Egypt in need of urgent financial lifeline

The arrival of an International Monetary Fund (IMF) delegation in Cairo yesterday to discuss a potential $4.8bn loan comes as Egypt’s fiscal situation looks increasingly dire.

Turmoil that has followed Hosni Mubarak’s overthrow two years ago has prompted a decline in the number of tourists bringing vital hard currency to Egypt. The Egyptian pound has declined from 5.8 to the dollar before the revolution to 6.8 now.

The IMF wants the government to implement tough reforms in return for the loan. The government, however, is reluctant to introduce unpopular measures ahead of a parliamentary election later this year.

Foreign reserves have declined from $36bn before the January 2011 revolt that ousted Mubarak to some $13.5bn now, according to official figures. That represents barely enough to cover imports for a three-month period - a standard benchmark for minimum reserve holdings.

Finance Minister Al-Mursi Hegazy was quoted in the state-run newspaper Al Ahram as saying that Egypt is in an “extremely difficult” position. The budget deficit has climbed to the equivalent of $21.5bn over the eight months of the Egyptian fiscal year to February.  That compares to $13.9bn over the same period of the 2011-2012 fiscal year, and represents 8.2% of gross domestic product.

The government concluded negotiations with the IMF last November, and the deal was due to go to the Washington-based body’s Executive Board for sign-off.

But it was then derailed when tax rises that formed an important part of the reforms agreed with the IMF were withdrawn by President Mohamed Mursi only the day after he had approved it.

Egypt ended up asking the IMF to postpone discussion of the loan, which is why detailed talks are beginning again now.

The government hopes that the loan will shore up the gap in its reserves as well as help it tackle the budget deficit in the short term.

The IMF loan is not enough to meet those goals, but it will facilitate the government taking out further loans of $14.5bn.

To get the loan, Egypt must convince the IMF that it will act to improve its budgetary position. But the government is aware of the potentially explosive public reaction to tax hikes and, especially, state subsidy cuts.

Riots and protests over shortages in cooking gas and diesel have provided a foretaste of what the reaction might be if fuel subsidies, which cost Egypt $14bn in 2011-2012, were drastically cut.

With Mursi now suggesting that parliamentary elections may not take place until October, it is not clear if the authorities have any immediate appetite for unpopular steps to satisfy the IMF.  But the government needs to build social consensus and talk about the economic situation honestly to win popular support for some painful measures. It is a tough challenge for the Mursi administration. However it is a challenge that cannot be avoided.