EU says it may lend Egypt up to 500 million euros

Reuters , Thursday 2 Feb 2012

Funds would be paid in tandem with IMF disbursements and be linked to reforms agreed with the global body, says EU official

EU loan will be tied to benchmarks Egypt agrees with IMF, according to one official (Photo: Reuters)

The European Union may be prepared to lend Egypt up to 500 million euros to help it finance a budget deficit provided it successfully concludes a financial assistance agreement with the IMF, an EU official said on Wednesday.

Egypt said in mid-January it had formally asked the International Monetary Fund (IMF) for a $3.2 billion aid package to fill a budget gap widened by a year of political and economic turmoil.

Egypt, which turned down a similar IMF package in June, said it now wanted the money as soon as possible and hoped an agreement would be signed within weeks.

The turmoil has pushed up unemployment, widened its budget and balance of payments deficits and drained its foreign reserves. Many economists believe a currency devaluation is imminent.

"It is new money for budget support that is linked to an IMF agreement," Gerhard Krause, head of the EU's economic cooperation section in Cairo, told Reuters in a telephone conversation.

Each disbursement of the EU funds would be paid in tandem with IMF disbursements and be linked to benchmarks that Egypt set for itself under a reform program agreed with IMF, Krause said. The interest rate has yet to be set, he said.

The EU's 27 member states would have to approve the loan agreement before it could be signed, Krause said.

The IMF has said any agreement would first have to attract broad political support within Egypt and be accompanied by financial commitments from other international donors. Thrashing out the technical details of a loan would take two to three months, it said.

The IMF has said Egypt has external financing needs of $10-12 billion in 2012 to finance its budget deficit, according to a Cairo-based economist. The World Bank is expected to provide another $1 billion and the Arab African Development Bank $500 million to $1 billion, he added.

Egypt said last week it would ask the World Bank for a $500 million loan and another $500 million loan from the African Development Bank.

Egypt is also expected to approach Gulf states such as Qatar and Saudi Arabia for additional funding.

Krause said the funds would be disbursed as part of its MacroFinancial instrument used for countries outside the European Union that have balance of payments or budgetary problems. It has been used intensively in the Balkan region and Eastern Europe in the past 15 years.

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