Cairo has been asking international donors and lenders for funding help after protests that ended President Hosni Mubarak’s 30-year rule scared away tourists and investors, two of its main sources of foreign exchange.
An IMF team was in Cairo this week to discuss a proposed agreement, which could be worth between $3 billion and $4 billion and provide a framework for other donors to offer additional support.
“The IMF agreement is difficult because of conditionality. It should require reform measures. But the Egyptian government says it is not in a position to agree to any,” said a European diplomat.
The IMF instead will probably come up with a short-term agreement with very soft terms.
“What is likely to come out is a short-term bridge finance of about 1-1/2 years, until a government with a mandate is elected,” the diplomat said.
Egypt, now ruled by an army council, holds a parliamentary election in September, with a presidential poll to follow.
The country’s central bank said it would not accept a program of measures but Cairo has told donors it faces a $10 billion-$12 billion balance of payments gap in 2011/12, diplomats said. Egypt’s financial year starts on July 1.
Over the last week, the World Bank, Saudi Arabia, Qatar, the US and other donors have pledged billions of dollars in various forms of aid.
The European Union would consider providing several hundred million euros of its own aid once an IMF agreement was signed, the diplomat added.
The Group of Eight biggest economies, which is starting a summit on Thursday in Deauville, France, is also expected to approve billions of dollars in aid.
The IMF would normally require Egypt to commit to measures to cut its budget deficit, which is expected to rise to about 10 percent of gross domestic product in the 2011/12 fiscal year, diplomats said.
Egypt resorted to IMF help during the 1990s but has otherwise generally been loath to be perceived to be taking orders from foreign institutions.
The current interim government that took over after Mubarak was toppled in February would be very reluctant to submit to any IMF-imposed austerity measures as it faces intense pressure from a restless public to quickly boost living standards.
“We definitely are not going to take any conditions from anyone. We will put the program that we see is for Egypt. We will not take any conditions,” said Hisham Ramez, deputy governor of the central bank.
“They are just helping us, projecting what we need. But it’s our say, not their say. This is very clear,” he said at a news conference attended mainly by the Egyptian press.
Diplomats say that, rather than impose austerity measures, the IMF is likely to require Egypt to work on making progress in democratic reform, improve tax collection and impose capital gains taxes that would reduce so-called “hot money” flows in and out of the country.
Another possibility would be to mandate a minimum level for foreign reserves as a discreet form of pressure on Cairo not to use up reserves to support the Egyptian pound.
But Ramez said such measures had not been part of the discussions with the IMF.
“No, no, no. There is nothing like that. We did not agree on anything like that,” he said.
Since political protests first erupted on Jan. 25, the pound has depreciated by less than 3 percent against the dollar, despite the loss of revenue from tourism and investment.
Diplomats said Egypt’s economy could be back on its feet at the end of the 1 1/2 year bridge financing period if all goes well. If it does not, and the balance of payments remain negative, Egypt could yet be forced to accept a standby program that would require more stringent economic reforms and measures to slash its budget deficit.
