DUBAI: Egypt's Muslim Brotherhood is holding the army to ransom. The moderate Islamist movement, which won almost half the seats in recent parliamentary elections, says it won't support a $3.2 billion aid deal with the International Monetary Fund. It has demanded new terms, or asked the army to step aside so a new government can negotiate with the fund. With Egypt running on thin foreign reserves, the military faces a tough choice. The Brotherhood may not be the only obstacle to an IMF deal but makes a fair complaint. It says it isn't against the principle of aid but objects to a transitional government setting the terms and spending the funds when ultimate responsibility to repay the loan will fall to the Brotherhood. The military has promised to hand over power after presidential elections, probably in late June. The IMF wants broad political backing before any deal is concluded. After last week's U-turn on its original pledge not to field a presidential candidate, the Brotherhood has thus given another sign that it craves power and doesn't trust the military. Excluding gold, Egypt has roughly $11 billion left in reserves after months of defending the pound to counter the adverse effect of tourism and foreign investment drying up. At the current pace of decline, reserves will be worth less than two months of imports by the end of June. The pound is widely expected to depreciate, with or without the IMF funds. But the difference, warns Capital Economics, could be an orderly devaluation — in the order of 20 percent — or a disorderly devaluation of up to 50 percent if Egypt is forced to devalue without support from IMF. A deal would send markets the signal that the country has a credible economic plan. Egypt's pound has depreciated just 4 percent against the dollar since the uprising. If the army doesn't bend to the Brotherhood's demands, Egypt can probably maintain its spend-and-defend policy until June or July. But that puts greater pressure on the military to ensure a smooth and fair presidential election is concluded on time. Otherwise it will carry the can for a messy unraveling of the pound. Una Galani is a Reuters Breakingviews columnist. The opinions expressed are her own.
