Published March 15, 2013
CAIRO – The International Monetary Fund is sending a senior official to Cairo this weekend to discuss issues that have delayed a $4.8 billion loan seen as a final lifeline to rescue Egypt, a political heavyweight in the region.
Egypt's multibillion dollar loan request is considered crucial to freeing up other loans and reassuring foreign investors who abruptly pulled their money out of the country when longtime authoritarian leader Hosni Mubarak was ousted from power in early 2011.
IMF spokesman William Murray said earlier this week that the global lender's director for the Middle East and North Africa would arrive in Cairo Sunday.
Egypt said last month that it had invited the IMF, which reportedly is not happy with the nation's proposed economic reform program, to resume negotiations that were suspended late last year amid violent clashes over the drafting of the country's constitution. Talks with the IMF also stalled when President Mohammed Morsi quickly rescinded tax increases for fear of the public backlash.
"The idea is to discuss with the authorities their economic program and the next steps in the IMF's engagement with the country," Murray said, adding that the IMF remains committed to supporting Egypt at this critical time in its history.
However, Murray declined to say whether the IMF official would be on a "negotiating" or "courtesy" visit.
"There's an ongoing discussion with the authorities and I don't want to characterize what form it takes," Murray said. "We've had ongoing contacts with the Egyptian authorities and we've remained fully engaged with them."
The IMF loan has been delayed, mostly because of political turmoil, which forced Egypt to change its economic forecast figures to more conservative estimates. Government officials were hoping the budget deficit would shrink from its current level of almost 11 percent to 8.5 percent in the next fiscal year, but now Cairo is suggesting it could be 9.5 percent.
Earlier this week, Egypt rejected a $750 million rescue loan from the IMF, deciding that it did not want to resort to taking emergency measures at this time. The stopgap loan, part of the IMF's Rapid Financing Instrument, would not have been a substitute for Egypt's multibillion dollar loan request.
Egypt had long been viewed as a stable corner of the Middle East. Reserves stood at around $36 billion just before Mubarak was toppled. The past two years of political upheaval in Egypt, however, have kept investors from returning and have curtailed tourism — both key foreign currency earners.
Foreign currency reserves were slashed by more than two-thirds following the uprising, dipping to a critical level of $13.5 billion this year.
One way Egypt is seeking funds is through the return of millions of dollars earned under rampant corruption during Mubarak's nearly three decade-long rule. Members of the Muslim Brotherhood group, from which the president hails, have spoken out in support of striking deals with former regime figures.
The so-called reconciliation talks have been confirmed by powerful Brotherhood businessman Hassan Malek, who was quoted in Egypt's state-run news agency saying the deals would assist with "real development."
Though Mubarak's two sons are still in prison facing corruption charges, several members of the former autocrat's inner-most circle have been released from prison in recent months.
But a decision by the country's top prosecutor to ban two of Egypt's biggest tycoons from travel caused shockwaves in business circles.
Onsi Sawiris and his son, Nassef, who manage Orascom Construction Industries, are in a dispute with the government over as much as 14 billion Egyptian pounds (almost $2 billion) in alleged taxes owed from the sale of shares in the company, which is one of the region's largest employers.
Onsi Sawiris' other billionaire son, Naguib, is a founder of one of Egypt's liberal opposition parties and was the owner of a liberal Egyptian satellite channel. In a recent television interview, Naguib Sawiris suggested the tax case was politically motivated.
Ashraf Swelam, senior advisor to the Egyptian National Competitiveness Council, criticized the timing of the travel ban. "This sends a negative signal to Egyptian and foreign investors that the government is not serious about pursuing reconciliation," he said.
Egypt has kept its foreign currency reserves afloat with handouts from oil-rich Gulf countries including Qatar, which has infused $5 billion in Egypt's central bank since Morsi took office last summer.
Qatar, among other external donors and lenders, has signaled it is no longer willing to lend Cairo money before a deal with the IMF is reached.
Egypt needs a cash infusion soon to keep the Egyptian pound from sliding. The local currency has depreciated by around 10 percent of its value to the U.S. dollar since December.
Foreign reserves are also needed to pay for crucial wheat imports and government subsidies of basic commodities like diesel that the vast majority of Egyptians rely on for survival. Energy subsidies make up the largest chunk of the around $20 billion a year — about a third of the national budget — that Egypt spends on subsidies. Cutting fuel subsidies are believed to be at the top of a government reform plan presented to the IMF to secure the loan.
Speaking on condition of anonymity in line with regulations, a U.S. diplomat in Cairo said this week that economic recovery will become increasingly difficult in Egypt if the IMF deal is not signed soon.
The London-based consultancy, Capital Economics, said in a recent statement that Egypt was too geopolitically important to fall and should be able to tide itself over with funds from other countries until an IMF loan is signed.
In what may have been a final lifeline before an IMF deal is reached, the United States and Egypt signed a $190 million budget support agreement this week. It is the first installment of a planned $450 million in budget support from the United States.
The IMF deal has also been stalled because Morsi's government is phasing in subsidy reforms to apparently delay implementing the unpopular measures ahead of parliamentary elections. The vote was slated to start in April but has been delayed indefinitely due to issues with the election law.
Morsi's Muslim Brotherhood group, which has a majority in the upper house of parliament, is seeking to holds its grip on power in the lower house of parliament too. If his government implements subsidy cuts and tax reforms too quickly, public backlash could cost the group at the ballot box.
Associated Press writer Mariam Rizk contributed to this report.