CAIRO: Egypt has little choice but to return to the IMF to help it find up to $15 billion to stave off a full-blown financial crisis, but the ruling army seems to be stalling to avoid blame for approaching a foreign institution for cash on its watch.
The $3 billion facility from the International Monetary Fund (IMF) that Egypt negotiated then rejected in June may no longer be enough to manage an orderly currency devaluation and get a growing budget deficit under control, economists say.
Adding to woes of an economy hammered by months of turmoil and violence, credit rating agency Moody’s downgraded Egypt by a notch this week and warned a further cut could be on the way because of political uncertainty.
"It’s not enough, because when the $3 billion was negotiated in June, the situation was very different," said Said Hirsh, an economist with Capital Economics.
Two finance ministers during Egypt’s political transition, both of now out of office, the planning minister who is still in her post and the new prime minister have all indicated Egypt was considering or needed the IMF’s support.
But on most occasions as government officials seem to edge close to signing up, the army has indicated its reluctance.
"The easiest thing would have been for the military council to accept the loans from abroad, give it to Egyptians to live a better life and then hand over power and the Egyptian people would have been responsible to repay these debts," General Mokhtar al-Mullah told reporters this month.
For many Egyptians who follow the nation’s finances, the IMF is associated with stringent conditions that have often hurt many in the society, though economists say and officials privately admit the measures have helped the economy as a whole.
Officials have also quietly acknowledged — and sources with a knowledge of talks with Washington-based institutions have concurred — that the last facility came with very few strings.
Army-appointed Prime Minister Kamal El-Ganzoury, also premier in the 1990s when Egypt was under an IMF program, said last week the government would not agree to an IMF facility until the outlook for the budget was clearer.
But he said it could be necessary and has warned that the country needed some austerity measures to correct its finances, though the most needy would be protected.
"If we are forced to resort to the IMF, we will resort to it. This is a matter open for discussion," he said.
But the army rulers and its cabinet are wary of tightening purse strings when the uprising that ousted Hosni Mubarak was fuelled partly by the deep anger of many Egyptians who felt they were growing poorer as a well connected elite prospered.
Egypt’s economy has been reeling since the uprising that ousted Hosni Mubarak in February frightened away tourists and investors, and some economists say if Egypt does not come up with external funding soon it could face both a currency and a budget crunch in the first quarter of 2012.
Economists say political and economic problems have grown since Egypt rejected the IMF facility in June.
Dozens of protesters have died in clashes with army, the budget deficit has mushroomed, the cost of domestic borrowing has increased, foreign reserves have fallen and demand for Egypt’s exports has fallen as the global economy weakened.
Any IMF package would almost certainly need to be renegotiated and enlarged, and any delays will only compound the crisis, the economists said.
The Egyptian pound’s losses are likely to accelerate, driving inflation and interest rates on government securities yet higher, sparking further civil unrest as more people are plunged into poverty and causing already declining FDI to drop further.
Several economists estimated that any IMF package would now need to be worth $10 billion to $15 billion.
"I suspect the government was hoping the economic conditions would be different now than they actually are," Hirsh said.
Part of the IMF funding could be used to help the government finance its budget deficit, now running at about 11 percent of gross domestic product, at cheaper rates of interest.
By relying solely on the domestic market for funds, the government in recent weeks has driven up interest rates on some of its securities to above 15 percent, versus the 1.5 percent it would have been paying for the IMF funds.
The higher cost of debt is in turn widening the deficit and forcing the government to borrow even more.
Another part of the IMF financing could help the central bank manage an orderly devaluation of the Egyptian pound.
The central bank has helped keep the pound strong since the uprising by drawing down about $16 billion in foreign reserves, which at the end of November stood at only $20 billion. Reserves have fallen by almost $4 billion in the last two months alone.
The rapid decline makes the central bank’s currency policy look increasingly unsustainable, and economists say a currency crunch could come sometime in the first quarter, a politically awkward time for the military council as it guides the country toward civilian rule.
"This is significant because it would be before parliament stands and presidential elections," an economist at a Western embassy said.
Under the military council’s schedule, parliament will come into session in April, followed by a politically fraught process of drawing up a new constitution and the holding of a presidential election at the end of June.
Hirsh estimated that if the government undertook an orderly devaluation supported by IMF funds, the pound would fall to 6.50 to the dollar by the end of June from 6.01 currently, but if the decline was disorderly it could fall to 8.00.
A weaker pound would translate into higher inflation, including higher prices for imported food staples such as the tea and sugar would cut into the budgets of lower-income Egyptians.
"The political situation will not be conducive to fixing the economy. We quite possibly will have people back on the street. It will be hard to take austerity measures," one diplomat said.
"The political hit for any austerity in the next six months would be pretty big."