Egyptian workers making clothes at a Chinese-owned textile factory in Egypt (photo: Khaled Desouki/AFP)
Interview with Ratna Sahay
In an interview with IMF Survey—the IMF’s online magazine—Ratna Sahay, Deputy Director of the Middle East and Central Asia Department, said the Fund remained committed to helping Egypt by providing policy advice and technical assistance.
IMF potential financial assistance was aimed at supporting the country and government in their objectives of “promoting social justice and preserving macroeconomic stability,” Sahay said.
If the government later decided it needed financial support, the IMF would work with the authorities on a program that is fully owned by the government, and ensure that it could achieve social cohesion. She denied that there had been any hidden terms in the previously negotiated arrangement that the government has since decided against. Here’s the full text of the interview.
IMF Survey online: Why has the Egyptian Government decide not to borrow from the IMF after negotiating a Stand-By Arrangement?
Sahay: In April and May this year, the Egyptian government estimated that the country had a financing gap in the range of $9-11 billion during 2011/12, and reached out to their bilateral and multilateral partners, including the IMF, for financial assistance. We reached a staff-level agreement on June 5 on a 12-month Stand-By Arrangement amounting to $3 billion. This arrangement would have supported the government’s homegrown economic plan, which aimed at promoting social justice through higher social spending, preserving macroeconomic stability, and designing a road map for reforms after the elections.
Last week, the Egyptian authorities revised their plans for the 2011/12 budget and decided not to borrow abroad, including from the IMF. Their revised budget now includes a lower overall deficit target of 8.6 percent of GDP (versus the 11 percent target earlier).
IMF Survey online: Some observers have speculated the agreement with the IMF was scrapped because of hidden or unannounced conditions to the loan, such as on subsidies or privatization. Is this accurate?
Sahay: No, nothing was hidden or kept quiet. The Egyptian authorities designed their own program with explicit policies and measures. The IMF arrangement included a number of benchmarks, which consisted of measures that were already in the government’s economic plan, none of them related to privatization or requiring changes to the subsidy regime during the period of IMF arrangement. In fact, we fully agreed with the authorities’ objective of promoting social justice and increasing transparency during this historical transition.
Having said that, it is important to note that generalized subsidies in Egypt are very large, wasteful, and often benefit the rich more than the poor. The good news is that the Egyptian people have become increasingly aware of this and would like to see the wasteful subsidy system reformed. Any reforms, of course, would require careful consideration and preparation; in particular, it would be essential to ensure that the poor are protected through a better targeting system, while the subsidies benefitting the rich are eliminated.
IMF Survey online: Then, what were the main policy components of the arrangement?
Sahay: The authorities program had some tax measures to help improve fairness and enhance revenue, there were also some measures aimed at strengthening data dissemination and fiscal transparency. The financial assistance from the IMF would have helped finance an increase in public sector wages of those who at the bottom of the pay grade and an expansion in job creating programs. It would have supported plans to increase investment in the education, health, and low income housing, which would in turn have helped the Egyptian economy to recover faster. Egypt is currently facing a sharp increase in international food and fuel prices, a decline in tourism receipts and foreign direct investment, and a sell-off of Treasury bills by foreigners, all of which hurts Egypt’s external accounts. IMF resources would have helped finance Egypt's temporary balance of payments needs in the coming year and prevented foreign exchange reserves from falling further.
IMF Survey online: But didn’t this mean an increase in Egypt’s external debt? Why borrow from abroad if the government can borrow domestically?
Sahay: The central government’s external debt as share of GDP under the arrangement would have increased temporarily, by less than 2 percentage points, to about 17 percent of GDP, which is a very low level. This includes borrowing from all foreign sources, including the IMF. Borrowing from abroad would have been relatively cheap, as global interest rates are very low. In the case of the Fund, the interest rate is currently only about 1.5 percent compared to more than 12 percent that the government has to pay when issuing domestic Treasury bills. Finally, external financing would have created room for domestic banks to lend more to the private sector, especially small and medium size enterprises which is key to help revive the economy and create more jobs.
IMF Survey online: What is your view of the government’s new budget?
Sahay: The earlier draft budget aimed at supporting the economic recovery through a moderately expansionary fiscal policy and a financing strategy that brought resources from abroad at favorable terms. The revised budget involves a decline in the targeted fiscal deficit from 11 percent to 8.6 percent of GDP. This would, of course, reduce the need to borrow. Nevertheless, by reducing expenditures on health, housing, and education, there is a risk that economic growth and job creation would be lower, at a time when promoting social justice is demanded by Egyptians and, indeed, is a key goal of the government. There are always trade-offs between different choices, and we respect the authorities’ decision at this time to reduce expenditure and opt for a smaller deficit.
IMF Survey online: Is it usual that the Fund enters into agreements with a transitional government?
Sahay: In all countries, we work with interim governments as well as permanent governments, as long as they are legitimate governments that are recognized internationally. This was the case in Egypt
IMF Survey online: Is the IMF still ready to help Egypt in the period ahead?
Sahay: The IMF continues to maintain a close policy dialogue with the authorities and remains committed to helping Egypt and its people through technical assistance and policy advice to achieve their objectives of maintaining social cohesion, preserving macroeconomic stability, and moving the economy on a path that leads to high and more inclusive medium-term growth and employment.
IMF Survey online: What happens if the authorities come back in the future with a new request for a financial arrangement?
Sahay: Egypt is member country of the IMF and it is our duty to help Egypt and its people at all times. The Fund would work with the authorities to assess the situation at the time of any future request. Any arrangement would seek to support an economic program that is fully owned by the government, and one that would help achieve the goals of the authorities and Egyptian people—social justice, transparency, and macroeconomic stability. Generally speaking, if the authorities anticipate that there might be a need to borrow externally, it is always better for any country to request an IMF arrangement at an early stage when economic challenges are less daunting.
IMF Survey online: How do you see Egypt’s economic prospects after the revolution?
Sahay: There will indeed be important challenges in the period ahead, but the revolution can unleash Egypt’s huge economic potential by promoting greater inclusiveness and transparency, and enhance governance. Combined with good economic management, these positive factors can leverage the country’s inherent strengths: a dynamic and young population, a large domestic market, access to key markets, and a privileged geographic position.
