Last updated: November 20, 2012 5:21 pm

Egypt and IMF agree $4.8bn loan

Egypt has reached a long-awaited initial agreement with the International Monetary Fund for a $4.8bn loan widely seen as crucial to salvaging its damaged economy after almost two years of political turbulence.

The deal, which Cairo hopes will restore confidence in its economy and spur the return of foreign investment, is key to unblocking a wider financial package of assistance from a range of external donors that totals $14.5bn, including the IMF loan.

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Ashraf al-Araby, the minister of planning, announced that Cairo had agreed with the fund on a 22-month reform programme aimed at “addressing the structural imbalance” in the Egyptian budget. He said details of the plan would be released on Wednesday.

Egypt’s budget deficit in the fiscal year which ended in June 2011 reached an unsustainable 11 per cent which the government has been funding mainly on the domestic market through bond issuances at interest rates sometimes exceeding 16 per cent.

The agreement will be presented for final approval to the IMF executive board on December 19.

Andreas Bauer, the head of the IMF technical team which negotiated the agreement, said that fiscal reforms to rein in the deficit were “a key pillar of the programme”.

He said the reform programme targeted bringing down the deficit to 8.5 per cent in the fiscal year that will start in July.

“The [Egyptian authorities] plan to reduce wasteful expenditures, including by reforming energy subsidies and better targeting them to vulnerable groups,” said Mr Bauer. “At the same time the authorities intend to raise revenues through tax reforms, including by increasing the progressivity of income taxation and by broadening then general sales tax to become a fully fledged value added tax.”

The 25 per cent top rate for income and corporate tax would not change, the cabinet said in a statement issued after the deal was announced.

Energy subsidies, which cost $17.5bn last year, account for 20 per cent of the Egyptian budget. Egyptian administrations, even before the revolt which toppled Hosni Mubarak as president last year, acknowledged that the fuel subsidies were wasteful and a drag on the economy. But they shied away from cutting them for fear of provoking social unrest.

The current administration says it will reduce waste by using a coupon system to distribute subsidised butane gas to ensure that only the poor have access to it. There are also plans to free the price of high octane gasoline, which is used by the better-off. Further price increases are envisaged next year.

“We see energy subsidy reform as a gradual process, and not as something to be done overnight,” said Mr Bauer. “Given the magnitude, it will take several years to wind them down, and to get buy in [from the population] and protect those in need, savings cannot be used exclusively to reduce the deficit but must also shore up necessary social spending.”

Both Mr Bauer and Mr Araby have been keen to stress that the economic programme is homegrown and not imposed by the fund. Mr Araby said Egypt would have adopted this programme with or without the IMF loan. Their assurances are aimed at pre-empting criticism from government opponents who charge that by resorting to the IMF and its conventional market-oriented prescriptions, the new Islamist authorities are walking in the footsteps of the ousted regime and adopting policies which can only add to the burdens on the poor.

Diplomats and sources close to the negotiations say there is a strong international desire to help stabilise the rule of Mohamed Morsi, the new Islamist president and avert economic shocks which could provoke unrest in the Arab world’s most populous nation.

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