Fish out of water? – Egypt is wrong to snub IMF and World Bank aid - analyst

Fish out of water? – Egypt is wrong to snub IMF and World Bank aid – analyst

Una Galani thinks Cairo's rebuff leaves it drawing on an even higher ratio of aid from undemocratic Gulf donors that have their own foreign policy agendas.

June 28, 2011 1:18 by Reuters

Egypt is mistaken to snub international aid. Cairo’s decision to turn down over $3 billion in aid from the International Monetary Fund (IMF)–and a possible $2 billion more from the World Bank—satisfies the strong anti-IMF sentiment in the country where the institution has won hate for its past praise of the old regime.

But it also concentrates financial risk.

For a start, Cairo’s rebuff leaves it drawing on an even higher ratio of aid from undemocratic Gulf donors that have their own foreign policy goals. Qatar and Saudi Arabia have pledged roughly $14 billion, dwarfing the $2 billion offered by the US, though many questions remain over if, when, and how the bulk of the Gulf aid will be channelled.

The IMF funding was small relative to the scale of Egypt’s projected fiscal deficit, originally forecast at 11 percent of GDP, or $29 billion. But it was reliable and came with few strings attached. In terms of direct budget support, Qatar has “gifted” just $500 million with Cairo claiming that Saudi has offered a similar amount.

‘NO’ IS NOT THE RIGHT ANSWER

True, shaving $4 billion off planned spending in the budget for the coming fiscal year starting in July, and lowering the deficit to 8.6 percent of GDP, or around $22 billion, should compensate for turning down $3 billion from the IMF. Fuel subsidies for the industry will be cut. Egypt also hopes for higher tax revenue, but HSBC argues its expectations there might be optimistic in light of the decision to scrap the planned capital gains tax.

Cairo is also yet to adjust its rather rosy GDP growth forecast of 3-3.5 percent to take into account the new budget’s impact: a slower-growing economy would cause a higher budget deficit. Meanwhile the flight of foreign investors has put the extra financing burden on local banks, which this week held back from buying all the nine month paper on offer with a 13 percent yield.

Egypt is stabilising. Foreign reserves fell only $800 million in May, out of a total $15 billion since the start of the year. But question marks still hang over the currency. And there’s no guarantee a new government will be in place as expected in September, to insure that major funding decisions are backed by democratic legitimacy. However good it feels, “no” to the IMF isn’t the right answer.