Egypt Might Seek IMF Loan It Earlier Rejected as Borrowing Costs Increase
The Egyptian government may ask the International Monetary Fund for the $3 billion loan it rejected this year after domestic borrowing costs soared, Deputy Prime Minister Hazem El Beblawi said.
“The government has discussed the issue and there is an agreement in principle,” Cairo-based El Beblawi, who is also the finance minister, said in a telephone interview today. “We are considering the right time.” Egypt’s ruling military council, which turned down the previous loan agreement, will not object to the government’s decision, he said.
Dwindling international reserves and foreign investment after the revolt that toppled President Hosni Mubarak have forced the government to pay the highest borrowing costs in three years. The yield on Egypt’s one-year Treasury bills jumped 65 basis points, or 0.65 percentage point, yesterday to 14.725 percent, seven basis points less than a peak in September 2008 at the height of the global financial crisis.
Egypt reversed course in June and said it wouldn’t be taking the IMF loan it had announced three weeks earlier. Then- Finance Minister Samir Radwan, who lost his job in a July reshuffle, said in a July 27 interview that the ruling generals vetoed the loan after a “damaging” media campaign because the IMF was seen as tainted for endorsing the economic policies of the Mubarak regime. He said the loan came with no strings attached at a total cost of 2.5 percent.
“Domestic borrowing has reached high limits, so it’s logical to diversify,” El Beblawi said. Along with the IMF, Egypt may seek funds from the Islamic Development Bank, the Arab Monetary Fund and the African Development Bank, he said.
Net international reserves tumbled $14 billion in the first 10 months of this year to $22.1 billion in October, according to central bank data. Economic growth in the fiscal year that ended in June slowed to 1.8 percent, compared with 5.1 percent in the previous 12 months, after revenue from tourism and foreign direct investment plunged. Egypt’s benchmark stock index tumbled 42 percent.
“It is a concern that the government is still ‘considering the right time,’ given the increase in T-bill yields since the ouster of the Mubarak regime, the collapse in the central bank’s reserves and the impact on foreign investment and tourism,” Raza Agha, a London-based senior economist at Royal Bank of Scotland Plc, said in an e-mailed response to questions. “The time is now.”
Egypt’s 5.75 percent dollar bond due April 2020 pared earlier losses and was trading 2 basis points up at 6.13 percent as of 11:26 a.m. in London. The country’s default risk surged 233 basis points this year to 475, according to data provider CMA, which is owned by CME Group Inc. (CME) and compiles prices quoted by dealers in the privately negotiated market.
El Beblawi, justifying the delay in making a decision, said the government will try to get “public consensus” behind the loan to avoid the fate of the original agreement.
A group of economists and political activists who opposed the first loan agreement started a campaign on Oct. 31 demanding more public scrutiny over Egypt’s foreign borrowing. Activists say the government should exhaust domestic solutions to increase revenue before resorting to foreign borrowing.
The campaign taps into a vein of resentment among Egyptians toward debt that can be traced to a 19th-century borrowing binge by autocratic rulers such as Khedive Ismail. The experience, still taught at local schools, cost the country its stake in the Suez Canal before the 1882 British invasion.
While IMF assistance may boost investors’ confidence “in the very short term,” questions remain on whether a democratically elected government would want to “own the program, be on good terms with the IMF and implement the necessary fiscal reforms against a delicate political backdrop,” Gabriel Sterne, London-based senior economist at Exotix Holdings Ltd., said by e-mail today.
The country will begin a three-phase parliamentary election on Nov. 28. The ruling generals say they won’t cede power to a civilian government until after a presidential vote, for which no date has been set.
The pound has lost 3 percent against the dollar this year.
“Without the fiscal discipline, there remains doubt over whether foreigners and Egyptians alike retain confidence in the pound, and therefore whether the leakage in foreign exchange reserves can be plugged,” Sterne said.
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