IMF official in Egypt as currency crisis bites

IMF official in Egypt as currency crisis bites

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Mon, 07/01/2013 - 20:08

A senior International Monetary Fund official met Egypt's government on Monday to discuss a vital US$4.8 billion loan as the Islamist-led state battles to contain a currency crisis set off by political turmoil that is depleting its foreign reserves.

The IMF's Middle East and Central Asia director, Masood Ahmed, met Prime Minister Hesham Qandil at the start of a visit coinciding with a sharp decline in the value of the Egyptian pound, which has hit a series of record lows against the dollar.

"At this stage, the putative US$4.8 billion IMF deal is the only thing standing between Egypt and a disorderly economic deterioration," HSBC said in a note issued on Monday. "The fact that Mr. Ahmed is making the trip to Cairo is positive."

Egypt has endured nearly two years of political upheaval since the euphoria of the uprising that toppled former President Hosni Mubarak in February 2011 and eventually brought Islamists to power. Their credibility — and how well they do in forthcoming parliamentary polls — may rest on how they handle the economic crisis.

Before the visit, the IMF had said Ahmed would discuss recent economic developments and "possible IMF support for Egypt in facing these challenges." Egyptian state media said the IMF team would stay for several days.

"We will attend many meetings with the Egyptian government today. The technical team will come later," Ahmed said after the meeting attended by Egypt's newly sworn-in finance minister, a little-known academic who is an expert on Islamic economics.

"All details will be discussed in these meetings today," added Ahmed, who was due to meet President Mohamed Morsy later.

The pound has lost more than 4 percent of its dollar value since 30 December, when the central bank introduced a new system for selling foreign currency to try to stem the fall in foreign reserves. The pound's slide has raised concern about inflation in the food-importing country that could ignite further unrest.

The pound has been weakened by investors and ordinary Egyptians selling their pounds for dollars, fearing that further political instability will erode their local currency savings.

The pound last traded at LE6.45 to the dollar on Sunday. Markets were closed on Monday for a public holiday marking Coptic Christmas. The currency has now lost more than a tenth of its value since Mubarak's overthrow.

Trying to revive an economy pummeled by a turbulent political transition, the Islamist-led government struck an initial agreement on the IMF Stand-By Arrangement in November.

But last month Cairo postponed formal conclusion of the deal because of new political confrontations and protests ignited by Morsy's drive to fast-track a new, Islamist-tinged constitution that was approved in a popular referendum.

Confronted by lethal street violence at the time, Morsy postponed planned tax increases seen as part of a package of austerity measures needed to secure the IMF loan.

Egypt must now renegotiate some terms of the accord, and economists say the IMF board's approval is not a certainty.

In the past two years, Egypt's finances have been bolstered by aid from foreign donors such as Qatar, which the government says has deposited US$2 billion at the central bank.

Qatari Prime Minister Sheikh Hamad bin Jassim al-Thani is due in Cairo on Tuesday for talks with Qandil that would include "ways of supporting economic, trade and investment ties in this important period," Egypt's state news agency said.

With parliamentary elections approaching, Morsy has seemed wary of any action that could undermine the popularity of the Muslim Brotherhood, which propelled him to power in a June vote.

Parliamentary election

The parliamentary election process is due to get under way within two months of the passage of the new Constitution, which was signed into law on 26 December. However, the vote could be pushed back slightly by the need to secure the constitutional court's approval of a new election law, say some analysts.

A slight delay might suit the Brotherhood, letting Morsy secure the IMF deal while allowing extra time for his group to explain its merits before the election. "It would allow a window between the IMF and the elections to argue they are fostering an economic recovery," said a Cairo-based diplomat.

Qandil said on Sunday the government would seek to reassure the IMF about the government's economic plans and the economy's capacity for recovery.

Finance Minister Al-Morsy Al-Sayed Hegazy, who was sworn in on Sunday as part of a cabinet reshuffle, said he was ready to complete discussions on the IMF loan.

"We think there is enough IMF shareholder support and interest in the near-term stability of Egypt that negotiations will likely reach a timely agreement shortly," Bank of America Merrill Lynch (BAML) said in a note released on Monday.

"Should Egypt fail to seal a deal shortly or delay it for too long, a hard landing would ensue, along with a large (Egyptian pound) devaluation."

Having spent more than US$20 billion defending the pound since Mubarak's fall, the Central Bank introduced the new system for auctioning foreign currency to preserve what it described as critically low foreign currency reserves.

The Central Bank said on Sunday its foreign reserves had inched down US$21 million in December to US$15.015 billion. Economists had expected a steeper fall.