The war of words that erupted this week between the ruling military council and the Muslim Brotherhood means an IMF loan will take longer time. And time, like hard currency, is something of which the Egyptian economy is particularly short.
Observers have long predicted a clash between the two biggest forces vying to shape Egypt’s political order. But few expected it to kick off as the IMF enters a crucial phase in determining a loan that is needed to avoid catastrophic currency devaluation.
The Brotherhood is pressing the generals to sack the interim government and appoint a new one led by its political wing, without waiting for completion of the transition process in June.
The new tensions will almost certainly complicate efforts to reach a deal with the IMF, which says an agreement is conditional on broad political backing. In practice this means the support of the Brotherhood’s Freedom and Justice party, since it is likely to lead the next government, whether it comes now or after the election.
The loan matters enormously, though less for its monetary value than its timing, which will signal a much larger wave of foreign money to flow back into Egypt.
FT said that the $3.2bn under discussion is far less than what is needed to plug the hole in the Egypt’s finances. The deficit in the June 2012 fiscal year is estimated at $24bn and the government has been funding it through borrowing on the local market at exorbitant rates of 15 per cent and above.
Investors, markets and foreign donors are all looking to the loan agreement as a signal Egypt will be putting its house in order – a necessary first step in the economic rehabilitation of the country.
The hope is that Egypt’s commitment to a reform program agreed with the fund would help restore confidence in the country’s economic management, prompting a return of investment and the disbursing of loans from the EU, World Bank and Gulf Co-operation Council, among others.
With foreign reserves standing at $15.7bn in February – only enough for three months of imports – devaluation is looming. Egypt has used up more than $20bn since February 2011 to defend the pound and the central bank is running low on ammunition, analysts say.
The FJP said last week after a meeting with the IMF that while it was not opposed to borrowing from the fund, the government had not provided necessary clarifications about its economic programme, or how it plans to use the loan or repay it.
“The party does not have information about the real needs of the budget in Egypt,” said the FJP in a statement. “The government has not expended enough effort in finding alternatives [to borrowing] which do not add to public debt.”
An IMF technical mission is expected in Egypt this week, and as it works with the government, some of the details to which the FJP referred might become clearer. But until the group has resolved the crisis in relations with the military, it seems likely the party might withhold its support.