CAIRO – The International Monetary Fund on Sunday agreed to provide Egypt with $3 billion in financing to help the Arab world's most populous nation ease the blow to its economy sustained by the popular uprising that ousted former President Hosni Mubarak.
The loan announcement comes days after the government unveiled a draft budget that projects the deficit swelling to nearly 11 percent of the nation's gross domestic product, as officials look to boost social services spending to meet persistent demands by a population that complained of gross economic inequity under the former regime.
The 12-month standby arrangement spans fiscal year 2011-2012, which begins in July, and carries a 1.5 percent annual interest rate -- a level which Finance Minister Samir Radwan said fell far below the international borrowing costs Egypt would have had to agree to had it turned to the open market for assistance. The loan, which must still be approved by the IMF's executive board in July, is to be repaid over five years, with the payments due to begin three years and three months after its disbursement.
Officials said the loan was aimed at supporting Egypt's "home-grown" economic plan of supporting social justice after decades under a regime widely accused of enriching the wealthy in a nation where over 40 percent of the population lived on or below the World Bank's poverty delineation of $2 per day.
"We very much welcome the authorities' plans to foster social justice" through increasing spending on health, education, housing and transportation, Ratna Sahay, the IMF's deputy director for the Middle East and Central Asia, told reporters, listing some of the government's current priority programs.
"Support from the international community will greatly facilitate the realization of the authorities' economic objectives and, in this context, the IMF is committed to supporting Egypt and its people through this arrangement," said Sahay in an earlier e-mailed statement.
Finance Minister Samir Radwan said the government, in the wake of the revolution, was faced with the dilemma of meeting growing demands while keeping the budget deficit "within reasonable limits."
"This agreement is aimed at getting us out of the bottleneck," Radwan told reporters, referring to Egypt's current economic challenges. "It is a result of the increase in demands and the decline in resources."
Since the start of the January 25 uprising, Egypt's key foreign revenue sources have taken a beating.
Tourism is down sharply, as is foreign direct investment. Meanwhile, anti-regime protests morphed into labor unrest following Mubarak's ouster in mid-February, with workers demanding increases in pay, greater benefits and opportunities that matched broader calls for a greater equalization in the distribution of income, where it seemed the poor seemed to get poorer and the rich, richer.
While Egypt had enjoyed economic growth rates that reached 7 percent before the start of the global economic meltdown, the forecast of a 5.8 percent jump in GDP for the current fiscal year was slashed to as low as 1 percent by some analysts. Economic growth is forecast around 3 percent for the coming fiscal year, roughly half earlier projections.
Under the draft budget, revenues are seen at 350 billion pounds ($59 billion) while expenditures come in at 514 billion pounds ($87 billion). Revenue increases are expected through tax reforms, compliance and administration while the deficit is expected to be financed in part through foreign grants and loans. The idea is to ease pressure on domestic institutions so they can push ahead with boosting private sector growth and development.
Even as the country struggles with declining revenues, the same factors that helped stoke the uprising remain as prevalent, if not more so, than before the start of the uprising.
Unemployment remains well above 10 percent and significantly higher among the youth that comprise the bulk of the population. Inflation has also climbed, in part linked to global commodity price increases, further straining Egyptians already struggling under the disruptions to economic activity caused by the uprising.
The draft budget is aimed at easing some of that strain by boosting social service spending, including on subsidies, while raising government sector salaries to 700 Egyptian pounds per month, about $120 -- all under the framework of greater social egalitarianism. But to meet what Radwan has said was a budget shortfall of about $10-12 billion, Egypt has turned to the international community for help.
The IMF loan, along with funding pledged by the World Bank, the United States, Saudi Arabia, Qatar and the Group of Eight industrialized nations is aimed at helping bridge that gap while working in conjunction with the priorities laid out by Egyptian officials.
Radwan said that he received a check from Saudi Arabia toward $4 billion in grants, soft loans and project support, but mentioned also that Egypt had so far received more support in terms of "hugs and kisses" than in money deposited into accounts. The comment appeared to reflect concerns that the pledges by some nations would not materialize as quickly as Egyptian officials hope -- if at all.
The United States has pledged about $2 billion, divided evenly between a debt swap and financing guarantees, while Qatar has pledged about $10 billion in the form of investments in projects. The G8 nations offered $20 billion to Egypt and Tunisia, though it remained unclear how much of it was new funds.
Sahay said while the IMF funding was tied to benchmarks, it did not come with conditions that have often led to criticism of the international organization. The IMF is often blamed for forcing structural changes in countries that hit hard at lower income groups.
The IMF said in a statement that while fundamental structural reforms like easing subsidies would ease the burden on the state, "we share the government's view that immediate implementation of such reforms is not feasible in the context of this arrangement as additional preparatory work in needed to ensure than an effective safety net is in place to protect low income households."