The International Monetary Fund confirmed Thursday it was sending a mission to Egypt to discuss possible financial aid to the country, even as analysts cautioned that the potential lifeline may not be enough to stem serious economic worries that materialized following former President Hosni Mubarak's ouster.
Egypt turned down a US$3 billion IMF load in June, when officials argued that they did not want to saddle a new, post-Mubarak civilian government with additional debt.
In the aftermath of the popular uprising that toppled Mubarak, the country's economic situation has deteriorated sharply over the past year, with net international reserves falling by 50 percent and tourism and foreign investment hammered.
With the yields it is forced to pay on bonds climbing, and its sovereign rating repeatedly downgraded by the three major international ratings agencies, Egypt is scrambling to find funds to cover budget shortfalls as it looks to satisfy an increasingly angry population.
The mission from the international organization will be in Cairo next week to "initiate discussions for possible IMF support" that would serve as the "first step" in the process leading to possible financial assistance, IMF spokesman Gerry Rice said in Washington.
Analysts question whether the funds, if offered and accepted, would be enough to help overcome a financial crunch that is being amplified by depreciation pressures on the Egyptian pound and investor unease with the course of the country's political transition.
"The proposed that a $3 billion facility would help plug a gaping hole in the budget. But it would not be sufficient to stabilize the country's growing external payments imbalance," London-based Capital Economics said in a research note. "A currency devaluation still seems likely."
Egyptian officials have stressed they want to keep the projected budget deficit at 8.6 percent of the gross domestic product — a target economists have said may not be attainable given the ongoing instability and the need to fund a slew of social projects and meet promised pay hikes in the public sector.
Capital Economics said that over $62 billion of Egypt's debt is due to mature this year, equal to roughly 30 percent of GDP.
"Even if the government is able to finance most of it domestically, it is likely that this would come at a higher cost," said the report. In addition, "Egypt's spending commitments on fuel and food subsidies and public sector salaries are difficult to scale back if the government needs to tighten its belt."
Subsidies account for about 35 to 40 percent of the government's total spending, and officials are worried that the IMF loan could carry with it preconditions such as scaling back on those expenditures that could be politically untenable in a country where the unemployment rate has climbed since the ouster of Mubarak in mid-February and headline urban inflation crept up, year-on-year, in December to 9.55 percent.
A devaluation of the pound or even its depreciation because of current economic conditions, would increase the country's import bill and stoke inflation. The mass uprising that began nearly a year ago was built on a slew of economic complaints by an overwhelming majority of the country's roughly 85 million citizens, and a spike in food prices and other costs would likely not sit well.
"Since food inflation was a key driver of the Egyptian revolution, political risks will increase," said Capital Economics.
The IMF mission's visit comes as officials have repeatedly complained they have received little of the billions pledged by foreign donors following Mubarak's ouster to support the transition to a democracy and support the battered economy.