Egypt Readies for Tough Reforms as Gulf Seen Tightening Aid

(Bloomberg) -- President Abdel-Fattah El-Sisi said Egypt would end its dollar exchange rate problem within months because it can’t put off tough measures to revive the economy, amid signs Gulf states’ aid won’t flow as freely as before.

In an interview with three state-run newspapers published Tuesday, El-Sisi said officials had waited too long to act, and that piecemeal measures taken over the years were no longer tenable. With the country bracing to meet International Monetary Fund requirements for a $12 billion loan, El-Sisi’s comments offered some of the strongest indications yet that Egypt was moving to free its exchange rate or devalue its pound.

“The size of the challenges is beyond imagination, and the responsibility for coping with them doesn’t fall solely on my shoulders but is a responsibility shared by Egyptians as a whole,” El-Sisi was quoted as saying in state-run Al-Ahram. “The future of the nation is at stake.”

The impoverished country of more than 90 million faces new sacrifices to win the IMF loan, which could unlock billions of additional dollars in aid. Earlier this month, the sides reached an initial agreement on the package, which is meant to restore the confidence of foreign investors and provide a desperately needed infusion of foreign currency.

In return for the money, Egypt likely promised to float or devalue its currency, analysts have said. Either step could further fuel inflation and stoke unrest.

Backing Required

The executive board of the Washington-based lender will not consider the loan, however, until Egypt secures up to $6 billion in commitments from bilateral creditors. The United Arab Emirates was the first to step up, agreeing to deposit $1 billion with Egypt’s central bank, state-run WAM news agency reported Tuesday.

The deposit has a six-year tenor. WAM didn’t say whether the money had arrived in Cairo, and Egyptian central bank officials didn’t immediately answer calls and messages seeking comment.

The U.A.E., along with Saudi Arabia and Kuwait, has already pumped tens of billions of dollars into Egypt since the 2013 ouster of Islamist President Mohamed Mursi. The new injection shows that Gulf countries, while struggling with their own budget worries amid falling oil prices, are unwilling to reverse course on Egypt, the largest Sunni nation and a counterweight to Iran.

“For the Gulf, Egypt is too big to fail, however diminished its regional status,” said Steffen Hertog, an associate professor of comparative politics at London School of Economics. At the same time, their relationship “has clearly cooled,” he added, saying the money is likely to be given with strict conditions attached.

Expect Conditions

Egypt can no longer take unconditional Gulf support for granted, analysts said. Saudi Arabia, for one, has been increasingly offering loans and investments instead of grants.

“Sisi’s popularity is declining, pretty dramatically, and the economy is showing no signs of improving, so the U.A.E. and Saudi are likely discussing whether Egypt is worth their investing,” Sarah Yerkes, a visiting fellow at the Brookings Institution in Washington, said by e-mail. “But, given Egypt’s importance, I don’t see the relationship ending any time soon.”

Along with the IMF’s $12 billion loan, Egypt is targeting $9 billion over three years from other creditors, including the World Bank and African Development bank. The country also plans to issue $3 billion to $5 billion in dollar bonds during the fiscal year ending June 30, with the first sale expected in 2016.