Egypt under IMF spotlight as loan talks resume

By Ulf Laessing and Paul Taylor

CAIRO (Reuters) - An International Monetary Fund (IMF) team resumed long delayed negotiations with Egypt on Wednesday on a $4.8 billion loan to ease a deepening economic crisis in the most populous Arab country.

After two years of political upheaval, foreign currency reserves have fallen to critically low levels, limiting Egypt's ability to buy wheat, of which it is the world's biggest importer, and fuel.

President Mohamed Mursi's government signed a preliminary deal with the IMF in November but postponed ratification in December due to unrest ignited by a political row over the extent of Mursi's powers.

The IMF mission began by meeting finance ministry and the central bank officials and is expected to stay "a week or 10 days or more", government spokesman Alaa El Hadidi told reporters. Prime Minister Hisham Kandil will meet the team when it has completed its work, he said.

Cairo must convince the global lender it is serious about reforms aimed at boosting growth and curbing an unaffordable budget deficit. That implies tax hikes and politically risky cuts in state subsidies for fuel and food including bread.

An IMF deal has eluded Egypt for nearly two years, despite on-off talks first with an army-led government and now with Mursi's Muslim Brotherhood-controlled administration.

Economists say the IMF appears to question whether Egypt has the political consensus needed to enact reforms - doubts that months of turmoil have done nothing to ease.

Parliamentary elections that were due to start this month have been pushed back until October and a new legislature may not be in place until December.

Finance Minister Al-Mursi Al-Sayed Hegazy said on Monday the government aimed to have a loan agreement completed by the IMF's spring meetings, held on April 16-21. But IMF officials have not given a timeline and some private economists say a full deal before the parliamentary polls seems unlikely.

"Our base case is that an IMF deal is unlikely before parliamentary elections, but an emergency loan could possibly be reached in the meantime," Brahim Razgallah, an economist at JP Morgan, said.

"...Since the constitutional crisis, things have become more difficult and the political divide has widened... The IMF will insist on having a political consensus behind the reform programme."

Just before the visit, the government announced an increase in the price of subsidised cooking gas. But it has postponed plans to ration subsidised fuel using smart cards until July 1 and some reports say that date may be pushed back further.

The Egyptian pound has lost a tenth of its value against the dollar this year and is trading even lower on the black market, driving up inflation. Shortages, meanwhile, threaten to exacerbate tension in the street, where Mursi's opponents have been airing political grievances in protests that frequently turn violent.

POUND TUMBLES

The United States and the European Union have urged Egypt to build a broad political consensus in support of reforms required by an IMF programme, but the main political parties have become increasingly polarised.

U.S. Secretary of State John Kerry said on Tuesday that Egypt was at a "tipping point", telling reporters: "We share a very real concern in the Obama Administration about the direction that Egypt is apparently moving in."

"We have been working very, very hard in the last weeks to try to get the government of Egypt to reach out to the opposition, to deal with the IMF, to come to an agreement which will allow Egypt to begin to transform its economy and improve the lives of its citizens."

The leftist Popular Current party led by Hamdeen Sabahi, who came third in last year's presidential election, denounced the proposed IMF loan in a statement on its Facebook page and joined a small demonstration outside the Supreme Court on Wednesday against the mission's visit.

"This loan will lead to colonisation and the continued dependency of the Egyptian economy," Popular Current said, adding it would have negative effects on the economy and on the social and living conditions of Egyptians.

Seeking to protect the Egyptian pound, the central bank has raised interest rates, increasing the cost of borrowing needed to finance a state deficit expected to hit 12.3 percent of GDP without reforms.

An economic plan submitted to the IMF envisages cutting the deficit to 9.5 percent in the fiscal year beginning in July.

The financial crunch has forced the government to cut back on fuel imports, leading to shortages that have caused transport disruptions and power cuts. To ease shortages, Cairo has said it aims to import oil from Iraq and neighbouring Libya while paying off some of the money it owes to foreign energy firms.

Egypt has also cut back on wheat imports, running down grain reserves in the hope that a bumper harvest will be enough to feed its 84 million people.

A government statement on Wednesday said wheat reserves have fallen to 2 million tonnes, enough to last 81 days. On March 27, the government said it had a stock of 2.116 million tonnes.

Without a deal, Cairo could perhaps still limp along for several more months with help from friendly Arab states such as Qatar, but it would not be comfortable.

Source: http://news.yahoo.com/imf-egypt-face-tough-talks-4-8-bln-071942118.html

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