Seek loans and reform – S&P to Egypt

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Egypt’s President Mohamed Mursi (R) and Prime Minister Hisham Kandil meet with IMF Managing Director Christine Lagarde (C) at the Presidential Palace in Cairo, on 22 August 2012. Photo – Amr Abdallah Dalsh/Reuters

Standard and Poor’s warned Egypt on Thursday that much-needed support from international lenders could weaken Egyptian institutions if authorities are unable to effectively address ongoing economic, fiscal and external challenges.

The international ratings agency also said it was keeping Egypt’s foreign and local currency sovereign credit ratings at ‘B/B’ because of the “negative outlook” in light of social and political tensions.

The agency also removed the ratings from CreditWatch in an apparent approval for the working relationship between the newly elected Morsi, and the military.

IMF director general Christine Lagarde, who received the $4.8 billion loan request during a visit to Cairo this week, said the lender “will accompany Egypt” as it undertakes its challenging journey of reform.

But Lagarde made no firm commitments, saying that the amount, details and terms of the loan programme – which Cairo hopes to seal by the end of the year – were still under discussion.

The IMF chief said its support was to be accompanied by an Egyptian economic programme incorporating fiscal, monetary and structural measures, which she said would require “determination” and “political courage”.

Some Egyptian commentators doubt that the new authorities could use this loan to sustainably improve the economic conditions of the population.

“This credit is intended to cover expenses (wages, food imports)… to allow the Muslim Brotherhood to comfortably reach the upcoming elections and to calm the economic situation,” writes Ibrahim Eissa of Al-Tahrir newspaper.

In the end, “it is the Egyptian people who will cough up” the money to repay the loan, he says.

Ahmad Galal, an analyst at the Economic Research Forum, estimates that Egypt needs $10 billion to begin to stem the crisis, and will have to obtain “other resources” in addition to the $4.8 billion requested from the IMF.

But the effort also requires deep internal reforms to be implemented over the years to come.

“In the short term, we must stimulate economic activity and create jobs. In the medium term, it is necessary to reform the education system, upgrade infrastructure and tackle the informal sector,” among other steps, he said.

Economist Angus Blair, founder of the Signet Institute in Cairo, told AFP that “sorting out the (petrol and gas) subsidies programme to make sure it is better targeted” should be a top priority, along with encouraging investment.

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