Egypt has formally requested a $4.8 billion loan from the International Monetary Fund, a presidential spokesman said on Wednesday during the visit to Cairo by IMF chief Christine Lagarde.
“We have officially requested a $4.8 billion loan from the IMF and talks are currently going on inside about the request,” spokesman Yasser Ali told Reuters as Lagarde held discussions with President Mohamed Mursi. He said details would be announced later.
The managing director of the International Monetary Fund (IMF) arrived in Cairo on Tuesday for key talks with Egypt’s newly elected government over a long-awaited financial package to support the country’s ailing economy.
The loan negotiations could take months to be finalized, Egyptian officials told Al Arabiya. The IMF has already agreed to a previous loan request of $3.2 billion. Any increase in the requested amount must first be approved by the IMF’s board of directors before any deal can be sealed.
Christine Lagarde's visit marks the first time an IMF managing director visited Egypt since 2008, when then-director Dominque Straus-Khan came to Cairo. It comes at a time of economic uncertainty and a drop in Egypt’s foreign exchange reserves below $15 billion, barley enough to cover the cost of three months of essential imports.
The IMF chief will begin her one-day visit by meeting with President Mohamed Mursi at the presidential palace and will go on to meet with the economic team that includes Finance Minister Mumtaz al-Saeed and Central Bank Governor Farouk el-Okda. She will then hold a joint press conference with Prime Minister Hisham Kandil.
Upon her arrival in Cairo, Lagarde told Al Arabiya that she came with a “positive” message for the Egyptian people.
The purpose of the trip is to express the IMF’s continuous commitment to supporting Egypt and its people during its transition and to paving the way for resuming loan negotiations.
An announcement was still expected from Lagarde on Wednesday on a timeline for resuming loans’ talks in earnest. Previous negotiations stalled as a result of political bickering between Egypt’s now dissolved Islamist-dominated parliament and the military-appointed cabinet. It is thought that under the current administration, this stalemate can be broken.
The IMF has stipulated that any aid be contingent upon broad-based support for an economic program.
Earlier this year, officials from the Freedom and Justice Party (FJP) of the Muslim Brotherhood told Al Arabiya that they preferred exploring alternative sources of funding before resorting to borrowing.
An FJP member told Al Arabiya that resuming talking with the IMF did not constitute a change of position.
“There is no change in our position; we do not have a negative position when it comes to dealing with any international organization,” said Abdallah Shehata, economic advisor to President Mursi and member of the FJP.
“On the contrary, now we have a government that has been formed by an elected president and this president is working within his presidential platform.”
Shehata said the FJP has found problem with the lack of detail provided by the transitional government on its economic program.
“Unfortunately there was no cooperation with the previous transitional government,” he said, adding that he expected a final agreement to be reached in about two months.
The details of the new economic program are still unclear. A previous program, presented to the fund by the military-backed Cabinet, was described as vague by the Muslim Brotherhood and rejected by the dissolved Islamist-dominated parliament.
However, Islamist President Mursi retained the military-appointed Finance Minister Mumtaz al-Saeed, who drafted the previous economic program. This raised questions about how the new economic program will differ from the previous one and if the parameters of IMF negotiations carried out under the military-backed government of Kamal el-Ganzoury would change.
“We at the Freedom and Justice party refuse any talk of negotiating based on the Ganzoury principles,” Shehata told Al Arabiya.
“There is now an elected president, there is a government that must implement the presidential program,” he said. “You cannot negotiate based on principles laid out by a transitional government even if the minister in place is a continuation of the transitional government.
While the details remain murky, a viable economic program will need to address a number of pressing economic issues. The budget deficit, which is projected to reach $23 billion (LE 140 billion), will need to be reduced.
Egypt will also have to tackle the challenging issue of subsidy reform and in particular energy subsidies, which drained more than $15.6 billion (LE 95 billion) from the state budget in the previous financial year.
Subsidy reform is highly sensitive, given that 40 percent of Egypt’s population lives under the poverty line and depends on state-subsidized basic products.
Shehata confirmed that the president’s economic program includes reforms to the subsidy program.
“The Freedom and Justice Party and the presidential program talk about reforming the subsidy program but with mechanisms that do not affect the poor,” he said. “We consider this a red line.”
The government is reportedly preparing plans to begin reforming its energy subsidies in October of this year, as a step towards receiving an IMF loan, according to Egyptian daily Al Masry Al Youm.
The ministry of petroleum has reportedly presented suggestions to the prime minister which include changing the price of energy products and improving the efficiency of subsidies distribution through ‘coupons’ or ‘smart cards.’
Head of the General Authority for Petroleum Hany Dahy is quoted as saying that various ministries have agreed to test coupon distribution for gas canisters nationally this October with the aim of reducing subsidies to some energy products by 50 percent within 3 years and by 80 percent within five years.
In addition to addressing the budget deficit and subsidies, there have also been reports that the IMF could ask the authorities to adopt a more flexible stance on the value of the Egyptian pound. The central bank has been draining foreign exchange reserves over the past 18 months to prop up the local currency and prevent devaluation.
In the run up to Lagarde’s visit, the finance minister indicated that Egypt could request a amount larger than $4.8 billion, but that was the sum generally expected to be asked from the fund.
The IMF board is currently in recess and is expected to reconvene in October. This means that any loan deal would not be completed before then. Once the board gives its green light to the new amount, disbursements would be made immediately.
The interest on the larger amount would be the same as the previously agreed 1.1 percent and the repayment and disbursement schedule would depend on negotiations with Egyptian authorities. Egypt could also be granted a grace period before repayments must begin, but this would also depend on the outcome of negotiations.
(Carina Kamel is a Senior Correspondent at Al Arabiya and can be followed on Twitter @Carina_bn. )