Egypt cabinet reshuffle could delay IMF loan, warn economists

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The reshuffle of Egypt's cabinet, which included an overhaul of the government's entire economic team, does not improve the outlook for the country’s finances and could derail or delay a loan from the IMF, economists warn.

On Tuesday, President Mursi replaced nine ministers, including the ministers of finance, planning, investment and petroleum, in a widely anticipated reshuffle aimed at placating the opposition and breaking the political deadlock. This is the second cabinet reshuffle since Mursi took office last June.

Two of the new appointees with economic portfolios are members of the Muslim Brotherhood; one has a background in Islamic finance and another is seen as a technocrat.

Economists don't expect significant change to Egypt’s economic policy – and warn that the new cabinet will face the same challenge of winning opposition support for unpopular but urgent reforms.

“The reshuffle of Egypt’s cabinet doesn’t change the bigger picture that achieving support from across the political spectrum for much-needed economic reform will be extremely difficult,” research consultancy Capital Economics said in a report published Tuesday.

Capital Economics said that because the new cabinet consists of more Brotherhood-affiliated members than the previous one it “increases the risk of political polarization.”

Some experts warned the ministerial changes could derail negotiations with the International Monetary Fund over a $4.8 billion loan that is seen as crucial to winning investor confidence and which remains polarizing.

“IMF officials have told me that each time they get used to a minister, he disappears”, Samir Radwan, Egypt's former finance minister was quoted as telling Egyptian newspaper Ahram Online. “We now have our fifth finance minister since the revolution; this is a sign of instability.”

Bank of America Merrill Lynch Global Research said the reshuffle is “unlikely to bridge gaps with the secular opposition” and that it “could drag talks further” over the IMF loan.

“The increased [Freedom and Justice Party] reach into the economic administration is likely to augur of further delays in IMF negotiations, in our view, presumably because they were unhappy with conditionality and the turn of negotiations,” Bank of America Merrill Lynch said in a research note.

The bank noted that the reshuffle “solidifies” the Islamist presence in the cabinet.

“Muslim Brotherhood members now account for nearly a third of the Cabinet's 35 portfolios,” it said. “The reshuffle appears to indicate the Muslim Brotherhood sees value in deepening its reach in key ministries that control IMF and multilateral lending negotiations… it would imply the Muslim Brotherhood was likely unhappy with the current negotiations, which could drag talks further.”

Bank of America Merrill Lynch added that it believes “an IMF agreement is not imminent, and unlikely before parliamentary elections.”

Not all share the same view. Cabinet spokesperson Alaa El Hadidy said the reshuffle would have no bearing on IMF negotiations.
“A change in some of the individuals in the government does not at all mean a change in the government's policies, its financial and economic reform plan,” El Hadidy told media on Tuesday.

The new Finance Minister, Fayyad Abdel Moneim, a relative unknown with a PhD in economics from Al Azhar University, is Egypt’s 5th finance minister since the revolution. He is seen as similar to the outgoing El Morsi Hegazi (who held the job for less than five months) in that he is an academic with no official affiliation to the Muslim Brotherhood but with expertise in Islamic finance and Sharia compliant banking.

In his first remarks after being appointed Abdel Moneim said his priorities would be ratifying the new budget, gaining parliamentary approval for the new tax law and finalizing an agreement with the IMF.

The new Planning Minister, Amr Darrag, a founding member of Muslim Brotherhood's Freedom and Justice Party and a former member of parliament, will also be a key figure in IMF talks. He told reporters on Wednesday that negotiations were continuing and that there was no disagreement on the structure of subsidy reform, a cornerstone of Egypt's economic reform program.

The new Investment Minister, Yahia Hamed, is a member of the Islamist Freedom and Justice Party and a former adviser to President Mursi who also worked on his election campaign. He will be tasked with regaining foreign investor confidence and is seen as lacking investment experience.

The Petroleum Minister, Sherif Hedara, who most recently served as head of The Egyptian Petroleum Corporation within the ministry, is a mechanical engineer who faces the mammoth challenge of implementing energy subsidy reform in time for a July deadline.

Prime Minister Hisham Kandil retained his position despite calls to replace him because of his handling of the economy.

The opposition National Salvation Front described the changes as a “disappointment” in a statement while the liberal Free Egyptians party said “no cabinet reshuffle has taken place.”

Amr Moussa, head of the opposition Conference Party, said the reshuffle “doesn't change anything” adding that he expected another reshuffle in the near future.

The Muslim Brotherhood's Freedom and Justice Party welcomed the reshuffle and confirmed its support for the government.

The new cabinet will need to gain consensus on economic policy at a time of political division. It will also begin implementation of tough reforms including lifting energy subsidies and increasing taxes.

Under the outgoing government, parliament approved a new tax on stock transactions and bank loans.

But debate on a proposed income tax law was suspended due to disagreements between lawmakers and the finance ministry over expected revenue from the taxes. The new finance minister will need to provide parliament with figures for how much revenue is anticipated from each income tax bracket.

The fate of the controversial sales tax that resulted in a policy U-turn last year is still unknown with sources telling Al Arabiya an amended law has been presented to the upper house of parliament “in secrecy.”

The proposed budget for the new financial year starting in July sees overall tax revenue increasing by more than 30 percent however it is unclear how this will be achieved given that parliament is still discussing the new tax legislation.

Spending is also set to rise, with the wage bill rising by a fifth and the cost of subsidies increasing by 12 percent. The deficit is expected to drop from 10.7 percent in the current financial year to 9.5 percent.

The government plans to phase out energy subsidies – about a third of state expenditure - in July with the introduction of "smart cards" to regulate the distribution of petroleum products.

But some economists question the viability of introducing reforms in a short time frame.

In a report published last month, investment bank EFG Hermes said the budget assumes a “highly optimistic scenario” for growth and revenue and that the timetable for reform was “highly unlikely, even from a purely logistical perspective.”

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