Egypt open to IMF deal, but terms could change: advisor to President Mursi

An economic advisor to President Mohammed Mursi has confirmed to Al Arabiya that Egypt is not opposed to resuming talks with the IMF over a financing package, but that the details of the deal would be determined once the president’s economic team is formed.

Abdullah Shehata, a member of the Muslim Brotherhood’s Freedom and Justice Party, acknowledged that the there was ‘no comparison’ between the interest rate being offered by the IMF of 1.5 percent and the cost of borrowing on the local markets, which is hovering around 16 percent.

“We have no objection to continuing talks with the IMF,” Shehata told Al Arabiya. “We don’t have a problem with the IMF, we know we need help in the coming period. How much will depend on the economic program.”

Shehata said the Muslim Brotherhood’s previous reservations had more to do with the economic program of outgoing Prime Minister Kamal el-Ganzoury rather than the IMF. A deal could materialize but the new government would have to decide its terms and conditions.

Talks with the IMF over a $3.2bn loan stalled after months of squabbling between the Islamist dominated people’s assembly and the military-appointed cabinet over the country’s economic policy.

The IMF has stipulated that a deal can only be signed once ‘broad-based support for a national economic program’ is reached. The loan is seen as essential to staving off a balance of payments crisis and a disorderly devaluation of the Egyptian pound.

“Not only will reaching an agreement with the Fund trigger the release of other official funding, it would also signal to foreign investors that the new government has a credible economic plan,” Said Hirsh of Capital Economics said in a note. “This, in theory, should result in capital flowing back to Egypt.”

Earlier this week, Egypt’s outgoing government signed a $1bn agreement with the Islamic Development Bank to finance fuel and food imports. Egypt’s foreign reserves, currently at $15.5bn, are just enough to pay for three months of imports.

The latest developments come as Egypt enters unchartered political territory with a delicate balancing act between the generals, the new Islamist president, and his party’s backers over the formation of a new government.

The country must also chart a new economic course that boosts growth and fulfils the demands of the revolution for jobs, better living standards, and social justice.

“He’s really got to get moving fast,” Angus Blair, founder of the Cairo-based think tank Signet Institute told Al Arabiya, referring to Mursi. “He doesn’t have much time and the wiggle room is very limited in order for him to boost confidence in the economy.”

Blair says that selecting the right economic team is crucial, but cautions that some of his opponents ‘may want to see him trip up’ which would not be in Egypt’s favor.

“There are people who would like to see his administration fail,” Blair said, “but Egypt’s economic problems are so profound that this administration must succeed quickly in its economic program.”

“There is a window of opportunity for Mursi to get the right team together and institute a really solid economic program and avoid a possible disorderly devaluation of the Egyptian pound,” Blair said.

“The cabinet will have to compromise, be creative in working on problems and make some of their policies more contemporary to build confidence quickly.”

Dr. Osama Ghazaly Harb, political commentator and founder of the liberal Democratic Front party, told Al Arabiya that Muri’s success in forming a government will depend on his degree of alignment with the Muslim Brotherhood and their political arm.

“The more Mursi separates himself from the Brotherhood, the more likely other groups will be willing to cooperate with him,” Dr. Harb said.

Alia Moubayed of Barclays Capital says that challenge for Mursi’s team will be reaching a political consensus on the necessary economic reforms.

“We think it is extremely critical for the president working with the various political stakeholders to form a government and an advisory team that is capable of addressing Egypt’s momentous challenges,” Moubayed said. Mursi will need to form a cabinet “capable of working together to implement in a coordinated fashion a wide ranging set of reforms and initiatives.”

The Muslim Brotherhood’s ‘Renaissance Project’,” on which Mursi ran his campaign, will also need to be fleshed out. The plan, which is light on detail, calls for 100 national projects worth more than $1bn each but does not specify how they will be financed.

Unemployment, currently above 12 percent and nearly 30 percent among youth, will be reduced by 5 percent annually according to the renaissance manifesto but there are few details on how this will be achieved.

Mursi has indicated that Egypt could see up to $200bn in foreign investment in the coming period, but economists say most foreign investors are likely to remain on the sidelines until a deal is done with the IMF.

The IMF’s Managing Director Christine Lagarde called Mursi to discuss Egypt’s economic situation and reiterated that the IMF stands ready to support Egypt and looks forward to working closely with the authorities, according to a statement.

The IMF said Egypt faced “significant immediate economic challenges, especially the need to restart growth and address the fiscal and external imbalances.”

The IMF’s latest statement and the Brotherhood’s confirmation to Al Arabiya that it is open to loan discussions both come nearly 12 months to the day after Egypt first refused a loan from the IMF, back in June 2011.

In April of this year, Dr. Mohamed Gouda, economic spokesman for the Brotherhood’s Freedom and Justice Party, told Al Arabiya the party would prefer to explore other methods of financing before resorting to borrowing. He cited tapping the government’s so-called ‘private funds’ as an alternative.

Wael Ziada, head of research at investment bank EFG-Hermes, says it is misguided to focus on the elusive private funds.

“Everybody is so fixated on the private funds,” Ziada said. “People think the private funds are like a till with all the money inside and the minute you have the key, the money will start flowing out. This is not how you finance your budget deficit.

Many economists say it makes sense to green-light an IMF deal, given the high cost of borrowing locally.

“It is quite urgent we think to revive talks with the IMF, but also with other donors to support the new government’s plan,” Moubayed of Barclays Capital said.

“We remain rather optimistic about Egypt policymakers’ ability ─ if the political forces come together and form a cabinet quickly – to renew discussions with the IMF and to reach out to the international investment community.”

Moubayed also says it is important to “sort out the confusion about the rules governing the political process and the road map for the completion of the new constitution and transition of powers to a newly elected Parliament.”

Hirsh of Capital Economics says “everything will depend on the IMF on what Mursi does in terms of getting together a proper coalition so that the next government has a broad political spectrum.”

But Hirsh remains cautious on Egypt’s political conditions in the near term.

“The fact that parliament has been dissolved and the military still controls key institutions does not bode well,” he wrote.

Hirsh expects the initial period of Mursi’s term to be ‘difficult’ and sees tensions with the military rising as the new government attempts to take control of political life.

Still, Hirsh is upbeat on Egypt’s long-term prospects and expects economic growth of 6-7 percent on average over the next 20 years.

(Carina Kamel is a senior correspondent for Al Arabiya based in London and can be followed on twitter @Carina_bn.)