Egypt may need $15bn from IMF to avoid crunch

Egypt has little choice but to return to the IMF to help it find up to $15 billion to stave off a full-blown financial crisis, but the ruling army seems to be stalling to avoid blame for approaching a foreign institution for cash on its watch, economists said.

The $3 billion facility from the International Monetary Fund (IMF) that Egypt negotiated then rejected in June may no longer be enough to manage an orderly currency devaluation and get a growing budget deficit under control.

Adding to woes of an economy hammered by months of turmoil and violence, credit rating agency Moody's downgraded Egypt by a notch this week and warned a further cut could be on the way because of political uncertainty.

'It's not enough, because when the $3 billion was negotiated in June, the situation was very different,' said Said Hirsh, an economist with Capital Economics.

Two finance ministers during Egypt's political transition, both of now out of office, the planning minister who is still in her post and the new prime minister have all indicated Egypt was considering or needed the IMF's support.

But on most occasions as government officials seem to edge close to signing up, the army has indicated its reluctance.

'The easiest thing would have been for the military council to accept the loans from abroad, give it to Egyptians to live a better life and then hand over power and the Egyptian people would have been responsible to repay these debts,' General Mokhtar al-Mullah told reporters this month.

IMF hesitations

For many Egyptians who follow the nation's finances, the IMF is associated with stringent conditions that have often hurt many in the society, though economists say and officials privately admit the measures have helped the economy as a whole.

Officials have also quietly acknowledged -- and sources with a knowledge of talks with Washington-based institutions have concurred -- that the last facility came with very few strings.

Army-appointed Prime Minister Kamal al-Ganzouri, also premier in the 1990s when Egypt was under an IMF programme, said last week the government would not agree to an IMF facility until the outlook for the budget was clearer.

But he said it could be necessary and has warned that the country needed some austerity measures to correct its finances, though the most needy would be protected.

'If we are forced to resort to the IMF, we will resort to it. This is a matter open for discussion,' he said.

But the army rulers and its cabinet are wary of tightening purse strings when the uprising that ousted Hosni Mubarak was fuelled partly by the deep anger of many Egyptians who felt they were growing poorer as a well connected elite prospered.

Egypt's economy has been reeling since the uprising that ousted Hosni Mubarak in February frightened away tourists and investors, and some economists say if Egypt does not come up with external funding soon it could face both a currency and a budget crunch in the first quarter of 2012.

Problems multiply

Economists say political and economic problems have grown since Egypt rejected the IMF facility in June.

Dozens of protesters have died in clashes with army, the budget deficit has mushroomed, the cost of domestic borrowing has increased, foreign reserves have fallen and demand for Egypt's exports has fallen as the global economy weakened.

Any IMF package would almost certainly need to be renegotiated and enlarged, and any delays will only compound the crisis, the economists said.

The Egyptian pound's losses are likely to accelerate, driving inflation and interest rates on government securities yet higher, sparking further civil unrest as more people are plunged into poverty and causing already declining FDI to drop further.

Several economists estimated that any IMF package would now need to be worth $10 billion to $15 billion.

'I suspect the government was hoping the economic conditions would be different now than they actually are,' Hirsh said.

Part of the IMF funding could be used to help the government finance its budget deficit, now running at about 11 percent of gross domestic product, at cheaper rates of interest.

By relying solely on the domestic market for funds, the government in recent weeks has driven up interest rates on some of its securities to above 15 percent, versus the 1.5 percent it would have been paying for the IMF funds.

The higher cost of debt is in turn widening the deficit and forcing the government to borrow even more.