Egypt seeks IMF rescue package
Egypt formally asked the International Monetary Fund for a 4.8 billion dollar loan, seeking a desperately needed rescue package for its faltering economy but raising the possibility of painful restructuring in a country still reeling since its revolution more than 18 months ago.
The loan deal, which Egypt says it will reach by the end of the year, presents a major test to the Muslim Brotherhood-rooted president, Mohammed Morsi, the country's first freely elected leader, brought to power after the fall of Hosni Mubarak.
The IMF has avoided making specific conditions for a loan but it seeks a cohesive government plan for restarting economic growth and reducing a deficit that has grown to 23.6 billion dollars (£14.9 billion), some 8.7% of gross domestic product.
A key part of that is likely to be reducing subsidies that take up a third of the government budget every year. Touching those subsidies, however, could bring social upheaval, since they keep commodities like fuel and bread cheap for a population of around 82 million, some 40% of whom live near or below the poverty line.
"The government will have to take urgent measures, at the top of them cutting energy subsidies," said Mohammed Abu Basha, a Cairo-based economist at investment bank EFG-Hermes Holding SAE. The biggest subsidies are those on fuel - including petrol and cooking gas - costing the government some 16 billion dollars (£10 billion) a year.
Egypt's upheaval since the 18-day uprising that led to Mubarak's ouster on February 11 2011 has pushed its economy toward the brink. Amid near constant instability since, foreign investment has dried up. Revenues from tourism - one of the country's biggest money makers and employers - fell 30% to 9 billion dollars (£6.67 billion) in 2011 and the industry is only making a meager recovery.
Meanwhile, the government has been burning through its foreign currency reserves, which have plummeted by more than half, to prop up the Egyptian pound and prevent a devaluation that could spur inflation.
The government also faces mounting demands to increase salaries for the millions of civil servants and public sector workers and boost social spending. Infrastructure has crumbled, with electricity and water outages pervasive this summer, bringing angry complaints, some directed at Morsi.
Egypt's hope is that the IMF package - its first loan from the organisation in nearly 20 years - will provide not only a cash boost but, more importantly, a seal of approval that will bring back international investment.
Mr Morsi, his Prime Minister Hesham Kandil and other Egyptian officials met today with IMF chief Christine Lagarde in Cairo. State TV said Egypt requested a 4.8 billion dollar (£3.02 billion) loan, up from the 3.2 billion dollar (£2.02 billion) proposal discussed earlier this year. Finance Minister Momtaz el-Said told the state-run Al-Ahram newspaper that the increase was needed because the deficit had grown with the drop in income from investment and tourism.
Ms Lagarde's visit "gives a positive message to Egypt and the whole world that Egypt is stabilising and that the economy is heading to a recovery," Mr Kandil said. He said he expects a final agreement by December.
Mr Kandil said his government has drawn up a comprehensive economic recovery plan for the IMF that includes strategies to counter the deficit, encourage investment and ensure that subsidies reach those most in need. He did not provide details.
Ms Lagarde said "Egypt faces considerable challenges." An IMF team will start talks in September with the government over its recovery plan and the loan, she said.
"Getting the country's economy back on track and raising the living standards for all will not be an easy task," she said. "The Egyptian people have legitimate expectations for a better life and greater social justice. We at the IMF stand ready to help."
Abdel-Hafiz el-Sawy, a chief economist with the Muslim Brotherhood who met with earlier delegations from IMF, acknowledged that "the government is facing a mountain of problems, and whenever it gets out of one trap to fall in the next".
"The IMF loan is small but its impact is in the fact that it gives Egypt a certificate that improves the country's economic prospects," he said.