Egypt wavers on brink of $4.8B IMF deal as economy deteriorates

Mursi meets with IMF chief Christine Lagarde in Cairo on Aug. 22, 2012.

CAIRO: Egypt is close to an agreement with the International Monetary Fund on a $4.8 billion loan that would help it fight a deepening economic crisis but is still bristling at the conditions, diplomats said.

An IMF program could help stabilize Egypt’s economy in the rocky transition to democracy since the 2011 overthrow of former President Hosni Mubarak, unlocking up to $15 billion in aid and investment to improve a dismal business climate.

But diplomats and politicians say Islamist President Mohammad Mursi still has to approve required tax increases and subsidy cuts that prompted him to halt implementation of an earlier IMF deal in December, two weeks after it was agreed in principle.

“The mission said it was waiting until now for the government to present some of the road map related to reforming the economic system, and it is still in dialogue with the government to get acquainted with this map,” Abdullah Badran of the hard-line Islamist Nour party told Reuters after meeting IMF negotiators.

Egypt’s economy has deteriorated significantly since then. Tourism and investment have shriveled due to political turmoil in the Arab world’s most populous nation, where 40 percent of the 84 million citizens live on less than $2 a day.

The projected budget deficit has risen to around 11 percent in the fiscal year ending in June, foreign currency reserves have shrunk to less than needed to cover three months’ imports, and the country is suffering fuel shortages.

An IMF delegation has been holding talks in Cairo since April 4 on a revised economic program that includes a gradual reform of costly fuel subsidies that swallow 21 percent of the budget or 12 percent of gross domestic product, and an extension of sales tax to fewer items than previously planned.

The country’s finance minister and central bank governor have told local media the talks have been going well, and diplomats said they were due to conclude, one way or another, before the Fund’s mission returns to Washington Tuesday.

“We’re waiting for clarity from the presidency,” a diplomat briefed on the negotiations said.

A spokesman for the Mursi’s office declined comment on whether he had given the green light for an agreement.

Diplomats said the ruling Muslim Brotherhood had been reluctant to impose unpopular tax and fuel price increases before parliamentary elections due to start in October.

Nevertheless the Brotherhood’s Freedom and Justice Party is pushing through parliament new tax laws apparently linked to the IMF deal. Opposition politicians accuse the government of trying to impose its will without dialogue.

While the IMF team has been in town, the government has picked up $5 billion in apparently unconditional support from Arab allies Qatar and Libya to help it over the coming months.

But Planning Minister Ashraf al-Araby warned last week that Egyptians would face worse austerity without an IMF deal. Ministers fear a long, hot summer of power cuts, and possible fuel and food shortages that could spark unrest.

The state-owned Al-Gomhuria daily quoted an economic source as saying the IMF deal had reached the final stages for signing.

An Egyptian ministerial delegation including the central bank governor and the planning minister will go to Washington this week for the annual spring meeting to seek agreement on the final phrasing of the loan deal, it said.

Central bank chief Hisham Ramez was quoted by independent Al-Shorouk newspaper as saying Egypt had not requested an increase in the loan, but the amount could be raised by up to $1 billion if the maturity were extended beyond 30 months instead of the 22 months foreseen in last November’s accord.

The IMF mission, headed by Andreas Mauer, has spent the last few days meeting government and opposition political leaders to seek broad backing for implementation of the reform program.

Politicians who have participated in those sessions said there was wide acceptance of the need for an IMF loan but less willingness to accept even relatively mild conditions attached.

“We heard the IMF’s view, and it became clear to us that they are asking for some reforms to the tax system, and their view is that there must be a review of subsidies,” said Badran, the Nour party’s parliamentary floor leader. “This, in our view, will increase the burdens on the poor.”

Leftist Popular Current party leader Hamdeen Sabahi said his group would support any unconditional loan that supported the Egyptian economy, but it must not be on terms that put extra burdens on the poor, farmers, workers and the middle class, or that dictate how the government spends the money.

“The Popular Current cannot agree to a loan with conditions that include lifting subsidies from basic commodities,” Sabahi, who came third in last year’s presidential election, said on his Facebook page.

Diplomats said the IMF had softened its conditions compared with many other adjustment programs, partly because the United States and European Union countries that are the Fund’s biggest shareholders were determined to support Egypt.

“There is a sense that Egypt is too big to fail,” one senior diplomat said. “The trouble is that the Egyptians know this, and think they can use it to escape the conditionality.”

IMF and World Bank studies show that most fuel subsidies benefit wealthier Egyptians rather than the poor, few of whom have cars.

“Estimates show that the richest 20 percent of the population in Egypt receives more than half of the spending on fuel subsidies,” said Caroline Freund, the World Bank’s chief economist for the Middle East and North Africa region.

That also may explain why the subsidies are so hard to reform, with powerful interest groups keen to preserve their advantages.

A version of this article appeared in the print edition of The Daily Star on April 15, 2013, on page 5.




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