The goal, according to IMF director for the Middle East and
North Africa Masood Ahmed, is to phase out wasteful subsidies,
especially in the energy sector, and to use the resources for
more spending on health, education and infrastructure
development as the country emerges from decades of authoritarian
rule.
The IMF talks in Cairo will aim to reach an agreement before
the end of the year. The deal is likely to unleash further
financing from other international lenders like the African
Development Bank,the World Bank. Finacning by regional donors
such as Qatar and regional donors.
The Obama administration has also said it will offer Egypt
$1 billion in debt relief as well as financing and loan
guarantees for American companies and banks to invest in Egypt.
Egypt's economic problems are enormous. A budget deficit
has mushroomed to 11 percent of gross domestic product, there is
massive youth unemployment and currency reserves are low.
The government has spent the last several months developing
an economic program and ensuring political and social support
for it at the IMF's insistence. Ahmed said in an interview with
Reuters the IMF mission will assess the specifics of the plan in
coming weeks.
"The program has to address the challenges that Egypt now
faces," said Ahmed.
"These challenges are quite formidable and they are both
short-term challenges in terms of strengthening fiscal and
external resilience, but also the challenge of laying the
foundation for a revival of economic activity over the medium
term that is going to provide jobs.
"Beyond the short term problem, the Egyptian economy has to
be guided by a vision of inclusive and job creating growth, with
more transparency and a level playing field. The future cannot
be a return to the past."
Ahmed emphasized that it was important to prevent the budget
deficit from widening further through a gradual reduction in
energy subsidies, 60 percent of which benefit the wealthy that
have more money to spend on energy products.
One proposal is to target the subsidies at Egypt's poorest
households through direct cash transfers or vouchers. Cutting
subsidies is a political hot button issue and Ahmed said it was
important that the government be open and clear about its
intentions.
The government, which took office in July, has vowed to
push through reform of the subsidies, which consume as much as a
quarter of the state budget, but still has to explain how or
when it will happen.
"Our experience with subsidy reform in many countries is
that such reforms are best done when they are well prepared and
phased in rather than implemented overnight," Ahmed said. "I
don't think it will be sensible to try to implement hasty
changes in a way that aren't fully thought through or risk
backlash.
The IMF has estimated that with necessary measures the
government will be able to reduce the budget deficit to 10
pecent of GDP in the financial year ending June 2013. It also
believes that further substantial cuts in the budget deficit
will be needed in 2013-2014 to put the budget on a sustainable
path.
Implementing the measures will reassure investors and boost
confidence, Ahmed said.
"You have to take measures that are seen as being
substantial and credible and have an impact on the outcome, even
in the first year," Ahmed said. "At the same time I believe you
also have to signal the direction of subsequent actions that
will be taken.
"You also don't want to over-reach because if you cut back
spending too quickly then you also have an impact on growth --
in a way you're cutting back stimulus - so its a fine balance."
Ahmed said the an IMF program will also help lower interest
rates that local banks charge, which have been pushed up by
increased demand by the government for financing and growing
incertainty. Egyptian government has been borrowing around $2
billion a month from local banks, crowding out financing
available for the private sector.
Analysts have suggested that one way of boosting economic
activity and exports is for the government to educe the value of
its currency. Some analysts have estimated the Egyptian pound to
be overvalued somewhere in the vicinity of 40 percent.
The debate is a political hot potator and Egypt's president
Mohamed Mursi has rejected any notion of a currency devaluation.
"I don't want to get into specific valuations, but the
important point is that over the medium term Egypt needs to
build resilience and become competitive," Ahmed said when asked
whether Egypt will need to devalue its currency.
Popular protests in 2011 chased away both tourists and
foreign investors, two of Egypt's main sources of foreign
exchange, putting pressure on the currency and helping to widen
an already gaping budget deficit.
A weaker pound would encourage exports and stop a drain on
foreign reserves.
(Editing by Kim Coghill)