Question

Egypt and the IMF closing case

When President Abdel Fatah al-Sissi came to power in a 2013 military coup, he promised to fix Egypt’s mounting economic problems. Three years later, those problems had only intensified. The country was struggling with low economic growth; 13 percent unemployment; a 12 percent inflation rate; a large trade deficit, amounting to 7 percent of GDP; a persistent budget deficit of around 12 percent of GDP; and public debt, which by 2016 stood at 92 percent of GDP. The tourism trade, a major source of foreign currency, had collapsed in the wake of concerns about terrorism, which included an Islamic State–linked insurgency in the Sinai Peninsula that claimed the bombing of a Russian passenger jet in 2016. Foreign direct investment, another source of foreign currency, had also slumped in the wake of Egypt’s economic and political problems.

One major issue was a lack of foreign currency in the country, which made it difficult to pay for imports and resulted in shortages of key commodities. For example, Egypt imports one-third of its sugar. By mid-2016, this commodity was in short supply due to the inability of Egyptian traders to get the foreign currency required to pay for imported sugar. Historically, in times of trouble, the oil-rich Arab states of the Persian Gulf had loaned foreign currency to Egypt at low interest rates, but a collapse in oil prices had left those states financially strained, and loans were not forthcoming. In an indication of the depth of Egypt’s problems, while the official exchange rate of the Egyptian pound was pegged at 9 pounds to the U.S. dollar, the black market rate had soared to 18 pounds to the dollar.                                 

In mid-2016, with its foreign exchange reserves being rapidly depleted, the Egyptian government applied to the IMF for a loan. The IMF agreed to loan Egypt up to $12 billion, but only if the government undertook a number of economic reforms. These included liberalizing the exchange rate, letting the Egyptian pound float against other currencies. The thinking was that the pound would immediately depreciate against major currencies such as the U.S. dollar and the euro, making Egyptian exports cheaper and its imports more expensive. This should help the country to improve its trade deficit and earn more foreign currency. At the same time, the IMF required the Egyptian government to implement an austerity program that included an immediate end to energy subsidies, which had kept energy prices artificially low; reforms to public enterprises to make them more efficient; tighter monetary policy to rein in inflation; and the imposition of a value-added tax to raise government revenues.

In November 2016, Egypt let the pound float freely. It immediately lost 50 percent of its value against the U.S. dollar, trading at around 13 pounds to the dollar. The depreciation continued into the new year, with the pound falling to 19 pounds to the dollar by mid-January 2017, bringing the official exchange rate and the black market rate into equality. Egypt also moved rapidly to impose the value-added tax. In return, the IMF released the first $2.75 billion of its loan to Egypt. Further tranches of the loan will be released as Egypt makes progress on the economic reforms advocated by the IMF.                                 

Only time will tell if these policies will work. In addition to a fall in the value of the pound, the immediate impact included a surge in the annual inflation rate to around 20 percent. The IMF envisages the inflation rate falling to 7 percent within three years, while there should be sharp improvements in both the trade deficit and the budget deficit. However, the planned austerity measures carry significant political risks for the Egyptian government. If protests materialize over short-term hardships, the government might cave in to political pressure and pull back from the IMF-mandated reforms. If that happens, the IMF might withhold further installments under the loan program, and the Egyptian economy could continue to deteriorate.

CASE DISCUSSION QUESTIONS

1.Was it appropriate for Egypt to bring in the IMF? What other alternatives did they have?

2.Do you think that the policy measures required by the IMF are appropriate? What are these policy measures designed to do? What might be the unintended consequences of these measures?

3.As a potential foreign investor, at what point would you be willing to invest in the Egyptian economy? To what extent would policies imposed by the IMF influence your decision?

(Please answer three questions, thank u)

Answer 1

1.  Abdel Fatah al-Sissi became president of Egypt in 2013 and took pledge to reslove the country's mounting economic problems. But the same got in vain as even after 3 years ., in 2016 the condition of country became worst. The country was struggling with low economic growth; 13 percent unemployment; a 12 percent inflation rate; a large trade deficit, amounting to 7 percent of GDP; a persistent budget deficit of around 12 percent of GDP; and public debt, which by 2016 stood at 92 percent of GDP. The tourism trade, a major source of foreign currency, had collapsed in the wake of concerns about terrorism, which included an Islamic State–linked insurgency in the Sinai Peninsula that claimed the bombing of a Russian passenger jet in 2016. Foreign direct investment, another source of foreign currency, had also slumped in the wake of Egypt’s economic and political problems.

One major issue was a lack of foreign currency in the country, which made it difficult to pay for imports and resulted in shortages of key commodities The lack of foreign currency made country's situation even more bad as there were no foreign currency reserves to import required items to satisfy the consumer's demand and to boost the economic activity of the egyptian country.

Since President of Egypt could not reslove the ongoing economic crisis prevailed in the economy, the country went to IMF (INTERNATIONAL MONETORY FUND).

Brief of IMF : The International Monetary Fund (IMF) is an organization of 189 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.

The decision taken by egypt to bring in IMF to tackle the ongoing economic crisis in the country.The country was suppposed to get loan from IMF to curb the crisis but on some pre approved conditions held by IMF. The loan approved by IMF was not disbursed at once but it was disbursed in tranches on monitoring whether the country is followiing the conditions held by IMF before approving loans.

Below are the conditions of IMF before approving loan to IMF.

The IMF agreed to loan Egypt up to $12 billion, but only if the government undertook a number of economic reforms. These included liberalizing the exchange rate, letting the Egyptian pound float against other currencies. The thinking was that the pound would immediately depreciate against major currencies such as the U.S. dollar and the euro, making Egyptian exports cheaper and its imports more expensive. This should help the country to improve its trade deficit and earn more foreign currency. At the same time, the IMF required the Egyptian government to implement an austerity program that included an immediate end to energy subsidies, which had kept energy prices artificially low; reforms to public enterprises to make them more efficient; tighter monetary policy to rein in inflation; and the imposition of a value-added tax to raise government revenues.

The othet alternative to IMF was only the internal economic reforms which could led by the country's president.

2. The policy measures required by IMF was quite appropriate.  The IMF agreed to loan Egypt up to $12 billion, but only if the government undertook a number of economic reforms. If IMF would not ask for the required measures then the approved loan by IMF would be utilized the way it wa supposed to be utilized.This was done by IMF to improve the economic condition of Egypt, To efficient utilization of funds and for the welfare of citizens of Egypt country.

the immediate impact included a surge in the annual inflation rate to around 20 percent. The IMF envisages the inflation rate falling to 7 percent within three years, while there should be sharp improvements in both the trade deficit and the budget deficit. However, the planned austerity measures carry significant political risks for the Egyptian government. If protests materialize over short-term hardships, the government might cave in to political pressure and pull back from the IMF-mandated reforms. If that happens, the IMF might withhold further installments under the loan program, and the Egyptian economy could continue to deteriorate.

The unintended consequence will be the even worst economic situation if IMF poilicy requirements would not go in line with country's internal economic reforms.

3.Being a foreign investor and after looking the economic and political condition, weak foreign currency, increased trade deficits and inflation , i would not be prefered to invest in a country like Egypt as it could lead to decline the value of my Invested amount.

But after Introduction of IMF in country's reforms , One may think to invest in country . However, the planned austerity measures carry significant political risks for the Egyptian government. If protests materialize over short-term hardships, the government might cave in to political pressure and pull back from the IMF-mandated reforms. If that happens , its not at all beneficial for any foreigner to invest in such weak economic and political country.