Friends again - but for how long ?

25 October 1996

The epic encounter between Egypt and the IMF reached a turning point on 11 October, with the approval of a new standby credit arrangement.

The first effect of the two-year agreement will be to conclude the debt restructuring plan signed with the Paris Club of international creditor governments in 1991. This final tranche of the debt accord has been pending since Egypt and the IMF fell out in 1994, mainly over the government's exchange rate policy.

Those and other disagreements are now long gone, and, at a signal from the IMF, creditor governments will erase from their books $4,000 million of debt service payments, mainly interest. In so doing, they will be taking away the main weapon in the armoury of the international financial community for pressurising Egypt into carrying out economic reforms.

The question bankers and economists are asking is: Is Egypt so committed to free market reforms that it will press ahead regardless; or will the removal of debt pressures prompt the government to slow down and even reverse some of the reforms?

For the time being, the government is being given the benefit of the doubt. Prime Minister Kamal el-Ganzouri's cabinet has, in just 10 months, done enough to convince international investors that Egypt is an attractive destination in which to place their funds. Foreign portfolio investment has gone from virtually zero to $380 million in April-September 1996, and there are clear signs of direct investment in new projects or privatised assets starting to pick up.

The IMF standby will be based on a policy programme devised by the government in consultation with fund officials over the past year. The normal tight fiscal and monetary disciplines will continue to apply, as control of inflation will be the programme's bedrock. In addition, the government will be required to introduce further tariff reductions, on top of the cuts announced in October. The most recent measure brought the general top rate down to 55 per cent; the next step will be to take it to 40-45 per cent.

IMF and World Bank officials say they hope the government will also make progress in its discussions with the EU about a free trade partnership agreement (MEED 11:10:96).

Tax reform will be a major part of the programme. The business community is eagerly awaiting the new investment law that will reform the system of tax exemptions and incentives for new projects. The government is also promising cuts in personal and corporate income taxes.

One of the most difficult parts of the programme will be privatisation. The government has sold more than $1,000 million worth of assets since 1993. Seventy per cent have consisted of shares in public sector firms offered through the stock exchange: this method has accounted for virtually all the assets sales of the past two years. The IMF standby programme envisages privatisation moving ahead decisively in the next two years - government officials have mentioned targets of about 90 firms to be sold, generating $4,000 million-5,000 million.

Strategic investors

For this to be achieved, the government will have to attract more strategic investors, who have so far been thin on the ground. This kind of privatisation takes much more time than offerings on the stock exchange, and only a handful of such sales are likely to be completed in the next two years.

Another area for potential slippage in the IMF timetable is banking reform. Of the four public sector banks, which between them account for 70 per cent of Egyptian bank assets, only National Bank of Egypt has shown any enthusiasm for privatisation. The bank has sold substantial amounts of shares in its joint-venture affiliates, and its executives are happy to talk of privatisation of the bank itself. This attitude is not so evident in the other three banks.

The future of the four banks is tied in to the wider issues of privatisation. The banks carry on their books enormous debts owed by public sector companies. There is no automatic mechanism ensuring that these debts are settled from privatisation proceeds. The funds go to the holding companies to use as they see fit. Paying off the debts of the hopeless cases among their affiliates is not a high priority.

Sooner or later the government and the IMF are going to have to face up to the intractable nature of some of the problems the new standby is supposed to address. And this time round, the IMF will not be able to use debt leverage to get its way.

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