decreased significantly, forcing the government to follow a strict monetary policy with regard to transferring foreign currency to finance imports of goods, services and raw materials, and this decision, in turn, multiplied the problems in terms of stopping the wheel of production in some sectors As a result, national exports declined.
Since the prescriptions of the International Monetary Fund come to treat urgent and urgent problems, it was necessary for the successive and upcoming governments to work on a radical treatment of the problems of the deficit in the balance of payments and the general budget of the state alike, in other words, treating the cause of the debt before its result.
It becomes clear to any follower and a quick look at the components of the balance of payments (the difference between cash inside and outside the country), that the big problem of this deficit is the chronic and significant increase in the country’s imports over its exports, so decision makers in Egypt must stop and discuss this part, and make plans To remedy this gap that is more than double.
It is also clear by reading the balance of payments to Egypt that the balanced figures that supplement this balance come from the remittances of citizens working abroad, then from the tourism and services sector, and mainly from the income of the Suez Canal, and this means, in short, that there is no real role for the industrial and agricultural sectors in obtaining currencies Indeed, the weakness of these two sectors helps in the leakage of foreign currencies from the monetary reserve of the Central Bank!
Egypt.. misfortunes do not come singly
The urgent need to reform the industrial and agricultural sectors in Egypt emerged with the outbreak of the war in Ukraine.
This war has deepened the crises of the Egyptian economy, which is already suffering from structural problems historically, and led to an unprecedented rise in food and energy prices, especially wheat and corn. Egypt is the largest importer of wheat in the world, with a purchase volume of 13 million tons of imported wheat annually.
With the rise in the price of wheat on today's date from the peak price in 2020 by more than 50%, the value of the foreign exchange needed to purchase the country's need for wheat increases by more than half, not to mention the rest of the basic commodities such as corn and vegetable oil, whose prices have also increased significantly.
On the other hand, the price of oil rose by more than 100% during the period between March and June this year, and with Egypt importing 160,000 barrels per day, the bill for cash leaving the central bank’s coffers rose remarkably as well.
The emergency conditions of the war deepened the wounds of the country's cash reserves, and as an inevitable result, the Egyptian pound exchange rate fell sequentially.
New IMF and Egypt
It is important to understand that the IMF's mission is advisory rather than financing.
The Fund's mission - as he says - is to help troubled countries or governments to adopt programs and policies to solve problems.
This is done by making recommendations related to the monetary policy managed by the central bank, and the fiscal policy, which includes government spending and the tax system, is the prerogative of the government.
The International Monetary Fund, as an advisory body, designs programs for monetary and fiscal policy reforms that are discussed and approved. It - that is, the Fund - does not approve any funding until the concerned government adopts the recommendations and prescriptions of the Fund.
These prescriptions are often painful, which means that the new loan will carry unpleasant news for the Egyptian citizen, especially for the poor and the middle class.
The new financing package, which was adopted by the Egyptian government and the International Monetary Fund at the level of experts and technicians, includes approving a $3 billion loan from the Fund over a period of 46 months, in addition to 6 billion from other creditors.
As for the recommendations and demands that were agreed upon, they are:
First: Flexible floating of the Egyptian pound exchange rate, which has already happened, as the US dollar exchange rate amounted to 23.10 Egyptian pounds at the time of writing this article.
Second: On a related matter, the Fund demanded a gradual halt to import through documentary credits that are subject to the supervision of the Central Bank, and this measure would ease restrictions on the import of materials involved in production in order to enhance export.
Third: The Fund recommended improving the revenue components of the government's general budget through tax reforms that ensure efficient tax collection, transparency and legal accountability.
Fourth: The Fund encourages the temporary extension of the ration card, and we do not know if the intention is to reduce dependence on it in the coming period or to make structural reforms in the ways of granting it so that it reaches the eligible only.
In theory, these recommendations may help the export sector and reduce the balance of payments deficit, but on the other hand, they mean an increase in taxes, and the challenge of subsidizing basic commodities on which the poor citizen depends.
What to do?
Populists in developing countries like to blame the International Monetary Fund for all the tragedies that the people bear as a result of the agreements concluded between governments and the Fund, but the reality is that the role of the Fund comes after the country has entered the cycle of economic disasters through budget deficits and the balance of payments alike. .
Therefore, what is required is for governments to devote their efforts and development plans to addressing these disasters, imbalances, and deficits.
Governments must work to treat the cause of debt before its result, but what often happens is that governments fail in this, and therefore continue and go too far in debt and diversify its sources, and therefore there must be a strategy for the state whose goal is to reach a moderate public budget without a deficit, and the same is true As for the balance of payments, this strategy can be based on key points, including:
Reaching the country to the stage of self-sufficiency in food products, especially strategic ones, which drain the country's reserves to secure them through imports.
For a start, we have 3 strategic commodities: wheat, corn and vegetable oil. I do not think that these goals are difficult for a country like Egypt, which has vast areas, in addition to the gift of the Nile, and the expertise available to Egyptians.
Activating and strengthening the role of the private sector by allowing it to acquire the proportion of its contribution to the country's economy.
This, of course, requires reducing the role of the public sector, the government and the army in the economy.
Encouraging Egyptian exporters to take their place in a highly competitive world.
This could be through financial incentives in the local currency, and we have in the experience of China and other Asian countries an example of this policy.
We must work to provide an attractive environment for foreign investment, and for the people of the country in the diaspora. This can only be achieved by political stability, fighting corruption, enhancing transparency, addressing bureaucracy, and carrying out attractive tax reforms, as well as the flexibility of the flow of foreign currencies to and from the country.
As an essential source of foreign currency, tourism must be developed by addressing existing problems.
This includes ensuring the security of the tourist, developing tourist and archaeological facilities, and qualifying the personnel working in this important sector.
The government and the public sector are required to focus more on investing in capital projects to ensure sustainable job creation.