25 June 2024 03:03 PM

Egypt and the International Monetary Fund

Friday، 17 March 2023 - 08:42 PM

What is the IMF

The International Monetary Fund (IMF) is a specialized agency emanating from the United Nations and affiliated with it, and is based in Washington, D.C., and the main objective of establishing the Fund was to create a more stable economic environment, and the Fund specializes in providing loans to member countries to address the temporary deficit in their balance of payments, and thus works to stabilize exchange rates. The determination of borrowing and voting rights is due to the state's share of the Fund's funds, for example, the United States has a voting share of 23%. , and the European Economic Community collectively has a 19% voting share. When a state obtains a loan, it is in exchange for providing an equivalent value from its own currency, and the state must recover this currency of its own within a period of three to five years.

Establishment and membership of the International Monetary Fund

The idea of establishing the International Monetary Fund emerged from the international interest in establishing a stable international economic system, and keenness to avoid the occurrence and repetition of mistakes that had stood as an obstacle in the face of the international economy in previous decades, which caused it great losses, and the International Monetary Fund came as a result of historical events, the most important of which was World War II, and as influenced by the economic and political ideas that prevailed in the country in that period. economic and restored.

The idea of establishing the International Monetary Fund (IMF) was crystallized at a conference held in 1944 in Bretton Woods, New Hampshire, in the United States of America, in the presence of a number of heads of state with the aim of developing a framework for cooperation to establish a more stable global economic order, which focused on helping the countries affected by the First and Second World Wars to rise again and avoid the recurrence of the crises that followed these wars, such as the Great Depression. The IMF officially came into existence on December 27, 1945 after The Charter of the Fund was signed by 29 countries at the Bretton Woods Conference in the United States of America from 1 to 22 July 1944, and began its work on the first of March 1947, and the number of its members is 183 countries.

B- The role of the International Monetary Fund at its inception:

Monitor economic and financial developments and policies in member countries at the global level by advising them based on the experience gained for more than 50 years, and predicting and reducing the occurrence of financial crises, for example: The Executive Board urged the Japanese government, in its annual review of its economic performance for the year 2000, to stimulate growth through (low interest rates) and encourage restructuring in companies and banks.

Lending to member countries with balance of payments problems not only to provide them with temporary financing, but also to support correction and reform policies aimed at solving their underlying problems such as the Asian financial crisis of 1997-1998, where he helped Korea pledge US$21 million to help it improve the economy and recover from the recession.

Providing technical assistance and training in areas of expertise to member countries' governments and central banks, for example: assisting the Baltic states, Russia, and others in establishing a treasury system for their central banks at the time of the collapse of the Soviet Union.

Strengthening the stability of exchange rates and preventing countries from competing to devalue their currencies.

Establish a system of multilateral payments and eliminate exchange restrictions that prevent the growth and revitalization of international trade.

Providing international liquidity to settle payments during the increase in reserves has been used in this so-called Special Drawing Rights.

C- International Monetary Fund:

Breakdown of the IMF:

Board of Governors: The IMF chairs the Board of Governors (the Ministers of Finance or Central Bank Directors of their respective countries), each representing one of the member countries of the Organization, and annual meetings of this Board are organized to discuss the Fund's issues.

Executive Board: The Executive Board manages the day-to-day operations of the Fund, and this Board consists of twenty-four Executive Directors who meet at least three times a week, eight of whom represent individual countries: China, France, Germany, Japan, Russia, Saudi Arabia, the United Kingdom and the United States of America, and the remaining sixteen Directors represent the rest of the Member States.

Board of Directors: The Board of Directors is chaired by the Managing Director, who is appointed by the Board for a renewable five-year term and oversees the Fund's 2,700 employees from more than 140 countries.

The IMF is accountable to its member countries, a responsibility that is essential to its effectiveness. The day-to-day work of the Fund is carried out by an Executive Board representing member countries, an international staff led by the Director General and three Deputy Directors General – each member of the management team selected from a different region of the world.

The Board of Governors, which includes representatives of all member countries, has the highest authority in the management of the IMF and usually meets once a year during the annual meetings of the IMF and the World Bank. Each member country appoints a governor – usually the finance minister or central bank governor of that country – and an alternate governor. Basic policy issues relating to the international monetary system are considered twice a year by a committee of governors called the International Monetary and Financial Committee (known as the Interim Committee until September 1999). The Development Committee, a joint committee of the IMF-World Bank Board of Governors, advises and reports to governors on development policies and other issues of concern to developing countries.

D- Objectives of the Fund:

To promote international cooperation in the monetary field through a permanent body that provides means of consultation and synergy with regard to international monetary problems. - To facilitate the expansion and balanced growth of international trade, thus contributing to the achievement and maintenance of high levels of employment and real income, and to the development of the productive resources of all member countries, as one of the basic objectives of their economic policy.

Work to stabilize exchange rates, maintain regular exchange arrangements between member countries, and avoid competitive devaluation.

Assist in the establishment of a multilateral payment system for current transactions between member countries, and in the elimination of exchange restrictions that impede the growth of world trade.

- Strengthening the confidence of Member countries, allowing them to temporarily use their public resources with sufficient guarantees, so that they can correct imbalances in their balance of payments without resorting to measures harmful to national or international prosperity.

Work in accordance with the aforementioned objectives, to shorten the period of imbalance in the balance of payments of the member country and mitigate its severity.

Monitoring the global economy.

Poverty alleviation and contribution to debt relief and cancellation, especially in countries under heavy debt, and as of June 2001, about twenty-three countries have benefited from this contribution to debt relief, nineteen of which were in Africa.

E- Conditions of Membership and Member States:

Membership Conditions:

The Fund works to help countries solve their economic problems by providing loans and technical investments, and this is what made the countries of the world resort to the Fund because of the severity of their suffering from the deficit in their balance of payments, which led the Fund to set conditions for joining it and gaining membership, and these conditions are: – Determining its currency in gold or in a foreign currency. – Commitment to the agreement and respect for the conditions set. – Freedom of entry and exit of countries from the Fund. – Each new member must submit his share in a period exceeding 30 days. – To study an application The entry of any country into the Fund must be in writing. – The period is set at one month to accept or reject the application, and this is within the limits of negotiations with the requesting countries to join.

The Fund considered the member states that signed the "Proton Woods" agreement as founding members, and the number of 29 countries out of 44 countries that attended the conference and this before 31-12-1945, then added 10 countries on March 14, 46, then Australia joined in 47, but at the present time the number of members is currently close to 200 members.

F. Main means of achieving the role of the IMF

The IMF is overseen and accountable to its 189 member countries, and its primary mission is to ensure the stability of the global monetary system—the international exchange rate and payments system that allows countries and their citizens to conduct trade with each other. The Fund fulfills this mission through 3 main means:

1- Economic supervision: The IMF supervises global monetary policy as well as monitors the financial and economic policies of member countries at the domestic and international levels. As part of this, the IMF advises its members on adjusting economic policies.

2- Lending: One of the main responsibilities of the Fund is to provide loans to its member countries that are going through actual or potential economic problems, as countries resort to borrowing from the Fund to help them rebuild foreign exchange reserves, stabilize the currency rate, continue to cover import payments, and create conditions for strong economic development, while adopting some policies to address any problems.

However, obtaining financing from the International Monetary Fund requires meeting a set of conditions, foremost of which is the adoption of a bold economic reform program aimed at addressing the financial and monetary imbalances and structural problems plaguing the economic system of the state that needs financing. In case of non-compliance, the Fund will cease funding.

3- Capacity Development: The IMF's role is not limited to governments around the world to develop their economic policies and institutions by providing the necessary training to citizens, which helps member countries to drive economic development and create more jobs.

Egypt and the IMF

Egypt joined the membership of the International Monetary Fund in December 1945, and Egypt's share in the Fund is about $ 1.5 billion, and Egypt resorted to borrowing from abroad for the first time in its history during the era of the late President Anwar Sadat, where it agreed with the International Monetary Fund in 1987 1988 on a loan of $ 185.7 million in order to solve the problem of delayed external payments and increase inflation.

Political and economic turmoil, such as those left behind by political developments in Egypt in 2011, usually lead to a decline in business activity, the economy being affected by some negative factors and the suspension of financial markets, which led to investor reluctance. Therefore, some measures are needed to restore economic stability and return it to a sustainable growth path.

In November 2016, the IMF agreed to provide financial assistance to Egypt worth US$12 billion in six tranches over three years. In July 2019, the IMF's Executive Board decided to disburse the final tranche of the $2 billion loan following the fifth review of the economic reform program.

The economic reform program aims to regulate the functioning of the foreign exchange market, reduce the budget deficit and government debt, promote economic development to create more jobs, especially for women and youth, as well as protect low-income people during the reform process.

History of Economic Relations. Between Egypt and the Fund

- Egypt has been a member of the Fund since 1945, and the first real test of that relationship was in the fifties with the start of attempts to obtain the first loan to help finance the construction of the High Dam, but that attempt failed, as political and social considerations always prevented the implementation of any plan that carries real efforts to complete the loan.

- In May 1962, Egypt signed the first agreement with the Fund for stabilization to obtain the first loan, but the negotiations were frozen for a period of time, until the Egyptian government resumed them in the second half of the seventies, and the Egyptian government signed an economic stabilization program with the IMF during the period 1977-1981, in order to overcome those problems related to the deficit in the balance of payments.

The justifications for the loan decision were represented in many circumstances and circumstances experienced by the Egyptian economy after the October 1973 war, during the period between 1973 and 1977 the economic stabilization program was held, and during that year, the financing of the bulk of the various imports was through banking facilities, which amounted to about 1.21 billion dollars, those facilities represented a significant jump in dependence on this type of debt, and the ratio of the trade balance deficit to GDP reached 10.2%, and the debt rate rose to 39.8%. This is the highest rate recorded by international statistics among the group of underdeveloped countries this year, due to Egypt's increasing dependence on short-term foreign loans and the advent of repayment terms for most medium and long loans.

After the repercussions of the war subsided, a set of problems emerged that had the largest role in reformulating and shaping the Egyptian economic policy, foremost of which was the increase in Egypt's need to import foodstuffs, especially wheat, and its compulsion to import these materials by paying in cash or through banking facilities, and this coincided with the sharp increase in the prices of these materials in the global market following the high oil prices, in addition to what Egypt faced after the war, from a rapid deterioration in the numbers of commodity stocks of raw materials. Mediums, strategic commodities and foodstuffs, and compounded the difficulty of these problems, the small size of the international reserves that Egypt possessed at the time, and the exposure of development efforts to severe pitfalls, represented by the deterioration of savings and investment rates, and the deterioration of international exchange rates to the detriment of Egypt.

In 1974, Egypt's trade deficit jumped dramatically from EGP 98 million in 1973 to EGP 530 million. That's about five-and-a-half-fold. The deficit increased from 2.6 percent in 1973 to 12.6 percent in 1974 because of a sudden increase in imports financed by short-term external loans (bank facilities). The ratio of international reserves for imports fell from 11.2 percent in 1973 to 4.4 percent in 1974. Moreover, Export coverage of imports deteriorated to 64.5 percent and the budget deficit increased from 14 percent in 1973 to 18 percent in 1974.

In light of these indicators, the political authority announced its adoption of a policy of economic openness, which in turn provides guarantees, incentives, concessions and an attractive climate for investments. The state's economic policy showed a tendency towards official foreign loans and a preference for the form of private foreign investment, which provides an opportunity for foreign and Arab capital to contribute to supporting the Egyptian economy.

In 1975, the volume of aid provided by Arab countries to Egypt increased, reaching its highest level of $ 2.774 billion, covering 106% of the trade balance deficit and 80% of the total external deficit. In 1976, Arab aid fell to 1.72 billion, equivalent to 58 percent of the trade deficit and 42 percent of the total external deficit.

Egypt's most prominent dealings with the IMF:

- 1977-1978: Egypt borrows from abroad for the first time in its history under Anwar Sadat.  Borrowing $186 million to solve the problem of external payments and increase inflation.

1991-1993: Egypt borrows for the second time under Hosni Mubarak

Borrowing $375 million to plug the trade deficit.

1996-1998: Egypt claims a loan of $434.4 million, which is canceled.

- Cancellation of 50% of Egypt's debt to the Paris Club countries.

Since the January 25 Revolution:

Egypt is asking for a loan under the military council.

Egypt has twice asked for a loan under Mohamed Morsi.

Egypt asks for a loan increase from $3.2 billion to $4.7 billion, Morsi's reluctance to implement several reforms led to the suspension of negotiations.

2016 Agreement:

A 3-year economic reform program.

Get a $12 billion loan.

Egypt gets $20 billion from IMF in last 5 years.

In June 2021, the Executive Board of the International Monetary Fund (IMF) approved the disbursement of the final tranche of Egypt's standby loan worth about $ 1.7 billion out of a total loan of about $ 5.4 billion.

The disbursement of the last tranche of the loan within days brings the value of what Egypt received from the IMF to about $ 20.2 billion during the last 5 years through 3 different loans, including the extended credit facility loan worth $ 12 billion in 6 tranches over 3 years, coinciding with the economic reform program that Egypt began implementing in 2016.

While the remaining value includes two loans, one in the form of emergency aid through the rapid financing instrument worth $ 2.77 billion to contribute to facing the repercussions of the Corona pandemic crisis, and the other through the credit readiness program, which extended over a year and included 3 tranches with a total value of $ 5.4 billion. Egypt overcomes the "Covid shock".

In December 2022, the IMF's Executive Board approved a 46-month agreement with Egypt under the Extended Fund Facility (EFF) worth approximately US$3 billion.

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