NEW YORK // The delay of a crucial International Monetary Fund loan amid widening political turmoil is a major blow to Egypt's teetering economy. It is also a sign of the enormous difficulties ahead for reforms that experts say are necessary for a democratic transition.
Egypt's request to delay the US$4.8 billion (Dh17.6bn) loan comes as the United States and international lenders hoped to push ahead with loans and other aid despite the political crisis engulfing president Mohammed Morsi.
Even as the backlash by protesters against Mr Morsi's suspension of judicial oversight and the Islamist-led drafting of a new constitution increased, the administration of US president Barack Obama continued to push for aid and debt relief for Cairo.
The IMF loan was seen by economists as crucial for saving Egypt from a debt crisis as well as restoring confidence in the economy among international investors.
The agreement on the loan was also necessary to unlock nearly $10 billion more in aid and financing from the US and other countries. A US state department spokeswoman said on Tuesday that "there are aspects of the US support for Egypt that … depend on the reform standards that the IMF and Egypt agree to [and] can't move forward till after".
Since coming to office in June, the Muslim Brotherhood-backed government of Mr Morsi had assured foreign investors that it was serious about free-market reforms and, after months of wrangling with the IMF, finally agreed to its conditions for the loan last month.
Mr Morsi announced the beginning of the agreed-upon revenue-raising measures early Monday morning in the form of increased taxation on non-essential goods such as cigarettes.
The unpopular move provoked further backlash, and the government quickly rescinded the order, with the prime minister, Hisham Kandil, calling for a "social dialogue" on tax reform and the government's economic plan. But the efforts to appease protesters failed and Tuesday it asked the IMF to delay its granting of the loan for at least a month.
"The timing was very bad," said Bessma Momani, an expert on the Egyptian economy at the Brookings Institution, a Washington think tank, who has written a book on the IMF's role in Egypt. "The last thing the US or the IMF want to see is any belief, real or perceived, that the Morsi government is trying to get these kinds of economic policies rammed through," she said.
For the IMF, the protests against the new taxes and Mr Morsi's quick reversal were a "yellow signal", Ms Momani said, that make lenders rethink the government's ability to articulate the need for reform and achieve public support. "Both sides are saying 'Let's get this out of the limelight because this is not the time', when it's going to create misperceptions," Ms Momani added.
The coalition of international lenders, which includes the US, European countries, the European Bank for Reconstruction and Development and the African Development Bank, also wants to ensure that the democratic transition in Egypt replaces the Mubarak-era economic system of crony capitalism and subsidies with structural reforms.
The Muslim Brotherhood is in large part made up of small businessmen who were unable to benefit from dictator Hosni Mubarak's cronyism and who support economic liberalisation, Ms Momani said. However, poor Egyptian voters, many of whom support the Brotherhood, are pushing their governments to make populist economic choices.
"There's a clash of ideologies between Islamist political economy and where global policies are today with a focus on austerity," Ms Momani said.
The Egyptian government under Mr Mubarak subsidised staples such as wheat and kerosene to offset the lack of economic opportunity, even though the subsidies were an enormous drain on the public purse.
The lifting of those subsidies will be one of the conditions that international donors such as the IMF will demand, Ms Momani said.
Even though Mr Obama recently promised loan forgiveness of $1bn for Egypt, on top of the more than $1bn the country receives in US aid each year, Ms Momani said she thinks it, even combined with the IMF loan, will not be enough to address Egypt's immense economic problems.
"For years the US has been trying to promote free trade and responsible economic policies, but it hasn't done well," she said.
Egypt's economy is largely informal and based on cash transactions that are difficult to tax, she added. Increased taxation of consumer goods will disproportionately affect the poor.
The military also plays an outsize role in Egypt's economy, with 30 per cent of GDP controlled by military-related industries that produce everything from macaroni to washing machines. "In Egypt, the military has a shadow economy that is one of the biggest problems," Ms Momani said.
Even if the IMF loan is finally agreed upon, the military's distortion of the economy will not be tied to the financing, she added. "The IMF articles of agreement don't allow it ever to question or ask about military expenditure."