Egypt resumes IMF loan talks; doubts about ability to impose required austerity measures

CAIRO – Doubts are emerging about the Egyptian government's ability to implement painful austerity measures linked to the International Monetary Fund's critical $4.8 billion loan that could stop an economic collapse.

A top IMF official began talks in Cairo Monday, the latest in the drawn-out negotiations for the loan. The government is confident that the loan would not only cover part of its huge deficit, but also, it would signal to investors that Egypt is again a safe bet after two years of turmoil that started with the 2011 uprising that unseated longtime President Hosni Mubarak.

But the Islamist government that replaced Mubarak has already had to postpone final talks on the loan because it was unable to carry out the first steps required by the IMF. President Mohammed Morsi of the Muslim Brotherhood announced some of the measures, including tax increases, but quickly rescinded them over unrest surrounding his proposed constitution, perceived as pro-Islamist.

Now, with parliamentary elections upcoming, critics doubt Morsi will want to — or be able to — implement measures that could stoke new public anger, like cuts in subsidies for fuel and food that allow millions of Egyptians to survive despite their meager incomes.

Despite economic growth in Mubarak's last years in office, poverty deepened. About 40 percent of Egypt's people live near or under the international poverty line of $2 a day.

The head of the IMF's Middle East and Central Asia Department, Masood Ahmed, met Monday with Morsi and his prime minister ahead of the technical talks due to start soon.

Masood's visit comes a day after Prime Minister Hesham Kandil named a new finance minister, aiming to tackle Egypt's deteriorating economy.

The numbers are daunting. The budget deficit from July to November last year reached about $13 billion, compared to $9.5 billion in the same period last year.

The government admitted that its foreign currency reserves are at a critical level — enough for only three months of vital imports. Reserves have plummeted over the past two years, as foreign investment and tourism have dried up.

According to the new constitution, Morsi has to call for new parliamentary elections within the next two months. The parliament to be chosen would be the first to flesh out the constitution with legislation, making its composition — the proportion of Islamists to secular and liberal parties — crucial to the nation's future.

Critics warn that Morsi, as a politician, would be hesitant to impose austerity measures that could further inflame sentiment against the Brotherhood, already losing support because of Egypt's troubles an opposition suspicious of the group's attempt to monopolize power.

"They are in a very difficult situation," said Ahmed Shokr, a founding member of Drop Egypt's Debt Campaign. "They are trying to demonstrate to the IMF they are committed to this program, but on the other hand don't want to do it too quickly ahead of coming elections. I expect whatever they introduce will be very gradual."

Brotherhood officials acknowledge the seriousness of the economic situation and its impact on their popularity.

"The government must take these measures. They can't be postponed, even if they have a negative impact on the party," said Mohammed Gouda, an economic expert in the Brotherhood's political arm, the Freedom and Justice Party. He added, "I have to deal with" the consequences.

After Morsi rescinded the first round of tax hikes on items like cooking oil, alcohol and cigarettes, the government offered a social dialogue on the economy. Gouda predicted some of the taxation measures might be altered after discussion with those involved.

Already the government has introduced a system designed to control the devaluation of the currency, long propped up by foreign currency reserves that are now too depleted to continue. Under an auction system, Egypt's central bank sold $360 million, allowing the currency to lose about 5 percent of its value in recent days

A devaluation has been anticipated as part of the talks with the IMF, but it is likely to further harm Egypt's trade deficit, because the country relies on imports for much of its basic food, including wheat, sugar and tea.

Samer Atallah, a professor of economics at the American University in Cairo, warned of implications from the negotiations for the loan.

"The whole process has been lacking transparency, and they put themselves in a difficult position without the political consensus needed to sell this to the public," he said. "I think austerity measures are extremely difficult to carry out before any elections, even with the Brotherhood's ability to mobilize" voters.

Fady Mohammed, a 21-year-old student who works on awareness campaigns in low-income neighborhoods, said discussions with people there focus on frustration at lack of change in their living conditions, two years after the ouster of Mubarak.

"Many say neither the Brotherhood nor the revolutionaries have done them any good," Mohammed said. "People feel that the government never takes the side of the poor and is more concerned about establishing control."

Gouda had no good news for the impoverished. He said years of poor economic policies were bound to hit Egyptians hard.

"We will have to rely on local civil groups and charities to compensate some of the low-income groups," he said.