Egypt’s Finance Minister appealed to parliament members to approve a loan of nearly $5 billion from the International Monetary Fund, in a Monday speech while the country attempts to stave off a potential balance of payments crisis.
Finance Minister Mumtaz al-Said urged Shura Council members in Egypt’s upper house of parliament to accept the $4.8 billion offer in financing from the IMF, describing it as a “necessary burden” to cut the budget deficit which has reached 135 billion Egyptian pounds. The country would not repeat the “catastrophe” of currency devaluation, he insisted.
“If we don’t receive the loan we will not be able to cover our spending needs,” the minister said, according to a statement. “Our resources are not sufficient and only cover 65 percent of the state’s needs.”
President Mohammed Mursi’s government says Egypt has no option but to seek external financing to meet over $11 billion in expenditures over the short and medium term.
It believes the $4.8 billion five-year loan it is negotiating with the IMF would trigger financing and investment from other sources that would go towards plugging that gap.
The government has so far resorted to borrowing from local banks through bond and Treasury bill auctions, but with yields reaching 16 percent, this is a very costly option compared to the IMF interest rate of 1.1 percent.
Talk of foreign borrowing and the IMF loan has stirred fear among Egyptians of unpopular austerity measures, and the lack of transparency under the possibility the fund could demand authorities to devalue the Egyptian pound.
During the parliamentary session, a number of members of the Shura Council objected to the IMF loan. Some, like MP Abdel Karim El Kassem, a member of the ultra conservative Salafi Nour Party, said the 1.1 percent interest on the loan undoubtedly constituted “usury” which was forbidden under Islamic law.
Other MPs like Nagy El Shehaby, head of ‘El Geel’ or The Generation party, said Egypt “would never prosper unless it stays away from the IMF” and that Egypt shouldn’t accept the loan because it meant the government was resorting to “the easy option” which he said would lead to a devaluation of the Egyptian currency.
In response, the finance minister said: “I swear to God there is no conditionality to the IMF loan.” He added that local banks were tightening their lending requirements, making it more difficult for the government to borrow locally.
'Will not repeat catastrophe'
“This loan is a necessity and we will not repeat the catastrophe of floating the Egyptian pound and devaluing it,” the minister said.
Some members of the government, such as Dr. Abdullah Shehata, a member of the Freedom and Justice Party’s economic team and an advisor to President Mursi, told Al Arabiya they had no problem working with the IMF.
“We do not have a negative position when it comes to dealing with any international organization,” Shehata told Al Arabiya in an interview. “On the contrary, now we have a government that has been formed by an elected president and this president is working within his presidential platform.”
But the Islamist ruling FJP’s position on what kind of loan conditions it will accept has remained ambiguous. So far the government had merely said the loan was contingent upon a “fully Egyptian” economic reform program that aimed to increase revenue and rationalize spending.
Officials have repeatedly insisted there are no plans to devalue the Egyptian pound as part of the IMF deal, however the government had been hit with criticism for lack of transparency, especially after a press conference with IMF chief Lagarde last month, when Egyptian Prime Minister Hisham Kandil triggered concern last month by giving no details but saying IMF conditions were “acceptable.”
A subsequent statement by the FJP referred to anticipated austerity measures, saying a financing deal with the IMF “will only be possible through a reform program that will affect the future policies of the Egyptian economy.”
The party also said it wanted to ensure the terms of an IMF loan were “based on Egypt’s best interests” and that the talks between the government and the fund were carried out with transparency.
In an apparent attempt on Monday to assuage concerns, the finance minister outlined to the Shura Council the government’s economic program, which he said would form the basis on an agreement with the IMF.
Plan to 'rationalize' subsidies
The program being drafted was 24 months long, and cutting the budget deficit was the top priority, he said, according to a transcript of the proceedings. The current budget stipulates the deficit be cut from 9.8 percent to 7.6 percent by the end of 2012 financial year.
The finance ministry is also preparing a study to “rationalize” government spending without affecting low-earners, according to Said. It also aimed to expand Egypt’s tax base through closing loopholes, cracking down on tax avoidance and implementing a progressive tax code based on personal income.
As for Egypt’s subsidy program, which constitutes 27 percent of total state expenditure and amounted to 145.8 billion Egyptian pounds, the government is “studying measures to rationalize energy subsidies and has found that 40 percent of subsidies are not going to those most in need, including bread subsidies,” the minister said.
The budget calls for a 25.5 percent reduction in energy subsidies from 95 billion to 70 billion Egyptian pounds through a plan to rationalize the use of petroleum products, improve distribution efficiency for low-income families, and gradually raising the price of gas for energy intensive industries.
Food subsidies are to be increased by 7.7 percent from 18.9 billion to 26.6 billion Egyptian pounds according to the new budget, with 16.2 billion going to bread subsidies alone.
(Carina Kamel is a Senior Correspondent for Al Arabiya and be followed on twitter @Carina_bn)