The Egyptian government has swung the ball back in the Muslim Brotherhood’s court in the tennis match that is Egypt’s wrangling over an International Monetary Fund financing package.
Finance Minister Mumtaz al-Said confirmed on Thursday that the government would sign a ‘letter of intent’ with the IMF next week, as a step towards presenting the financing agreement to the IMF’s Executive Board next month.
But, in comments to Al Arabiya, the Brotherhood said its position has not changed and no deal had been reached.
Al-Said said a final agreement on the $3.2 billion loan, seen as crucial to avoid a balance of payments crisis and a disorderly currency devaluation, would be reached by 15 May 2012, just over a week before the country’s presidential elections on May 23 and 24.
He said Egypt needs $10-$11 billion over the next 18 months to return to economic stability and urged all political groups to rally around the government’s efforts to tackle the crisis.
“The government is careful to coordinate with different political parties and powers regarding the IMF loan,” Al-Said said, in an apparent overture to the Brotherhood. “These political powers are a key part of the national fabric and a pillar of the Egyptian state.”
It is unclear how a deal can be reached by mid-May given that the Brotherhood has all but ruled out an early agreement on IMF support. When reached for comment, the Brotherhood said they had not changed their position despite the finance minister’s latest statements.
“We are not ideologically opposed to working with the IMF or other global institutions,” Abdel Hafez el-Sawi, head of the economic committee of the Brotherhood’s Freedom and Justice Party (FJP) told Al Arabiya. “But there is a lack of clarity from the government on its economic program.”
The FJP says its issue is with the Egyptian government which it says has yet to reveal the terms and conditions of the loan, or explain how it plans to spend the money and pay it back.
“Our ideal scenario would be to explore all other methods of financing before resorting to borrowing,” Dr. Mohamed Gouda, the FJP’s spokesman on economic affairs, told Al Arabiya. He cited raising the price of gas export and tapping the government so-called “private funds” as alternative sources of funding.
”If we do resort to a loan, then we must know how it will affect low earners as well as the long-term consequences for the economy,” Dr. Gouda said.
The finance minister’s comments come two days after the IMF issued a statement following its latest visit to Egypt, during which it held meetings with a wide range of officials including ministers, parliamentary committees and members of the Brotherhood’s FJP as well as other political parties.
The IMF said more work needed to be done to finalize the government’s economic program, particularly the fiscal budget for 2012-2013. It stressed “that broad-based support for a national economic program is essential,” adding the government must “mobilize the required political support,” reiterating their pre-requisite that any loan agreement receive backing from all political parties.
Because the current government is unlikely to remain in power beyond the presidential elections, the IMF is insisting that the loan, and accompanying economic program, receive widespread support, something that has so far eluded ministers.
Earlier this month, Khairat al-Shater, the Brotherhood’s second in command who is running for president, used his first media interview after announcing his candidacy to warn the government that the brotherhood would not support an IMF loan unless its terms were changed or a new government was formed to decide on how to spend it.
“We told them (the government), you have two choices. Either postpone this issue of borrowing and come up with any other way of dealing with it without our approval, or speed up the formation of a government,” al-Shater said in an interview.
The Islamist-led people’s assembly is seeking to withdraw confidence from the military appointed government of Kamal el-Ganzoury which they see as illegitimate.
Al-Shater said it was “not logical” that the Brotherhood approve a loan for a transitional government that would have to later be repaid by a permanent government.
In a sign of the IMF’s determination to win over the Brotherhood and gain wider support for the deal, the delegation chose to meet with the Freedom and Justice Party (FJP) on the first day of its visit in March, before it met with government officials.
An IMF official confirmed that their technical team held meetings with parliamentary committees over the past weeks and that if an agreement were to be reached, the IMF board would discuss the loan at its meeting in mid-May and an initial disbursement of funds could happen within days.
Egypt is on the verge of a balance of payments crisis and the timing of the loan is crucial.
Since last year’s uprising, the government has spent more than $20 billion propping up the currency, depleting foreign exchange reserves from $36 billion in December 2010 to $15.12 billion by the end of March of this year. This is equivalent to less than three months’ worth of imports and includes $4 billion in gold bullion, which the government would be reluctant to draw down, according to economists.
Experts see a devaluation of the Egyptian pound as increasingly likely, regardless of whether an agreement is reached with the IMF or not.
“We think that a devaluation of the Egyptian pound is more likely than not, even if the government reaches an agreement with the IMF this month,” Said Hirsh of Capital Economics wrote in a research note. “The only issue is whether the devaluation is orderly or disorderly.”
Hirsh sees the risk of a disorderly devaluation growing given the rising tensions between the interim government, the Muslim Brotherhood and the military council.
“Failure to secure help from the IMF would make a disorderly devaluation more likely. In this scenario, the pound could overshoot, falling by perhaps 50 percent or more against the U.S. dollar,” Hirsh wrote.
The cost of a disorderly devaluation would be severe to the economy, according to experts. Inflation, already running at above 9 percent, would be expected to spike, while interest rates would rise and banks would be under more pressure.
On the other hand, an agreement with the IMF makes an orderly devaluation more likely, the effects of which would be much more manageable.
(Carina Kamel is a senior correspondent for Al Arabiya based in London and can be followed on twitter @carina_bn. )