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Morsi really wants the IMF loan - for three reasons

After various discussions and realizations, it became obvious that Egypt's elected president Morsi and his PM Qandil are relying on the IMF loan.
AlBawaba | 27.08.2012
In less than two months after assuming office, Egypt’s President Muhammad Mursi decided to face up to the country’s mounting economic problems head on by first placing a request for a loan from the International Monetary Fund (IMF).

That request is significant for three reasons — it bypassed the reservation expressed by the Muslim Brotherhood, the main political force behind the regime, on dealing with the IMF during the transitional period, it also bypassed initial reservations expressed by the IMF itself, who wanted to conclude a deal that enjoys a broad political support and thirdly the volume of the loan that has almost doubled after jumping from $ 3 billion being mooted initially and during the transitional period to $ 4.8 billion being currently under discussion. Once more it is the evergreen relationship between politics and economy.

The Brotherhood reservation stems from its dislike that a transitional government gets the country into a commitment of billions of dollars. It argued that such a commitment needs to be made by a government that has a clear popular mandate. And because of the fragmentation that has been dominating the political scene; the IMF was dragging its feet when first contacted several months ago to initiate discussions on the proposed loan. It wanted a general political consensus.

Now that there is a clear authority with the needed political mandate it is becoming easier to forge ahead and even encourage the new regime to ask for a higher loan volume.

Egypt’s new Prime Minister Hesham Qandil summed the new mood when he described the visit of the IMF chief Christine Lagarde as sending a positive message that Egypt is stabilizing.

For almost 20 months since the outbreak of the popular revolution that brought to an end the rule of former President Hosni Mubarak, the country’s economy was in a shambles having its foreign reserves deteriorating by an alarming rate and is estimated currently to be around $ 14.4 billion from a peak of $ 36 billion in January of last year. Moreover, there is the yawning current account and budget deficit that was put at more than $ 20 billion.

The deal with the IMF, which is expected to be concluded completely before year end, can help shoring up the critical condition of the foreign reserves and hopefully improve the general business climate to allow for some sectors like that of tourism to roll on again.

After all tourism has been providing support to at least 10 percent of the population and is of the main contributors to the national economy. Needless to say that the past period saw a drop in tourism income because of the confusion dominating the political scene and the fall out in terms of security-related issues that led to fewer tourists showing up. However, any deal with the IMF is expected to touch on the thorny issues of subsidies and taxation. Improving government income through overhauling taxation system remains on the top of the list of reforms that are part of the bitter prescription suggested by the IMF.

As for subsidies there are two areas that need immediate attention — lowering subsidies on oil products and figures circulating speak about making a drastic cut to reduce the subsidies bill from LE 95.5 billion in the current financial year to LE 25.5 billion next fiscal year by applying the coupon system in various products and use other means to rationalize energy consumption.

Growing wheat consumption is one of the sensitive areas that needs to be addressed and urgently. Could lifting subsidy on bread be one of the options to be considered seriously? During the three decades of Mubarak’s rule, Egypt became the world top wheat importer and subsidizer of bread that is estimated to cost some $ 2 billion annually.

Consumption rose to around 18 million tons of which 10 million tons, or more than half, are imported. And almost one third of the amount imported comes from the US.

The wheat issue is becoming a complex one as it involved different aspects — the burden of import, the subsidy and on the top of that the other sensitive water issue, where the bulk of the Nile basin countries are grouping in one camp, led by Ethiopia, against both Egypt and Sudan, who insist that they have historical rights in the Nile waters that ought to be respected.

The other members of the Nile basin argued that previous agreements were conducted during the colonialism era and need to be revisited bearing in mind the growing needs of other countries.

The sudden death of Ethiopia’s strong man Meles Zenawi, who was a driving force in Nile waters politics, may have an impact on the future of this complex issue, but still the issue will continue to be whether a new trend based on cooperation to make the best possible use of the meager resources to meet the growing demands.
About the author: AlBawaba