Analysis: Egypt´s Brotherhood raises stakes by excluding IMF (REUTERS) By Patrick Werr CAIRO, EGYPT 04/11/12 2:45pm EDT)
Reuters News Service
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(Reuters) - In all but ruling out an early agreement on an IMF loan,
Egypt´s Muslim Brotherhood has dramatically raised the stakes in its
struggle with the army-led administration for control of a country
still reeling from a year of political turmoil.
The Brotherhood´s candidate for president, Khairat al-Shater, said
this week the group would not accept an International Monetary Fund
loan unless its terms were changed or a new government was formed to
monitor how it is spent, demands that almost certainly won´t be met.
Even without a loan before the presidential election in May and June,
whoever comes to power will be forced, sooner or later, to impose
hugely unpopular taxes and cuts in government spending to reduce
budget and balance of payments deficits inflated by a year of
political and economic turmoil.
But any delay in securing a loan brings closer the prospect of a
fully fledged fiscal crisis that would mean a jump in consumer prices
and interest rates, a sharp devaluation and huge pressure on banks.
It´s a game of brinkmanship in which the Brotherhood might be first
to yield to avoid inheriting an economy in tatters, fearing it will
end up taking the blame for painful measures that the current
government has repeatedly delayed.
The country´s transition to civilian rule will culminate at the end
of June, when the military hands power to a newly elected president
for whom the economy will be a top priority.
In the 14 months since the overthrow of Hosni Mubarak, Egypt´s army-
backed government has been supporting the economy largely by drawing
down reserves and borrowing from domestic banks, with interest rates
having risen to historic highs as funds grow tighter.
The government has spent more than $20 billion in foreign reserves to
prop up the currency since last year´s uprising. Reserves fell by
another $600 million in March to $15.12 billion, equivalent to less
than three months worth of imports.
Economists warn that with foreign reserves running low, the country
risks a disorderly devaluation of the currency unless it secures new
sources of funding. A political or economic shock could increase
pressure on the pound if it prompted people to switch funds out of
pounds and into dollars.
"If the IMF deal falls through, then the likelihood of foreign
capital returning to Egypt will diminish and there will be no let-up
in the pressure on the currency," said HSBC economist Simon Williams.
Barring shocks, the country should have a big enough financial
cushion to see it through for at least three months, until an elected
government is installed with a popular mandate to push through an IMF
The IMF, however, has demanded broad political support before it
signs any agreement, in particular from the Muslim Brotherhood, whose
Freedom and Justice Party won nearly half the seats in the new
Shater said he was not opposed to a deal in principle, but only to
the plan to disburse part of it while the army-backed transitional
government remained in power.
He said the Brotherhood might accept an IMF deal if the loan´s first
installment was reduced to $500 million from the current plan of
paying out more than $1 billion immediately upon signing.
DECLINING FOREIGN RESERVES
Economists say the central bank still has enough foreign reserves to
hold on well past the presidential election without having to devalue
"Capital flight has already taken place, and that´s going to leave
the central bank having to cover a shortfall of around $600-750
million a month from here on," said Williams, who estimated the
government could hold out for another six months.
But other economists warn that an outbreak of political violence
could provoke capital flight and disrupt tourism, which has yet to
recover since last year´s uprising. Similarly, a spike in oil prices
could drive up the cost of imported fuel.
The next three months hold potential political minefields, including
the increasingly polarized presidential election, a heated battle
over the wording of a new constitution and the verdict in the
politically charged trial of Mubarak, which is due to be read out on
Any resulting drain on dollars could exhaust the ability of the
central bank to defend the pound, which it has allowed to weaken by
only 3.5 percent against the U.S. dollar since the uprising.
"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," Said
Hirsh of Capital Economics wrote in an April 5 research note.
"The costs to the economy would be severe. This is likely to lead to
a spike in inflation, sharp hikes in interest rates, a potential
banking crisis and rapid fall in asset prices."
The government has been searching for ways to earn foreign exchange
to take the pressure off its reserves.
In November it began selling one-year treasury bills denominated in
U.S. dollars, an instruments that has now raised a total $4.75
billion, and on March 24 it began selling parcels of residential land
to Egyptians living abroad, a measure it hopes will eventually earn
it $2.5 billion.
It also wants to sell $1 billion in certificates of deposit to
Egyptians living abroad, but the plan has been delayed by technical
problems over their issue in one Gulf country, the planning minister
said last week.
Another option would be to implement capital controls to block major
shifts in funds.
One currency trader said rising concerns that the currency is headed
toward a devaluation has dried up the trade in Egyptian non-
deliverable forwards (NDFs).
"The NDF market is totally broken. Hardly anything trades now," said
the trader said. "There is no confidence in a remedy or timing of it,
so no one is providing liquidity."
"The large majority of players believe that it´s all but inevitable
that the currency will go unless there is a serious action plan, so
why bother selling U.S. dollars further than three months?" (Editing
by Giles Elgood) (© Thomson Reuters 2012. 04/11/12)
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