The 18 days of protests that ousted former Egyptian President Hosni Mubarak in mid-February and political unrest since has scared off tourists and investors. The rapid decline in tourism, a major source of revenue, and capital flight has depleted Egypt's foreign currency reserves.
The so-called "stand-by arrangement" amounts to credit on easy terms that Egypt is expected to use to avoid payment shortfalls and shore up its currency, the Egyptian pound.
Under the deal signed between the IMF and Egyptian Finance Minister Samir Radwan, $3 billion will be disbursed to Egypt in installments over the course of the next year. After the last installment is paid, Egypt will have five years to repay the loan, and its annual interest rate will be 1.5 percent. The Egyptian government currently borrows money in pounds at 10 percent a year and its market cost for dollar borrowing is over 5 percent.
The arrangement with the IMF comes as part of the Egyptian government’s plan to receive loans and donations from the World Bank, Western nations, and Gulf states to reassure markets about the stability of the pound and Egypt's ability to pay its debts.
“We are getting a lot of support in terms of hugs and kisses, that I can assure you,” Minister Radwan said. “But I believe it only when it comes in the shape of a check.” Saudi Arabia, Qatar, and the European Union are talking about loans, and President Barack Obama promised between $2 and $3 billion in economic relief, he said. But the details of these programs remain unknown.
On a recent morning under the hot Cairo sun, one of the world’s most famous tourist sites was speckled with just several dozen visitors. The pyramids of Giza used to see tens of thousands of tourists a day; now they see mere hundreds.
“People are afraid of Cairo,” says Ali Abdel Atti, standing next to his trinket stand near the Sphinx. “Sometimes I come here with empty pockets, and I leave with empty pockets.”
Tourism dropped 46 percent in the year’s first quarter, according to the government statistics agency.
The security situation has been unstable since police were pulled from the streets on Jan. 29 following violent clashes with protesters. Labor unrest and ongoing strikes, coupled with the fact that countless prominent businessmen are now facing charges of corruption, are also keeping investors out, economists say.
“The biggest problem with the economy is that there is a lot of uncertainty,” says Ahmed Kamaly, a professor of Economics at the American University in Cairo. “If there are signs of risk and problems, investment is going to be negatively affected.” He says foreign and domestic investment in Egypt has dropped drastically in the first quarter of 2011. “And investment not only affects the economy today, but it affects it over time.”
Economists are concerned about the growing government deficit, currently at 11 percent of gross domestic product (GDP). Revenue from taxes has declined as a result of decreased income while government expenditure has increased in response to workers’ demands. Labor strikes have been ongoing in Egypt since 2006, and instances of strikes increased during the revolution.
From Mubarak’s ouster in mid-February until mid-May, as many as 1 million workers were involved in strikes, says Kamal Abbas, general coordinator of the Center for Trade Union and Workers’ Services, an Egyptian nongovernmental organization that focuses on labor issues.
“The government is stuck in a bad position,” says Magda Kandil, executive director at the Egyptian Center for Economic Studies, a Cairo think tank. “The people who started the revolution have demanded a lot of adjustments, and the government has taken control of these in the form of additional employment, subsidies and pay raises.”
The 2011-12 budget announced by the Ministry of Finance on June 1 proposes an increase in spending by one quarter.
The IMF loan is expected to lower the Egyptian government’s deficit and ease financial restraints. “The need for money is real and dire,” says Hanaa Ebeid, a senior researcher at the Al-Ahram Center for Political and Strategic Studies. “There is really no choice – we can’t afford to not borrow.”
But some argue that the loans are only a temporary solution to larger problems that need to be addressed. “If you are going to spend and borrow now, you should try to institute private-led growth and address the issues the private sector suffered from before the revolution,” Dr. Kandil says. “I would like the government to say ‘enough of the short term agenda.’ We need to reorient policies to complement help from the international community so we can create jobs.”
Radwan said on Sunday that the government is determined to find sustainable revenue options. “We need to generate resources to increase the revenue side. We need to bring back investment and production to widen the tax base so we don’t need this amount of borrowing,” he said.
At the pyramids, the sense of urgency is evident. One 11-year-old moved from tourist to tourist trying to sell crinkled postcards. He is one of roughly 40 percent of the Egyptian population who live on $2 or less a day, according to a World Bank statistic. He’s never seen this ancient wonder of the world so empty.