IMF loan and Egypt: between rock and a hard place

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IMF Managing Director Christine Lagarde (L) talks with Egypt's newly Prime Minister Hisham Kandil during their press conference at the cabinet headquarters in Cairo, August 22, 2012. Photo/Asmaa El-Tobi
IMF Managing Director Christine Lagarde (L) talks with Egypt’s new Prime Minister, Hisham Kandil, in a press conference at the Egyptian government’s cabinet headquarters in Cairo, August 22, 2012. Photo/Asmaa El-Tobi/IMF. Photo/Asmaa El-Tobi/IMF

There is a clear divide between what Egypt wants in order to address its economic woes and the options it has in order to make it happen. On one hand, it wants to achieve economic stability and political certainties in order to kick start its economic growth and development  To achieve this, they need an influx of finances as the state itself teeters on weak ground. The funding is available from IMF but that means new terms and conditions being applied and a wave of austerity measures that are not welcomed by the country.

A $4.8 billion loan has been tabled based on conditions but it has been rejected outright. The state still feels that the cut on spending, energy subsidy and hike in taxes will be disastrous for the already disliked government.

The rationale provided by the Mursi government is that the poor of the country are already under a lot of burden and this will only add to the woes of the people. The ousting of Hossini Mubarak has also shown that people will protest and rally against any measure they feel is not justified and due to political deadlock in place, it can be the last nail in the coffin. Government officials feel that the known evil is much better than the unknown blessing and that they would rather deal with the problems already in place rather than mount more pressure through these reforms.

Some economic experts do feel that even though it will be an unpopular measure, it is still the need of the hour and something has to be done to provide support to the declining economy before things get worse. A point might also be reached where there is no return and the government might be arm twisted into putting these measures in place.

Social problems are also piling up due to the economic woes like lack of fuel, electricity and running water in the houses and protests have become a norm. The political scenario is also fractious as opposition is still rallying against Mursi and his rule and there is a power grab that seems to plague the whole system.

Economic reforms and austerity measures seem to be the last issue on the table at this point as it is feared that the country can spiral into chaos if problems are not dealt with. With all these in place, IMF loan is seen with a disdain and there is no support for the loan until some sort of middle ground is reached.

The loan is still vital for the country as its currency and foreign reserves are decimating rapidly. With the domestic situation, its currency has weakened significantly and foreign currency reserves are disappearing. The loan will provide a much needed boost to its currency which is used to import most of its food.

There is a downward spiral coming to the foray where the problems are causing more pressure to turn down the aid which can lead to further problems. A financial meltdown is an extreme case that can take place if no aid is provided. This situation seems unlikely as there are options to get debt and aid from Qatar and other neighbouring countries.

Egypt has failed to accept any such loans in the past due to the strings that were attached to it and even though the problems it is facing now could have been weakened, still it treasures its sovereignty more. The next few months are vital for the county as it has to be seen how the political, social and economic developments impact in the future.

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