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November 14, 2012 6:46 pm
The EU pledged up to €5bn in aid to Egypt on Wednesday, the Egyptian government said, as Cairo and the International Monetary Fund neared agreement on a $4.8bn loan that is seen as a lifeline to the country’s struggling economy.
The EU package includes a €2bn loan from the European Investment Bank to be disbursed over the next two years.
An IMF team has been in Cairo over the past fortnight for what people close to the talks say is an attempt to finalise a loan agreement which is crucial to unlocking much-needed foreign assistance and shoring up foreign exchange reserves.
Originally scheduled to leave on Wednesday, the IMF team said it was extending its stay, a sign that a deal could be imminent.
“The mission has been working closely with the authorities on their economic programme,” the team said in a statement. “The mission will remain in Cairo for a few more days to continue its work and build on the good progress already made.”
Since last year’s revolution ended the 30-year-rule of Hosni Mubarak, tourism and investment have plummeted and foreign reserves have fallen by more than half to $15.5bn – just above the critical amount needed for three months’ import cover.
But although badly needed, the IMF loan is controversial. Some critics charge that negotiations with the fund lacked transparency and accuse the government of replicating the policies of Mr Mubarak by resorting to the IMF. Western countries, anxious about instability in the Arab world’s largest nation, are understood to back the loan.
Although the $4.8bn under discussion with the IMF is less than half of what Egypt needs to plug its almost 11 per cent deficit, a deal is expected to help unlock other external finance from Arab, European and multilateral donors.
Few details have emerged from the Cairo talks, but the government’s “development” plan unveiled on Tuesday by Hisham Qandil, the prime minister, targets a deficit of 10.7 per cent in the current fiscal year, which ends in June 2013, through widening the tax base and reducing energy subsidies.
However, the plan posted on the prime minister’s Facebook page provides no timeline or specifics on the implementation of key fiscal changes. It foresees economic growth of 3.5 per cent in the current fiscal year and the creation of 700,000 jobs during the same period. It also targets $25bn in foreign reserves by the end of June.
But while analysts describe the growth figure and the predicted deficit as realistic, they say they are bemused by other targets. The lack of detail on the proposed fiscal measures has also drawn criticism.
“The plan includes a set of targets, which in our opinion, seem unrealistic, especially that there is no clarity on how they are to be achieved, “ said Beltone Financial, a Cairo-based regional investment bank. “This is especially true since most of the tools needed to achieve these targets are still a work in progress and have not been implemented or even approved.”
Parliamentary elections are expected early next year, and observers say it is unlikely that any unpopular fiscal measures will be implemented before the poll in case they undermine the electoral chances of Mr Morsi’s Freedom and Justice party.
Mohamed Abu Basha, Egypt economist at EFG-Hermes, the regional investment bank, queried the projected level of foreign reserves, noting that Egypt already had spending commitments of $5-6bn over the next six months and that it was unclear how an additional $10-$15bn would be found to raise them to $25bn.
“They didn’t clarify how they could reach this figure,” said Mr Abu Basha. “The plan largely talks about general issues and general long-term targets, but this is disappointing because the short term is more crucial now.”
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