Amid rising risks of sovereign debt, a technical delegation from the International Monetary Fund (IMF) has started detailed negotiations with the Egyptian Government over a $3.2 billion loan to get the country's battered economy back on its feet. The IMF mission in Cairo comes after a round of talks earlier this month to continue work on Egypt's economic programme, which could in turn be supported by the Fund. Although Minister of Finance Mumtaz el-Saeed has made it clear that social benefits for the low brackets will remain intact, analysts say that the major obstacle to secure the IMF's $3.2 financial aid is the cost of fuel subsidies, which account for 20 per cent of the State budget. "The IMF will insist on Egypt slashing its public expenses to narrow the budget deficit. But I doubt that the Government can really reduce public spending amid workers' demands and public employees' nationwide rallies," Nashaat Sabry, a Cairo-based analyst, told The Egyptian Gazette. Fuel subsidies are forecast to hit LE95 billion in the fiscal year 2011/2012 according to the Ministry of Oil. The budget deficit is seen to rise to LE144 billion ($24 billion) from a previous LE134 billion forecast according to official reports. Egypt's fiscal year begins on July 1. "The IMF sent a mission to Cairo for talks about containing the budget deficit. I think they wanted to test the waters, so the technical team could look into how the Government was planning to reduce its spending," Sabry said, referring to the visit of an IMF delegation led by Masood Ahmed, the Director of the Middle East and Central Asian Department at the IMF, in January. Ahmed said at the time that his talks with Egyptian officials were ‘productive'. "The programme developed by the Egyptian authorities and its key policies are currently being discussed with emerging political parties to ensure broad political support. This should help reduce uncertainty and boost confidence in the programme's successful implementation," Ahmed explained. But can Egypt really reduce its spending? Will its decades-long subsidy programme be affected? "I believe the subsidy schemes will be intact. No government can take that risk, particularly not now. The Government is expecting a deficit of 9 per cent. But it may hit 10-11 per cent of the Gross Domestic Product (GDP)," Sabry forecast. The Freedom and Justice Party, the political wing of the Muslim Brotherhood that dominates 40 per cent of Parliament, protested against the IMF loan, citing that the Government was an interim one and had not revealed how it would spend the loan. But as the country's sovereign debt rating is being downgraded, the IMF loan negotiations may reach a deadlock. Moody's Investors Service has downgraded Egypt's Government bond rating by one notch to B1 from Ba3 with a negative outlook, citing that external and fiscal positions "may remain particularly fragile". Moody's said the rating could be downgraded further in case the foreign exchange reserves continued to decline to a level that threatened the authorities' debt repayment capacity or its ability to support the Egyptian pound. "Falling foreign reserves will also pressure Egypt's negotiations with the IMF," Sabry said, noting that he would not be surprised if the negotiations failed.
