IMF loan will bring short term challenges for Egypt

02 August 2016

Fitch Ratings says IMF loan to Egypt would provide long term benefits but short term pains

The recently announced International Monetary Fund (IMF) loan would be credit positive for Egypt but will provide short term risks, according to a statement by US ratings agency Fitch Ratings.

In a press note released on 1 August, the ratings agency said that although the $21bn loan package would provide long term benefits, it did pose risks in the short term with Egypt likely to continue to face economic challenges.

The loan is unlikely to go ahead unless the Egyptians can uphold the conditions, which have been put forward by the IMF. Cairo will need to find a way to alleviate the impact of introducing more flexible exchange rates, wide-ranging fiscal reforms, the implementation of a value-added-tax (VAT), further subsidy cuts and overall reforms of its civil service in a bid to lower the governments wage bill. Egypt is also likely to privatise a number of state-run businesses.

Earlier this week, President Abdul Fattah al-Sisi warned Egyptians of the impact of the governments planned fiscal reforms as living costs continue to rise. “The problem is whether public opinion is prepared to accept the measures which could be tough or harsh,” he told young people at a leadership conference on 1 August.

Fitch Ratings believes that the requested economic development package worth $21bn, which the Egyptian government is aiming to obtain through several multinational sources, is still short of the country’s total financing needs for the next three years. The agency estimates that the needed amount would be closer to $10bn annually. However, a loan package would also likely stimulate some return of portfolio investment inflows.

Egypt aims to obtain the $21bn package over a three–year period, from the World Bank, the African Development Bank, the IMF, and international sovereign bond issuance.

The first half of this year has been difficult for Egypt. Tourism has reached a grinding halt and economic recovery in the short-term is proving impossible as fiscal headwinds slow growth.

The government will be hoping for a change of fortunes in the second half of 2016 as it anxiously monitors support across all state and civil institutions.

 

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