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Why is the IMF in a Hurry with Egypt? | ASHARQ AL-AWSAT English Archive 2005 -2017
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Egypt’s President Mohamed Mursi (R) meets with IMF Managing Director Christine Lagarde at the presidential palace in Cairo, in this August 22, 2012 file photo. (REUTERS/Amr Abdallah Dalsh)

This could be one of the few occasions when the IMF actively seeks to pressure a member state into taking out an urgent loan. The idea is that the funds would serve as a timely bridge until the county’s condition stabilizes, at which point both sides can negotiate a proper reform program in exchange for a substantial package of aid.

It seems that the IMF, which announced its offer to Egypt this week and expressed its readiness to provide an urgent emergency loan amounting to USD 750 million, senses the danger the Egyptian economy will soon be facing, after its foreign exchange reserves decreased to less than one third of their 2011 levels. Deficits in the balance of payments and the budget have also increased, and recent figures have indicated high inflation rates. This is not the first time that the IMF has expressed its willingness to negotiate and sign an agreement offering incentives to Egypt, but all too often domestic politics and tensions have interfered, rendering any agreement meaningless.

The IMF’s fears are justified. Egypt’s economic situation is perilous, as evidenced by its meager energy supplies in certain sectors, and its lack of foreign exchange necessary for imports. Yet the real problem lies in the fact that carrying out an economic reform program requires a state of stability and a minimum degree of social and political harmony in the first place. Unfortunately, this does not exist in the Egyptian political arena at present, given the widespread disagreements between various political currents and powers.

Concluding an agreement with the IMF is never easy, even at times of political stability. This is because the incentives offered—effectively a means for international investors and donors to gain trust as a prerequisite for further aid—are often tied to economic reform programs. These are usually unpopular with citizens, because they often involve cost-cutting measures and privatization. In many cases, economic reform also necessitates currency flotation, whereby the currency is devalued in order to make exports more competitive. At the same time, this causes local prices to soar because import costs rise automatically.

Egypt’s current problem is that there is no time to wait; the economy is declining rapidly to the extent that some expect it will only be two or three months before it reaches a critical point. However, no one seems able to put a stop to this decline because of the growing political crisis that now threatens the state itself, with the incomprehensible subversion and unjustifiable violence taking place on the Egyptian street.

Any agreement concluded with the IMF requires either a strong government or one that is formed by national consensus—not by disagreements and boycotts as is the case now—or through national unity, whereby every single group is represented. Such a government must lead the transitional period, revitalize institutions like the police force, and restore a degree of stability in both the political and security framework so that the economic wheel can begin turning once again.

The basic elements of the Egyptian economy are still intact and could quickly become operative if the political congestion was eased and the violence on the street was curbed. However, in order to do so, there must be political will in place, and steps must be taken to restore confidence between the fighting political parties. Harmony can only be achieved in accordance with a clear outline that regulates the rules of the political game, and dispels the current suspicions that one group is trying to hijack the state for its own agenda. These are the rational steps forward for any state suffering a crisis.