Draining cash, Egypt on $30 billion search for aid

By Aya Batrawy

Associated Press

Published: Friday, April 26 2013 6:36 a.m. MDT

With revenues down, the government has been burning through its foreign currency reserves, which have fallen to just $13.4 billion, 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 $14.5 billion a year in subsidizing fuel and $4 billion 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 Economics. 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 $3 billion, on top of the $5 billion it has already given Morsi's government. Libya announced this month it has deposited $2 billion in Egypt's Central Bank.

Egypt asked Iraq for $4 billion 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 $2 billion in loans, half of which has been delivered, and Saudi Arabia gave around $1.5 billion 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."

Morsi last fall reached a deal with the European Union to provide $6.5 billion 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 skeptical, 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 criticized 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."

Associated Press writers Max Seddon in Moscow and Don Melvin in Brussels contributed to this report.

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