New doubts Egypt will get $4.8 billion IMF loan
New signs of distress in Egypt's economy emerged Tuesday with the disclosure that foreign currency reserves - already at critically low levels - fell nearly 10 percent in just the last month as political turmoil flared anew on the streets.
With unrest holding back critically needed austerity measures, there is growing doubt that Egypt will be able to secure a $4.8 billion dollar IMF loan in time to rescue the flailing economy, or even at all. The loan is considered crucial to shoring up investor confidence and freeing up a wave of loans that Cairo has requested from other lenders.
The central bank said foreign reserves fell to $13.61 billion in January from $15.01 billion a month earlier, a $1.4 billion decline that provided stark new evidence of a dangerous deterioration in the economy. Foreign reserves stood at $36 billion before Egypt's uprising began in January 2011. The latest central bank figures show a drop of a total of $23 billion in reserves in the two years since, wiping out well over half of the money.
Even before that decline, the central bank said the $15 billion level represented a "critical minimum," or just enough to cover three months' worth of imports. The reserves are being propped up with billions of dollars in transfers from the energy-rich Gulf state of Qatar.
Still an official of the Muslim Brotherhood, the Islamist group that dominates the government, denied that Egypt has an economic problem.
Mohammed Gouda, a member of the Muslim Brotherhood's economic committee, told The Associated Press on Monday that he did not expect reserve levels to ever dip below $14 billion. He suggested that aid from oil-rich Gulf states is Egypt's lifeline until the IMF loan comes through and investors return.
"There are urgent problems such as with foreign currency reserves. But we are confident that with international help, we can overcome this period of political turmoil," Gouda said.
"We do not have an economic problem, but a security and political problem," he added, pointing to remittances from Egyptians living abroad, the Suez Canal and exports that provide billions in revenue each month.
Debt rating agency Fitch, which downgraded Egypt's ratings this week, said the country is not likely to get the IMF loan before parliamentary elections, expected in the next few months though no date has been set.
Fitch said there could be political pushback against austerity measures until the end of the year, adding the possibility of "an inconclusive or contentious election process would extend political uncertainty."
It added that a prolonged delay in implementing an IMF austerity program could lead to a strain on external finances, an abrupt depletion of reserves and a disorderly devaluation of the currency. Another concern is Egypt's widening budget deficit.
A banker with inside knowledge said Egypt may not be able to obtain the IMF deal at all because the latest wave of violence that claimed more than 70 lives in the past week is depressing tourism and international investment, two key foreign currency earners.
If violent protests continue, keeping tourists and foreign investors away, foreign reserves could be further even depleted in coming months, making it too difficult to meet IMF requirements without far-reaching and unpopular austerity measures, he said on condition of anonymity because he was not authorized to speak to the media.
On top of that, there are doubts that Islamist President Mohammed Morsi has the political will to implement the painful austerity measures such as tax hikes and subsidy cuts, widely believed to be conditions even more crucial to securing the IMF loan than reserve levels.
His government is not expected to carry out the measures until after parliamentary elections. Morsi is expected to hold off for fear of further inflaming violence and perhaps so as not to risk losing votes for his Muslim Brotherhood.
Morsi announced some austerity measures, including tax increases, in December but quickly rescinded them because of a previous wave of unrest over the new constitution that passed in a contentious referendum. The austerity measures, which were announced without much national dialogue, are now being discussed with the business community and political parties.
Egypt's new finance minister said this week that talks with the IMF, which have been going on since last year, will resume when Cairo revises its "economic and social reform program" after the national debate on tax changes concludes.
IMF spokeswoman Wafa Amr told the AP that the fund is waiting to receive an updated economic program from Egypt before discussing the timing of a possible mission to Cairo.
"As we have said before, we are willing to provide financial assistance for an economic program that addresses the current economic and financial challenges, is socially balanced, and has broad ownership so that it can be implemented by the government," she said.
Without the IMF loan, Egypt is not expected to finalize talks for a $900 million loan from the European Union, $500 million from the African Development Bank and $450 million from the United States. It is also in talks for $1 billion from Turkey.
William Jackson, an economist with Capital Economics, told the AP that the IMF could be willing to help Egypt even if reserves continue to fall because it does not want to see the regional heavyweight fall deeper into crisis.
"I suspect because of its geopolitical importance that a lot of countries will support it financially so it doesn't have a full blown crisis," Jackson said about IMF support for Egypt.
The delay and new reserve figures threaten Egypt's ability to pay for imports and keep the local currency from sharply depreciating.
Egypt is the world's largest importer of wheat, which provides subsidized bread for millions. Nearly half the population of roughly 85 million lives at or below the poverty line of $2 a day and relies on the government to subsidize basic commodities.
If Egypt's economic distress deepens, there are fears that this could drive even more unrest on the streets.
"Bread! Freedom! Social Justice!" was among the most popular rallying cries of the 2011 uprising that ousted authoritarian leader Hosni Mubarak from power and has been heard again in recent protests against Morsi.
The central bank has been using foreign reserves to prop up the pound at a level many experts saw as overvalued.
Hoarding and speculation by worried residents prompted the bank to implement a new auction system in December, which helped cushion the decline of pound. The currency has fallen more than 7 percent against the dollar in the past two months of turmoil.
London-based Capital Economics said Tuesday that Egypt's reserves underline the limited firepower that authorities have to stem depreciation pressures on the pound. The group said it presumes the pound will fall to 7.5 to the dollar in the coming months, threatening higher inflation and more economic pain.
The banker with inside knowledge said the central bank does not have enough dollars to supply the local market's demands. He pointed to the central bank's tightening of the sale of dollars this week as a sign of falling reserves and the struggle to continue propping up the pound.
Associated Press writer Brian Rohan contributed to this report.