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An Opportunity for Egypt and the IMF

LAGUNA BEACH – The Egyptian authorities and International Monetary Fund staff have struck a deal. If the IMF Board agrees next month, Egypt will receive a $12 billion loan to support the implementation of economic reforms. The primary objective of the three-year program will be to unleash Egypt’s considerable potential, enhance growth and job creation, and tackle foreign-exchange shortages. But the deal also represents an important opportunity to improve relations between Egypt and the IMF – an outcome that would yield far-reaching benefits for both sides.

Egypt’s relationship with the IMF has long been rocky. Most notably, in 1977, when Egypt reduced food subsidies in exchange for IMF financing, riots erupted in Egypt’s major cities, resulting in nearly 80 deaths and hundreds of injuries. The deal had to be terminated, and subsidies reinstated. Several more deals have been discussed since then, including in 2012; but most have gone off track or been abandoned.

Against that background, it is not surprising that many Egyptians view the IMF as overbearing, seeking to impose its will on countries without sufficient regard for local conditions. Some even view it as a tool of Western domination. This perception has caused past Egyptian governments not only to shy away from IMF support, but also to delay the annual economic consultations required under the Fund’s Articles of Agreement.

But Egypt’s economy is struggling, having been hit hard by both economic and non-economic shocks in the last few years. Security concerns, heightened by the downing of a Russian jet in Sinai last October, have produced a sharp decline in tourism, a major revenue generator. Remittances from Egyptians working in the wealthy Gulf states, another key source of income, are being undermined by the decline in oil prices. Receipts from the Suez Canal have been hit by to the slowdown in global growth and international trade. And foreign direct investment has declined, pending, among other things, greater clarification of the reforms that the government intends to pursue.

This would be a tough combination of economic challenges for any country to address. But, for Egypt, which has been performing below economic potential for decades, it has been particularly difficult. Indeed, Egypt now faces large twin fiscal and balance-of-payments deficits, rising inflation, and reduced economic growth. As a result, its international reserves and exchange rate have come under pressure, despite assistance from wealthy countries like Kuwait and, especially, Saudi Arabia and the United Arab Emirates.

Enter the IMF. The recent staff-level agreement with the Egyptian authorities is expected to be finalized in September, upon Board approval. On that basis, Egypt is already making plans to raise funds from other sources, including international bond markets, to support its reforms.

The Fund’s involvement seems appropriate. After all, the IMF was designed to help member countries confronting precisely the types of challenges that Egypt faces. Specifically, it provides focused technical assistance in key areas of economic and financial management, while aiding in the design of macroeconomic frameworks for national policies. And its quickly disbursed financial assistance often catalyzes other financial inflows from public and private sources.

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But, as history shows, taking advantage of what the IMF offers is not always easy. Past experience from many countries indicates that success depends on six key factors.

• A carefully designed economic program that is locally owned and accounts for a country’s economic realities.

• A focus on addressing social challenges that may arise – in particular, protecting the most vulnerable segments of the population.

• A strong and sustained political commitment to ensuring the program’s proper implementation.

• Sufficient and timely external financing.

• Transparent and timely communication, not only between the IMF and national officials, but also with other stakeholders, particularly citizens.

• Trust, so that if (or, rather, when) things do not go according to plan, the relevant parties can work together effectively to make the needed adjustments.

The good news is that the recently agreed deal between Egypt and the IMF seems to lay the groundwork for success (though the full details have yet to be released). For starters, Egyptian and IMF officials are said to have placed substantial emphasis on a set of pro-growth reforms aimed at improving sectors of Egypt’s economy with significant untapped potential.

Moreover, the agreement is understood to include fiscal, monetary, and exchange-rate measures aimed at containing financial imbalances and ensuring the program’s medium-term viability. And, importantly, it promotes the strengthening of social-welfare programs and safety nets – features that can do much to revive the IMF’s reputation in Egypt and bolster trust among stakeholders.

Of course, there is no way to guarantee careful implementation, comprehensive communication, or consistent efforts to reinforce trust – all of which are vital to enable mid-course adjustments that reflect inevitable changes in the domestic and external economic environment. But, based on their recent interactions, it seems that Egypt and the IMF have the potential to overcome their legacy of testy relations.

A constructive relationship between Egypt and the IMF would help attract more support for the country, both through additional bilateral and multilateral agreements and from domestic and foreign investors. Given the enthusiasm showed at last year’s Egypt Economic Development Conference in Sharm El Sheikh, which focused on attracting investment, it seems clear that Egypt’s prospects for economic and financial recovery are considerable. As for the IMF, it is now in a better position to demonstrate its capabilities to help member countries, thereby strengthening both its credibility and effectiveness.

Mohamed A. El-Erian, Chief Economic Adviser at Allianz, is Chairman of US President Barack Obama’s Global Development Council and author of The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse.

By Mohamed A. El-Erian

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