Egypt political crisis threatens to worsen economy

AP News
Posted: Dec 12, 2012 3:40 PM

CAIRO (AP) — Egypt's political crisis is threatening to plunge its ailing economy even deeper into distress after the government delayed a request for a $4.8 billion loan from the International Monetary Fund that would have eased a ballooning budget deficit and reassured foreign investors.

Fear of stoking the street unrest over a disputed Islamist-oriented constitution led President Mohammed Morsi to suspend a package of tax hikes that were key to reducing that deficit — and his government may now have to renegotiate the loan deal that took more than a year to hammer out.

While the government said it wants to delay the request for only a month, the IMF the mentioned no timeframe in its statement on Tuesday, saying only that it stands ready to "consult with the authorities on the resumption of discussions."

That raises the possibility that the loan may be put off until the political situation stabilizes, and so far protests have shown no signs of abating. Tensions have risen ahead of Saturday's constitutional referendum, with Morsi's opponents calling for Egyptians to reject the charter.

"It's a serious blow to hopes that the economy will get back on track — the country really needs a financial backstop to convince investors to bring back much-needed capital," said Neil Shearing from research consultancy Capital Economics in London.

"There can be no progress on the economy until the politics can be settled, and there is clarity about the direction of the government, the constitution and parliament," he added.

The tax hike was seen as a key first step in an economic reform package needed to generate revenue and meet conditions for the loan, agreed in principle with the IMF in November.

The government has said a dialogue with economists and interest groups would begin about the hikes next week. The increases, on goods including alcohol, cigarettes and cooking oil, are likely to be highly unpopular, and the opposition has used them to rally Morsi's opponents.

Until now, the Arab world's most populous nation has managed to get by on a drip feed of aid from individual donors, including the United States, which provides around $250 million in economic aid and $1.3 billion in foreign military assistance to Egypt per year.

Meanwhile, it has struggled with with low growth rates, a plunge in foreign currency reserves, and a loss of tourism revenues and foreign investment since the uprising that ousted Hosni Mubarak ushered in nearly two years of unrest.

Without the IMF loan, it will continue to rely on foreign aid — including from wealthy Gulf states — to avoid a possible local currency collapse or a further slowing of the economic growth desperately needed to provide jobs to its 85 million people.

But the tax hikes required by the plan are likely to be highly unpopular in a country where over 40 percent of the population lives near or below the poverty line, and the opposition has used them to rally Morsi's opponents.

Several groups opposed the IMF loan — including two Islamist-leaning parties, a number of well-known local civil society groups, and the April 6th Movement, credited with playing a key role in Egypt's uprising last year.

They say that the negotiations over the agreement lacked transparency, pointing out that it took place in the absence of an elected parliament. They also say the country's new economic program targets the poor, not the rich.

The nation has been deeply divided over the constitutional referendum, with the opposition planning more protests and the country's judges on strike over a decree by Morsi, since rescinded, which placed him above judicial oversight. The military is also signaling it may return to politics, leading to the possibility of even greater upheaval.

"In this polarized environment, it very difficult to pass these economic decisions," said Wael Ziada from investment bank EFG-Hermes, referring to the tax hike and planned cuts to fuel subsidies. "But they must be taken whether Egypt proceeds with the IMF loan or not. The current fiscal situation is unsustainable with the ballooning debt."

Negotiations for the loan had dragged on for over a year, as the country's need for cash following the uprising only grew. It had originally aimed for $3 billion in aid but upped the request as the economy deteriorated.

Aside from the funding itself, the loan was seen as a key stamp of approval needed by the government to encourage other countries and institutions to lend it more of its expected external needs for the coming years, a figure economists put at over $10 billion.

Failing that, it is difficult to see how Egypt alone can get back on its feet. The key tourism sector has yet to recover from the fallout of the popular uprising that toppled longtime-ruler Mubarak, and neither has the stock market.

Official unemployment stands at over 10 percent. Fuel shortages and power outages have aggravated the public, as have anticipated cuts in fuel subsidies, raising the possibility of a vicious cycle of resentment that could continue to fuel protests if additional foreign funding is not acquired.

"The IMF loan is really the only option," economist Simon Kitchen at EFG-Hermes said.