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Stop-gap IMF aid could prove lifeline for Egypt


Two years after the fall of former president Hosni Mubarak, Egypt is deeply divided between President Mohamed Mursi and a hostile opposition, most of which plan to boycott the parliamentary elections that will start next month. Photo – Bloomberg News

Washington: Egyptian President Mohamed Mursi is unlikely to find the political support needed to win a full-fledged International Monetary Fund (IMF) bailout before elections begin in April, but he might be able to secure temporary IMF aid.

Emergency aid would see the country through a four-stage election starting on April 22, while sending a signal to financial markets about Egypt's commitment to economic reforms and IMF support for the North African country, analysts said.

Cairo has indicated it wants to reopen talks with the International Monetary Fund on a $4.8 billion loan, which was agreed in principle last November but suspended at the government's request after violent street protests erupted the following month. But it is unlikely that loan could be finalised before the election, making interim aid more of a possibility.

Two years after the fall of former president Hosni Mubarak, Egypt is deeply divided between the ruling Islamists of Mursi and a hostile opposition, most of which plan to boycott the parliamentary elections that start next month.

Political turmoil has frightened away foreign investors and tourists, a major source of foreign currency needed to pay for wheat and fuel imports, leaving the economy in a state of near collapse.

"An interim agreement would be a compromise between domestic political issues and the international community," said Ibrahim Saif, an economist at the Carnegie Middle East Center in Beirut.  "It would send a message that Egypt is willing to take measures and convey a message to Egyptians that we're not succumbing totally to the IMF." 

Forex reserves
With confidence in Egypt at a low, foreign currency reserve being drained and the budget deficit widening, Saif said an interim International Monetary Fund  deal would help avert the economy going over an 'economic cliff'.

"I cannot see (Mursi) signing a full agreement with the IMF now, but I can see him having an interim agreement, something that politically makes sense, but will send some hints regarding the future," Saif added.  The International Monetary Fund could provide emergency aid through a rarely tapped rapid financing instrument designed for countries suffering from urgent balance of payment needs that are unable to immediately agree on a more-stringent IMF programme.

It would come with relatively few strings attached, which would play to Mursi's concerns over politically difficult reforms ahead of elections.  Any financing under this loan facility is limited to 50 per cent of a member country's IMF quota share, which determines how much the fund can lend. Egypt's access would be about $750 million.

Qatar's aid
While the amount is not nearly enough to plug Egypt's funding gap, analysts said it would help unleash additional loans from allies in the region such as Qatar. The United States, the IMF's largest shareholder, committed $250 million in budget support to Egypt during a weekend visit to Cairo by new secretary of state John Kerry. 
"It is paramount, essential, urgent that the Egyptian economy gets strong, that it gets back on its feet," Kerry said during the visit. "It is clear to us that the IMF arrangement needs to be reached, that we need to give the market the confidence."

Egypt's foreign currency reserves slid to $13.5 billion at the end of February from $36 billion on the eve of a 'Arab Spring' uprisings in 2011 that ended Mubarak's iron grip. 
The IMF has insisted any large-scale loan program be conditioned on initial economic measures to shore up confidence, which would reduce government's high domestic borrowing costs. 

In addition, it wants to make sure the government clearly communicates its plans to the public and wins the support of the main political parties so that there is an assurance that whoever wields power will continue with reforms.

Analysts say Mursi is highly reluctant to impose austerity and reform measures that are likely to be conditions of an International Monetary Fund deal before the lower house elections because they could spark fresh protests. 

A particularly thorny issue is reducing Egypt's costly subsidy system, which mostly benefits the rich and is a drain on state coffers. An IMF programme would seek a phased reduction of energy subsidies, which swallow up about 20 per cent of the budget. 

However, under Egypt's drawn-out electoral process, voting will only be completed in late June. This means that negotiations with the IMF might not resume for the better part of four months.

Economists say that would be too late for Egypt's economy, a point stressed by Kerry when he visited Cairo. With foreign currency reserves falling sharply and the budget deficit soaring, Mursi may not have the luxury of waiting unless he can secure bilateral funding, possibly from Qatar which has already given the Muslim Brotherhood government substantial help.

"We have invited the IMF mission to come to Egypt," Hany Kadry Dimian, Egypt's first deputy minister of finance, said.  However, he emphasised that a stop-gap aid programme without reforms is not a lasting solution.
 
"In all cases there must be economic structural reforms in place because the Egyptian economy cannot be run through depending on temporary economic aid," he said. - Reuters

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