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Ailing Egypt seeks $4.8 billion IMF loan

Associated Press
In this image released by the office of the Egyptian Presidency, International Monetary Fund Chief Christine Lagarde, second right, meets with Egyptian President Mohammed Morsi, right, in Cairo, Egypt, Wednesday, Aug. 22, 2012. Egypt’s prime minister says his country has formally asked the International Monetary Fund for a $4.8 billion loan to help boost its battered economy, and that he expects to reach a deal by the end of the year. (AP Photo/Egyptian Presidency)
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In this image released by the office of the Egyptian Presidency, International Monetary Fund Chief Christine Lagarde, second right, meets with Egyptian President Mohammed Morsi, right, in Cairo, Egypt, Wednesday, Aug. 22, 2012. Egypt’s prime minister says his country has formally asked the International Monetary Fund for a $4.8 billion loan to help boost its battered economy, and that he expects to reach a deal by the end of the year. (AP Photo/Egyptian Presidency)

CAIRO (AP) — Egypt formally asked the International Monetary Fund for a $4.8 billion loan on Wednesday, seeking a desperately needed rescue package for its faltering economy but raising the possibility of painful restructuring in a country still reeling since its revolution more than 18 months ago.

The loan deal, which Egypt says it will reach by the end of the year, presents a major test to the Muslim Brotherhood-rooted president, Mohammed Morsi, the country's first ever freely elected leader, brought to power after the fall of Hosni Mubarak.

The IMF has avoided making specific conditions for a loan but it seeks a cohesive government plan for restarting economic growth and reducing a deficit that has grown to $23.6 billion, some 8.7 percent of gross domestic product.

A key part of that will likely be reducing subsidies that suck up a third of the government budget every year. Touching those subsidies, however, could bring social upheaval, since they keep commodities like fuel and bread cheap for a population of around 82 million, some 40 percent of whom live near or below the poverty line.

"The government will have to take urgent measures, at the top of them cutting energy subsidies," said Mohammed Abu Basha, a Cairo-based economist at investment bank EFG-Hermes Holding SAE. The biggest subsidies are those on fuel — including gasoline and cooking gas — costing the government some $16 billion a year.

Egypt's upheaval since the 18-day uprising that led to Mubarak's ouster on Feb. 11, 2011, has pushed its economy toward the brink. Amid near constant instability since, foreign investment has dried up. Revenues from tourism — one of the country's biggest money makers and employers — fell 30 percent to $9 billion in 2011 and the industry is only making a meager recovery.

Meanwhile, the government has been burning through its foreign currency reserves, which have plummeted by more than half, to prop up the Egyptian pound and prevent a devaluation that could spur inflation.

The government also faces mounting demands to increase salaries for the millions of civil servants and public sector workers and boost social spending. Infrastructure has crumbled, with electricity and water outages pervasive this summer, bringing angry complaints, some directed at Morsi.

Egypt's hope is that the IMF package — its first loan from the organization in nearly 20 years — would provide not only a cash boost but, more importantly, a seal of approval that will bring back international investment.

Morsi, his Prime Minister Hesham Kandil and other Egyptian officials met Wednesday with IMF chief Christine Lagarde in Cairo. State TV said Egypt requested a $4.8 billion loan, up from the $3.2 billion proposal discussed earlier this year. Finance Minister Momtaz el-Said told the state-run Al-Ahram newspaper that the increase was needed because the deficit had grown with the drop in income from investment and tourism.

Lagarde's visit "gives a positive message to Egypt and the whole world that Egypt is stabilizing and that the economy is heading to a recovery," Kandil said. He said he expects a final agreement by December.

Kandil said his government has drawn up a comprehensive economic recovery plan for the IMF that includes strategies to counter the deficit, encourage investment and ensure that subsidies reach those most in need. He did not provide details.

Lagarde said "Egypt faces considerable challenges." An IMF team would start talks in September with the government over its recovery plan and the loan, she said.

"Getting the country's economy back on track and raising the living standards for all will not be an easy task," she said. "The Egyptian people have legitimate expectations for a better life and greater social justice. We at the IMF, stand ready to help."

Abdel-Hafiz el-Sawy, a chief economist with the Muslim Brotherhood who met with earlier delegations from IMF, acknowledged that "the government is facing a mountain of problems, and whenever it gets out of one trap to fall in the next."

"The IMF loan is small but its impact is in the fact that it gives Egypt a certificate that improves the country's economic prospects," he said.

Initial talks over a $3.2 billion loan stalled earlier this year amid wrangling between the military generals who ruled the country since Mubarak's ouster and Islamists who won the majority in the now-dissolved parliament. The Brotherhood had opposed letting the interim, military-appointed government sign a deal putting financial burdens on the next government. The IMF insisted on political consensus before approving the loan.

Since then, Morsi was inaugurated in late June and a month later formed the Kandil-led Cabinet, and the military handed over authority.

The plan presented to the IMF appears to be more or less similar to the previous government's plan, which the Islamist-led parliament had opposed, according to el-Said, the finance minister who also served in the former government, in an interview with el-Shorouk daily.

Now Morsi faces the tough task of economic reform. Already, the government has reduced fuel subsidies to energy-intensive factories which were seen as giving a bonus to the wealthy and increased taxes on Egyptians whose income exceeds 10 million a year.

But still remaining is the question of how to deal with subsidies that keep prices dirt cheap for gasoline and for butane fuel that many rely on for cooking. The gasoline subsidies are widely seen as inefficient because wealthier drivers benefit from them as much as or more than the poor.

The government is studying alternatives, such as distributing to the poor coupons for gas and fuel, while restructuring the tax system.

El-Said, the finance minister, also ruled out a devaluation of the pound — suggesting that the government hopes that an IMF will bring enough local liquidity to keep the currency strong without infusions from the state's reserves.

The IMF loan will not be enough to cover all Egypt's financing needs. IMF officials said earlier that the country needs a total of $10 billion to $12 billion in outside funding over the next 12 to 15 months.

Qatar has delivered around $500 million of $2 billion it has promised Egypt. Saudi Arabia promised to deposit $1.5 billion in Egypt's Central Bank. But other aid packages from the European Union, the oil-rich Arab Gulf states and other sources will heavily depend on Cairo's ability to secure the IMF loan.

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