Can Egypt handle IMF loan?

Can Egypt handle IMF loan?
Can Egypt handle IMF loan?

With inflation in the high teens, and other factors putting pressure on the national economy, the country of Egypt has pursued a plan to take out a $12 billion loan from the International Monetary Fund (IMF) -- and the eventual resolution of this deal is coming soon.

Reports released earlier this month show that IMF leaders still have to deliberate on some aspects of the plan to lend Egypt a sum of money that, by any national benchmark, represents a substantial investment in the country's financial recovery.

The Egypt loan has been delayed, in part, because of technicalities at the IMF: an Oct. 5 report showed officials saying that Egypt's loan was not discussed at one annual IMF meeting because it is supposed to be reviewed by executive board members in a meeting that, as of that time, had not yet been scheduled.

However, with likely implementation within the year, Egypt’s proposal and pending IMF acceptance begs the question of what has to happen to right the Egyptian ship of state -- or just to fully ratify the provision of the IMF money.

Some analysts are showing that for ratification of the IMF loan, Egypt will have to act further to devalue its currency, a move the nation's leaders have put off throughout the summer.

“The devaluation will have to happen, in my view,” CI Capital economist Hany Farahat said in a July 3 Reuters piece.

Other concessions may also be necessary.

“Currency devaluation appears likely for Egypt as it seeks to secure a $12 billion loan from the IMF,” Aniket Mittal, senior analyst of investment research and analytics at Aranca, recently told Gulf News Journal. “While an initial agreement was reached between the IMF and Egypt in August 2016, the final approval from the agency would require the country’s government to relax the exchange rate controls, reduce subsidies and secure $5-6 billion in bilateral financing.”

Some of these contingencies, Mittal said, will be more difficult to manage than others.

“Closing the bilateral financing requirements for the IMF loan appears slightly more challenging for Egypt,” Mittal said, citing pressure on GCC countries because of weak oil markets and plummeting oil prices.

That said, Mittal believes it is important for Egypt to turn to another area of the world, and coordinate some of this borrowing activity with a country that's typically seen as having an emerging role on the world stage.

“China's role would hold key,” Mittal said. “Also, given the renewed relationship of Egypt and China and China’s interest in the Suez for global trade, it would not be surprising to see China help Egypt meet the bilateral financing targets.”

Will Cairo get a helping hand from an ascendant China? How will its financial pivoting activities affect the national debt and monetary outcomes? 

More will become evident as the IMF moves forward, finalizing the significant loan for a country that could be the hardest hit by change in a region rapidly diversifying away from a devaluing commodity.