Egypt gains long-awaited relief for its struggling economy
After two years of negotiations, the Egyptian government has reached an agreement with the International Monetary Fund for a standby credit arrangement, promising substantial relief for the cash-strapped Egyptian economy. The IMF decided on Friday to grant $325 million to Egypt over an 18-month period. This represents a clear victory for President Hosni Mubarak in his struggle to get international credit at conditions politically acceptable for this volatile country.
In the long drawn-out negotiations, the Mubarak government resisted requests for harsh austerity measures and stiff reductions of food subsidies that could have triggered mass riots, such as those President Anwar Sadat faced in 1977. Most of Egypt's population is living at subsistence level and is unwilling to sacrifice on food.
The agreement with the IMF commits Egypt to use fiscal and monetary measures to achieve an annual reduction in the budget deficit. The government says it is committed to increases in energy prices, currently subsidized, to credit ceilings, and to raising revenues through more efficient tax collection. It also plans to institute a free market for foreign currency.
But there has been no promise to reduce the $2 billion spent annually on subsidizing food and other commodities.
``Our only commitment is to the people of Egypt and to continuing streamlining of government expenditure,'' said Salah Hamed, the central bank governor, in a press conference with Western reporters.
``The fund was believing in shock treatment,'' he said of the IMF's original demands. ``We reached a balance.''
Armed with the accord, which observers say is of unprecedented leniency, Egyptian officials will go to Paris later this week to seek rescheduling of part of Egypt's $40 billion foreign debt. Egypt has had difficulty meeting its interest payments on the debt.
The agreement ends a severe economic crisis that began in 1985, when Egypt's foreign-currency sources ran into dire straits. In 1985 and 1986, revenues from oil sales, Suez Canal tolls, tourism, and remittances from Egyptians working overseas all slumped. Until then, Egypt had been able to cover expenditures for imports, food subsidies, and debt service with foreign-currency earnings. But as they fell off and the debt-service bill rose, Egypt's balance of payments deficit grew to almost $3 billion annually.
Initially, President Mubarak's government resisted seeking an IMF agreement. Instead, it asked the United States for a reduction in the interest rate on Egypt's $4.5 billion military debt and for a larger cash portion within the $2.2 billion annual US aid program.
The US did not come through on either of these, although President Reagan apparently would have liked to have acted on the military debt if he had not had to obtain congressional approval.
The IMF and debt rescheduling was Egypt's last resort.
The Reagan administration heavily lobbied the IMF to accept a lenient standby credit program for Egypt. US pressure on the IMF was apparently so intense that it triggered the resignation of a high-level IMF official, according to news agency dispatches from Washington.
Under the IMF program, Egypt will immediately receive about $160 million. It is committed to reducing the budget deficit by 2 percent a year until the deficit reaches 5 percent of gross domestic product.
The government intends to reduce government expenditure by raising prices, currently subsidized, for agricultural crops and energy. It says it will increase revenues not only by tax collection but also by promoting an ``increase in the capacity utilization in all sectors.''
Mr. Hamed said that in September the IMF will review the measures undertaken and decide whether the remaining installment is to be disbursed. He refused to give additional details on Egypt's reform program.
But some sources are skeptical that Egypt will comply even with this lenient IMF program, given the political risks involved. Egypt won a standby agreement from the IMF in 1978, but abandoned it when the political risks of going ahead with austerity became too great.
Observers say that if there is mass resistance to the effects of the unification of currency, which will make imports more expensive, and to the increase in prices, the Egyptian government could very well abandon this IMF accord as well.