Egypt asks for 'sizable loan' from Russia

2013-04-26 09:15
Mohammed Morsi (AFP

Mohammed Morsi (AFP

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Cairo - During a meeting in a Black Sea resort city, Egypt's president and members of his government turned to Russian President Vladimir Putin and asked for a sizable loan, according to Putin aide.

Egypt's Mohammed Morsi appealed to Moscow and Cairo's past ties, recalling how the former Soviet Union stepped in to finance the building of the Aswan High Dam in the 1960s after the United States abruptly withdrew from the project, according to Russian media.

Still, the Russians' response seemed rather equivocal: We'll talk later.

Egypt has been knocking on doors around the region seeking billions of dollars in loans, bond purchases and grants, trying to fill rapidly draining coffers so it can keep power stations running and bakeries churning out cheap bread for the country's millions of poor.

The drive appears to have accelerated ahead of the summer, when the country's fragile electricity network often breaks down under increased energy use and when officials have predicted a drop in wheat supplies.

Several states — including Qatar and Libya — have responded in recent weeks. But strikingly, a few countries have balked, wary of pouring money into Egypt's worsening economy without some political stability after two years of turmoil since the fall of autocrat Hosni Mubarak.

Moreover, economists worry that Morsi's government is relying on an unsustainable policy, scrambling for foreign cash as a temporary cushion that allows it to put off major — and highly unpopular — economic reforms and avoid compromise with its political opponents.

The most crucial piece of aid, a $4.8bn loan from the International Monetary Fund, has been delayed by months of negotiations over how Egypt will reduce its massive system of subsidies, which the poor rely on for cheap fuel and food but which suck up large portions of the budget.

The problem

The government has taken some limited steps, but many economists believe it is postponing extensive reforms until after parliament elections to avoid austerity measures that could hurt Morsi's majority Muslim Brotherhood party at the polls.

The problem is: No date has been set for elections, and they won't be held until the fall at the earliest. That could mean months of economic limbo, with foreign lenders and donors reluctant to give unless there is a clear economic plan. Securing the IMF loan is considered key to boosting investors' confidence in Egypt and unlocking further aid.

In the meantime, the government has been seeking injections of cash.

Overall, Egypt has sought or is in talks for more than $30bn since the fall of Mubarak — the vast majority since Morsi was inaugurated in June, according to a compilation by The Associated Press of what has been announced. In an email, an official in the president's office could not confirm exact numbers but said the figure is "close to accurate."

The official, who was not authorized to talk to reporters and spoke on condition of anonymity, did not give further comment on economic policy.

The search for cash has opened Morsi's government to embarrassing opposition taunts that it is begging.

After Morsi and his team returned from Russia, his minister of industry and trade this week denied they asked Moscow for a loan, despite the Putin aide's public description of the closed-door meeting.

"Egypt does not beg anyone for aid," Hatem Saleh said. "What has been reported in the media is not worth responding to."

Political uncertainty

Egypt's need for funds is dire. After the 2011 uprising that toppled Mubarak, foreign investment in Egypt shriveled and tourism — a top revenue source — took a heavy blow. Neither has recovered since, with investors and tourists still scared away by the country's unrest and political uncertainty.

With revenues down, the government has been burning through its foreign currency reserves, which have fallen to just $13.4bn, a third of the pre-uprising level. Much of that has gone to propping up the currency and importing fuel and wheat for the subsidy system. Egypt spends some $14.5bn a year in subsidizing fuel and $4bn in food subsidies, the bulk of which goes to bread. Nearly half of Egypt's 90 million people live near or below the poverty line of $2 a day.

Egypt seems to be "reaching out to others as a backstop" until the IMF deal is sealed, said economist William Jackson of the London-based consultancy Capital Economic. He said there is "a real lack of clarity" on what it has received from other countries.

This month, oil-rich Qatar — a longtime ally of the Brotherhood — promised $3bn, on top of the $5bn it has already given Morsi's government. Libya announced this month it has deposited $2bn in Egypt's Central Bank.

Egypt asked Iraq for $4bn in March, but Baghdad declined, judging it "too risky", according to an Iraqi official who spoke anonymously because he was not authorized to talk to reporters. Egyptian officials have declined confirmation of the request, saying only that discussions are ongoing with Iraq.

In Russia, Putin aide Yuri Ushakov was quoted in local press saying Egypt asked last week for a loan that "was not small." The two sides agreed to "get in touch about it," he said.

Turkey in September promised $2bn in loans, half of which has been delivered, and Saudi Arabia gave around $1.5bn in loans and grants.

"Propping up the budget this way only serves to artificially cushion the Muslim Brotherhood and allows them to delay an economic reform plan," economic expert Farah Halime wrote in her blog Rebel Economy. Without the funds, "the Brotherhood would be forced to be more conciliatory toward opposition groups and find compromises".

Deadly street protests

Morsi last fall reached a deal with the European Union to provide $6.5bn over the next two years, mostly in loans that EU officials said would be directed at development projects. But parts of the package depend on Egypt reaching a deal with the IMF.

In recent days, the IMF and Egypt have given more hopeful signals. The presidency said Wednesday it expects a deal soon.

But both Egypt's largest investment bank EFG-Hermes and Capital Economics are sceptical, saying they did not expect it until after elections.

Egypt and the IMF were close to a deal in December, but Morsi quickly rescinded planned tax hikes and other measures in the face of public outcry. A burst of deadly street protests further set back the economy, forcing the IMF and Egypt to revise forecasts.

"We understand how important the IMF deal is," Mohammed Gouda, a member of the Brotherhood's economic committee, told The Associated Press. "We don't want loans or aid ... We want investments."

Economists at EFG-Hermes criticised the reliance on loans and aid to bridge the gap.

Such "last-minute, unstructured support further increases moral hazard risk," they said in a recent report. The aid is "making us less optimistic about the Egyptian authorities' ability and willingness to introduce a series of structural reforms in the short term to avert a balance of payments shock."

Still, Halime argues that loans and aid that go to actual development projects — as opposed to just filling the budget hole — should not be held up until the politics are worked out. Otherwise, she told AP, "you are waiting on Egypt's president to solve the problems while there is a society here that needs assistance now."

 

Read more on:    imf  |  mohammed morsi  |  hosni mubarak  |  vladimir putin  |  russia  |  egypt  |  north africa

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