Egypt's IMF talks give hope but only reform will trigger investment

CAIRO, July 28 (Reuters) - The prospect of a $12 billion IMF loan has boosted the mood in Egyptian business circles but it will not translate into foreign investment or inflows until Cairo implements tough reforms and resolves its currency crisis.

Egypt said late on Tuesday it was seeking $4 billion a year over three years from the International Monetary Fund to help plug a funding gap. The government hopes to finalise the deal in August.

Egyptian stocks have surged on hopes a deal would revive confidence and allow Egypt to remove restrictions on access to hard currency that have hit manufacturing and trade and made it hard for foreign firms to repatriate profit.

Executives at international companies operating in Egypt said IMF funding could buy Egypt breathing space to make painful reforms, but foreign investment would not come until the hard currency shortage was resolved.

“The times now are the most difficult businesses have faced in terms of access to dollars ... It doesn’t matter if you make $1 billion in profit if you cannot get it out of the country you will not invest,” said an executive at one multinational.

“The IMF talks give a light at the end of the tunnel. The future is positive, Egypt is a country of 90 million and it will get through this, but this will be an extremely rough ride.”

Egypt has faced a dollar shortage since the 2011 uprising ended Hosni Mubarak’s 30-year rule but scared off tourists and foreign investors, both key sources of hard currency.

The turmoil forced the central bank to ration dollars. Foreign reserves slid from $36 billion before the revolt to $17.5 billion in June as Egypt defended a currency buffeted by uncertainty and faced a widening budget deficit.

The government expects to receive a first tranche of at least $2 billion within two months of an IMF deal. It also plans to issue $2-$3 billion in eurobonds in September or October.

In addition to some $4.5 billion pledged by Saudi Arabia and the United Arab Emirates this year and $3 billion due from the World Bank over three years, the funding could buy Egypt time to implement plans to float state-owned firms.

A deal could also tide the government over until it lures back tourists to the Red Sea after last year’s plane bombing caused Russia and Britain to suspend flights.

At the same time, the government must implement existing reform plans that will likely form the basis of the IMF deal. Those reforms include cutting subsidies, trimming a bloated civil service and introducing a value added tax (VAT).

Once those steps are taken, economists say devaluing the pound to a more realistic and sustainable rate could boost exports and eventually unlock foreign investments. But the path is fraught with risk.

“Reform of the FX regime will be the big test. $4 billion is a big sum, but will cover just a third of the current account shortfall,” Simon Williams, chief economist for Central and Eastern Europe, Middle East and Africa at HSBC, said.

“A deal is a very positive first step, but after the losses and policy failings of the past five years, don’t underestimate what a difficult path lies ahead.”


Economists say the detail with which Egyptian officials have spoken suggest a deal is in its final stages. But talks over a far smaller package have faltered in the past.

“Egypt must be assured that it has the support of the big five in the IMF, including the United States and Britain ... this is politics,” said Fakhry Elfiky, an Egyptian economist and former IMF official. “Egypt needs this loan. If we are rejected, it would be a collapse.”

Economists say reforms will exacerbate double-digit inflation in a country where tens of millions rely on state-subsidised bread.

Civil service reforms have already been passed. A first round of subsidy cuts has been implemented. A VAT bill is in its final stages but faces resistance in parliament.

The risks are highlighted by the World Bank package Egypt agreed in December, also on the basis of its existing reform plan. The cash has yet to be disbursed as the World Bank waits for parliament to approve outstanding reforms.

Business people also point to a trail of missed opportunities that have damaged credibility in recent years.

When general-turned-president Abdel Fattah al-Sisi took power in 2013, he ended an experiment in Muslim Brotherhood rule that saw Egyptians suffer petrol shortages and blackouts.

Gulf Arab countries opposed to the Brotherhood showered Sisi’s Egypt with tens of billions of dollars. Dozens of preliminary investment deals were signed at a 2015 international conference that was meant to restore confidence.

But reforms, like investments, have been slow to materialise and the Gulf aid was wasted, economists say.

“Last year they got lots of money from the Gulf and what did they do? Nothing. Plus the pound depreciation: they don’t seem to have solutions for that and the cash shortage is the most worrying thing for business,” said an executive from another multinational.

“With the IMF, reform will be a must ... I hope so because otherwise even big businesses like ours would reach a point where cannot do business,” the executive said. “It is a total crisis now.” (Reporting by Lin Noueihed; Editing by Tom Heneghan)