Egypt resumed talks with the IMF about a badly needed US$4.8 billion (Dh17.63bn) loan yesterday amid mounting economic woes.
Masood Ahmed, the IMF's Middle East and Central Asia director, arrived in Cairo to discuss the deal, which was agreed in November but delayed last month by the Egyptian government after political unrest sparked by the president Mohamed Morsi's attempts to push through a new constitution.
The loan is needed to stem dwindling foreign currency reserves and stop an uncontrolled depreciation of the Egyptian pound.
"If IMF funding is secured, things will be tough. If it is not, the economic deterioration could be disorderly and painful," Simon Williams and Liz Martins, economists at HSBC in the Middle East and North Africa, warned in a research note yesterday.
Hopes that the deal may now be struck have been raised after the appointment of a new finance minister, Al Mursi Al Sayed Hegazy, as part of a cabinet reshuffle. Mr Hegazy was quoted as saying he was "completely ready to complete discussions" with the IMF.
Discussions have stalled on several occasions, in part because of public resistance to international loans. The on-off negotiations have taken a toll on Egypt's currency as investor confidence in the pound has sapped.
The pound has weakened to 6.445 against the US dollar, equating to a fall of about 10 per cent since the revolution in February 2011.
"While previous delays call for caution, we think a near term sealing of an IMF deal is more likely, in which case the Egyptian pound will stabilise well before reaching the psychological level of 7.0," Bank of America Merrill Lynch analysts wrote in a research note, released yesterday.
Turmoil in Egypt has also drained foreign reserves. On Sunday, the central bank said reserves dropped by $21 million last month to $15.015bn. Further underlining the pressures facing Egypt's economy, data released yesterday showed activity in the private sector slipped dramatically last month.
HSBC's purchasing managers index (PMI) survey slumped 12 points from the month before to 37, the biggest fall on record and the lowest level in the series' 21-month history. A reading below 50 signals a drop in activity.
Severe declines in output, new orders and exports dragged the reading lower. The decline coincided with widespread unrest as the new constitution triggered protests.
HSBC said the disorder and the large size of Egypt's informal sector meant the data needed to be treated with caution. "Whatever its limits and volatility, however, the PMI paints a clear picture of an Egyptian economy bereft of momentum," the bank wrote in a research note.
The deterioration of economic data comes as Egypt's ruling party redrafts a law to allow for the sale of Islamic bonds, Bloomberg News reported yesterday.
"Sukuk will not be an alternative to conventional finance tools," said Ahmed El Naggar, an official in charge of Sharia-compliant finance at the Islamist Freedom and Justice Party. "They will go hand-in-hand. The increase in the budget deficit has crowded out private-sector borrowing, so we want to introduce another tool."
The draft law bans non-Egyptians from buying sukuk linked to projects "vital to national security", which had previously been a sticking point in negotiations.
Last year a number of Arabian Gulf governments tapped into sukuk markets for the first time, with sovereign sales of Islamic bonds taking place in Dubai, Turkey, Qatar and Bahrain. However, North African governments have been slow to tap into Islamic finance markets.
The Arab Spring has prompted an increase in the number of states looking to Sharia-compliant finance as a means of broadening access to bank credit.
Oman liberalised its banking sector to permit the creation of several Islamic banks last year, while Tunisia's government told Reuters in February that the government was also seeking to issue a sovereign sukuk.