Sunday, June 05, 2011

Egypt to Obtain $3 Billion IMF Loan

Egypt to Obtain $3 Billion IMF Loan

Wall Street Journal

CAIRO—The International Monetary Fund agreed Sunday to lend Egypt $3 billion with few stated conditions to help the country mend its ailing economy.

Egypt's finance minister, Samir Radwan, and the deputy director of the IMF's Middle East and Central Asia Department, Ratna Sahay, at a news conference announced a 1.5% interest rate on the one-year loan, which is to be paid in full within five years.

The loan's terms mark a departure from the more forceful conditions the IMF usually imposes in the form of austerity measures, such as increased taxes and lower subsidies.

Ms. Sahay and Mr. Radwan said the terms of the loan were part of a "home-grown" financial plan designed for the most part by Egypt's transitional government and aimed at improving living conditions for Egypt's poor.

Imposing rigorous reform conditions would be inappropriate, they said, given that Egypt's unelected transitional government lacks a firm mandate for economic change.

"Of course the IMF in Egypt is usually linked to conditionality—this is the history of the IMF," Mr. Radwan said. "This [loan] does not require any kind of conditionality as it did in the past."

Instead, the loan's terms will include looser reform "benchmarks," the IMF's Ms. Sahay said. One primary aim of the deal, she said, will be restoring macroeconomic stability by bolstering Egypt's foreign-exchange reserves, which plummeted when the Egyptian government tried to prop up its currency during the uprising that ousted former President Hosni Mubarak.

Magda Kandil, executive director of the Egyptian Center for Economic Studies, an independent Cairo-based think tank that encourages private-sector growth, said the loan showed that the IMF is looking for a new model to fit scenarios like Egypt's. "If you look at the traditional IMF financial instruments, clearly none of the traditional IMF modalities would fit this situation very well," she said.

The announcement of the loan comes only days after Egypt's finance ministry published a draft of the country's first postrevolution budget, raising taxes on corporations and investors and increasing government spending.

Despite the IMF's praise for the budget proposal, both Ms. Sahay and Mr. Radwan said they had reservations, particularly concerning the budget's 26% spending increase on subsidies for "essential commodities." But the goals of the loan focus on ensuring social stability in the short term, Ms. Sahay said.

"As we can see with Egypt, one of the biggest drivers of the government is social justice," Ms. Sahay said. "If that is the priority of the government and the Egyptian people, we respect that priority."

Some economists have said Egypt's new budget hews too closely to the pro-market economic legacy of the former regime, said Ibrahim El Essawy, an economist and former member of Egypt's leftist Al Tagammu Party. Mr. El Essawy said he met with the finance ministry and the IMF in the days before the draft budget was announced.

"They do not have to impose any conditions because the IMF and the government are in agreement on the way in which the current economy should be run," Mr. El Essawy said.

"The government is sticking to the old system. They said we will not change our economic policy except in some minor details, referring to some slight reforms on taxes and imposing a moderate minimum wage and so on," he said.

The terms of the loan will now be submitted to the IMF's executive board for approval.

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