Cairo, Egypt (TML) – Egypt’s decision to reject loans from the International Monetary Fund (IMF) and World Bank may save the government unwelcome political controversy at home, but it risks undermining the country’s already severely strained economy, economists warned.

The terms of the IMF financing as well as the government’s plan to substitute it with lower spending and domestic borrowing remain murky. But economists said that without IMF help Egypt would almost certainly be saddled with higher debt costs and inflation. Furthermore, private business will now have a harder time raising capital for its own investment needs.

Less than three weeks ago, Cairo gratefully accepted an IMF offer to make $3 billion available at a very low interest rate of 1.5%. Egypt was also discussing a $2.2 billion two-year loan with the World Bank. But on Saturday, Finance Minister Samir Radwan said the government had changed its mind. Instead, it would cut its budget deficit for next year and borrow money at home.

“We do not need to go at this stage to the Bank and the Fund,” Radwan told the Reuters news agency.

The loans and aid are part of a wide-ranging effort by the U.S and other Western powers to help Egypt and the other Arab Spring economies make an orderly transition to democratic rule. But the assistance, particularly from the IMF and World Bank, has aroused the suspicions of many Egyptians, who fear that the aid will come with strings attached.

“There was a lot of excitement,” Magda Kandil, executive director of the Egyptian Centre for Economic Studies, told The Media Line. “They tried to appeal to these concerns saying that it was gesture of goodwill without any commitments to anything problematic.”

At the Group of Eight summit last month, leaders said that Egypt and Tunisia could receive as much as $20 billion total in loans from institutions like the World Bank

The U.S. has also promised a $1 billion debt-for-investment swap, about which few details have been given, and an additional US$1 billion in loans. Arab states, such as Qatar and Saudi Arabia, also offered support.

Egypt isn’t rejecting all of this largesse, but for now, Radwan said, instead of IMF funding Egypt would cut government spending in the next fiscal year. The original 2011/12 budget, approved June 1, contained a whopping 25% increase in spending to create jobs and subsidies for the poor. But last week just before it turned down the IMF loan, the government revised its plans, trimming 36 billion Egyptian pounds ($6 billion) from its deficit to 134 billion pounds, the equivalent of 8.6% of GDP.

In addition, the government will increase borrowing in the domestic market, Radwan said.

The problem is that borrowing in the domestic market means that Egyptian businesses will have to compete harder to get the investment capital they need to expand production and hire more people, Kandil said. She said it also threatens to add to inflationary pressures, creating a burden to Egypt’s hard-pressed poor. Government spending cuts may further undermine the economy.

With a gross domestic product forecast by the IMF of 1% this year as inflation reaches 11.5%, Egypt can’t afford to exacerbate either trend. Furthermore, another 700,000 Egyptians are entering the job market every year, further swelling the ranks of the unemployed.

While the mass protests that brought down President Hosni Mubarak are over, Egypt continues to suffer strikes, disorder and arrests of allegedly corrupt businessmen that have kept tourists and investors away.

The slowdown threatens to exacerbate the poverty and unemployment that helped spur the unrest to begin with, undermining political stability. Yet higher global prices for food and energy have forced the government to spend more on subsidies, diverting resources away from productive investment.

Egypt is already carrying about $35 billion in foreign debt and another $155 billion in internal debt, according to the Central Bank. Egyptian banks enjoy considerable liquidity that would enable them to provide more loans. But domestic borrowing will cost more than borrowing from the IMF, which will mean higher repayments for the government in the future.

“It may satisfy the financing needs of the government, but it will be problematic because you are financing at a higher cost and therefore burdening the government with future debt costs,” Kandil said.

The IMF usually conditions help on governments cutting their budgets, laying off civil servants and trimming or eliminating subsidies, earning the wrath of politicians and ordinary people targeted by the austerity measures. But the IMF’s June 5 announcement of the $3 billion in standby credit didn’t contain any explicit conditions and included the IMF view that “immediate implementation of such reforms is not feasible.”

Nevertheless, the deal did spark concerns in Egypt.

“I believe that this country’s future lies not with the same highly paid, unelected, unaccountable bureaucrats of the IMF, nor with their sacred indicators of budget deficits and market economics. Our future lies with a new home-grown economics that caters for the majority of Egyptians,” Wael Khalil, a socialist activist and blogger at Waelk.net, wrote in British daily The Guardian.

Fayza Abul-Naga, Egypt’s minister of international cooperation, felt compelled to answer critics of the deal by saying that Egypt wouldn’t “kneel” to dictations of the World Bank or the IMF. Kandil said it was possible that Cairo learned after agreeing to the IMF terms that there were indeed conditions attached that if found unacceptable.

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The United States and Britain are pressing Saudi Arabia to persuade the Yemeni president, Ali Abdullah Saleh, to formally stand down after flying to Riyadh for treatment for injuries that were sustained in shelling in Sana’a on Friday.

Diplomats said that Washington and London were insisting Saleh now be urged to implement a deal under which he would relinquish power in exchange for immunity from prosecution and financial guarantees about his future.

Pro-democracy protestors in Yemen were celebrating his departure after 33 years in power, but the Arab world’s poorest country still faces turmoil as well as immediate concerns over whether a truce will hold if Saleh tries to return and his relatives and supporters fight back.

The risks ahead were underlined by clashes in the southern city of Taiz, which left at least two dead and four injured. Shelling was also reported in Sana’a.

Saleh was described as recovering following emergency medical treatment in a Riyadh military hospital because he was injured by shrapnel when his palace compound was attacked by tribal rivals.

Yemen’s ruling party, the General People’s Congress, insisted he would be back, but diplomats and analysts expressed doubt, suggesting that Saudi patience with an always fractious and often manipulative neighbour was exhausted.

It would be impossible for Saleh to return, argued Abdul Ghani Iryani, a respected Yemeni political commentator. “He is out. That is the only rational course. The exit of the president has defused some of the tensions and war is less likely today than it was yesterday.”

If Saleh is finished, he will come to be seen as the latest scalp of the “Arab spring” – which since January has seen the overthrow of the presidents of Tunisia and Egypt, repression in Bahrain and anti-regime unrest in Libya and Syria. Popular demonstrations in Sana’a made a huge impact but the immediate trigger for Saleh’s ouster was old-fashioned military action – not Facebook protest.

Yemen, a desperately poor and volatile country of 23 million people, faces a complex series of problems including secessionist movements in the north and south, inter-elite and tribal rivalries and a small but menacing al-Qaida presence that has focused US and western attention and brought generous aid in recent years.

Saleh has been formally replaced by his deputy, Abed-Rabbo Mansour Hadi but the constitution allows for the creation of a military council to oversee government business. Diplomats said a key question was the reaction of Saleh’s son Ahmed, commander of the powerful Republican Guard, and his nephews Yayha and Amar, who control other key elements of the security forces. Saleh’s brother commands the Yemeni air force.

Al-Arabiya TV reported that Hadi had already met the US ambassador to Yemen Michael Feierstein and was also due to see members of the military and Saleh’s sons. The Saudi-owned channel also described Ahmed Saleh as running the country in his father’s absence in Riyadh.

Reinforcing the point, the official Yemeni news agency Saba issued a statement saying that Saleh’s family had not accompanied him to Saudi Arabia – which was seen as a clear warning that his sons would remain in place.

Amidst the jubilation in Sana’a, one good sign was the agreement of the al-Ahmar family, leaders of the Hashid tribal federation that has been fighting Saleh, to abide by a truce aimed at stopping the street fighting in the capital.

Saleh blamed the al-Ahmars for the attack on his palace on Friday and ordered government forces to retaliate with an artillery barrage against their homes in the Sana’a neighbourhood of Hasaba.

The Hashid announced their support for the protest movement in March, and al-Ahmar fighters initially adhered to the movement’s non-violence policy.

Saleh’s departure was foreseen in the accord brokered by the six-nation Saudi led Gulf Co-operation Council. It provided a timetable for the president to leave office and to clear the way for new elections within 60 days. He declined to sign the agreement, despite several attempts by Gulf leaders to end to the crisis.

Now in Saudi Arabia – and perhaps under pressure from his hosts – he may no longer be able to renege on it. “Saleh may be determined to brazen it out but he will find it hard to resist for very long,” predicted one western diplomat.

William Hague, Britain’s foreign secretary, said he was “very worried” about the situation in Yemen, admitting that previous efforts to persuade Saleh to step down had failed. “We have not succeeded in that but we will continue working very hard on that,” he said on the BBC’s Andrew Marr show. “It could become a much more serious threat to our own security.”

Hundreds of British citizens have been urged to leave the country while Sana’a airport is still open.

“People are worried about what will happen after Saleh’s departure,” Farouq Abdel Salam, a resident of the southern port city of Aden, told Reuters. “They’re most worried about a military coup or struggles for power within the army.” Saleh has ruled Yemen since unification in 1990. Yemen Saudi Arabia Arab and Middle East unrest Middle East Ian Black guardian.co.uk © Guardian News & Media Limited 2011 | Use of this content is subject to our Terms & Conditions | More Feeds

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