An emergency IMF loan for Egypt?

Several sources are reporting that the International Monetary Fund (IMF) may offer Egypt a stopgap loan while negotiations continue on the main $4.8 billion package. An IMF spokesperson would say only that the fund "is fully committed to supporting Egypt at this critical time" and is "currently reviewing the authorities’ economic program and their macroeconomic projections and…are discussing with them the next steps in our engagement."

There are conflicting accounts of whether Egyptian officials belive such an emergency measure is necessary. Negotiations on the larger loan package have proceeded fitfully for months but have apparently run into fresh difficulties. The Financial Times has this account of the key sticking points:

At a time when Egypt’s foreign reserves have reached $13.5bn – below the critical level of three months of imports – Cairo favours a gradual approach to reform even as it is forced to cut its imports of fuel and wheat. Another complicating factor in IMF negotiations is the fact that Mohamed Morsi, the Islamist president, is reluctant to introduce measures such as a sales tax ahead of parliamentary elections.

The IMF deal faces even deeper potential problems both from the demand and the supply side. The post-Mubarak political atmosphere in Egypt is not particularly friendly to the IMF; many Egyptians recall that the Fund several times provided backing to the government of Hosni Mubarak. An Islamist party has insisted that any deal with the international lender must secure religious approval. As Reuters reported last month:

The Salafist Nour Party says the loan agreement, seen as vital to easing a deep economic crisis, must be approved by a body of senior scholars at Al-Azhar, a religious institution whose new role is embedded in the constitution.

Such a challenge could complicate the Muslim Brotherhood-led administration’s effort to finalize the International Monetary Fund deal that was tentatively agreed last year but shelved following political unrest in Cairo.

Meanwhile, key IMF board members (and the United States in particular) face questions about whether Egypt’s troubled government deserves international funding. Several observers have insisted that any loan package include strict conditions on human rights and freedom of expression. All of which means that a deal struck by IMF staff and Egyptian officials may still face serious obstacles. 

The tense dance continues in a financial atmosphere that appears increasingly threatening. The ratings agency Fitch warned two weeks ago that further delay could be dangerous:

An IMF deal is vital for a sustained improvement in the balance of payments, and to prevent uncontrolled currency depreciation. A sustained period without IMF support could result in tighter capital controls and a sharper fall in the pound. The need for an IMF deal is becoming more pressing in the absence of further pledges of bilateral support beyond a reported agreement by Qatar to buy USD2.5bn of Egyptian T-bonds in March.

Last week, U.S. Secretary of State John Kerry released millions in U.S. budget aid after receiving assurances that Egypt would "complete the IMF process." It now looks increasingly likely that some kind of emergency loan will be necessary to buy time.