CAIRO: In all but ruling out an early agreement on an IMF loan, Egypt's Muslim Brotherhood has dramatically raised the stakes in its struggle with the army-led administration for control of a country still reeling from a year of political turmoil.
The Brotherhood's candidate for president, Khairat al-Shater, said this week the group would not accept an International Monetary Fund loan unless its terms were changed or a new government was formed to monitor how it is spent, demands that almost certainly won't be met.
Even without a loan before the presidential election in May and June, whoever comes to power will be forced, sooner or later, to impose hugely unpopular taxes and cuts in government spending to reduce budget and balance of payments deficits inflated by a year of political and economic turmoil.
But any delay in securing a loan brings closer the prospect of a fully fledged fiscal crisis that would mean a jump in consumer prices and interest rates, a sharp devaluation and huge pressure on banks.
It's a game of brinkmanship in which the Brotherhood might be first to yield to avoid inheriting an economy in tatters, fearing it will end up taking the blame for painful measures that the current government has repeatedly delayed.
The country's transition to civilian rule will culminate at the end of June, when the military hands power to a newly elected president for whom the economy will be a top priority.
In the 14 months since the overthrow of Hosni Mubarak, Egypt's army-backed government has been supporting the economy largely by drawing down reserves and borrowing from domestic banks, with interest rates having risen to historic highs as funds grow tighter.
The government has spent more than $20 billion in foreign reserves to prop up the currency since last year's uprising. Reserves fell by another $600 million in March to $15.12 billion, equivalent to less than three months worth of imports.
Economists warn that with foreign reserves running low, the country risks a disorderly devaluation of the currency unless it secures new sources of funding. A political or economic shock could increase pressure on the pound if it prompted people to switch funds out of pounds and into dollars.
"If the IMF deal falls through, then the likelihood of foreign capital returning to Egypt will diminish and there will be no let-up in the pressure on the currency," said HSBC economist Simon Williams.
Barring shocks, the country should have a big enough financial cushion to see it through for at least three months, until an elected government is installed with a popular mandate to push through an IMF agreement.
The IMF, however, has demanded broad political support before it signs any agreement, in particular from the Muslim Brotherhood, whose Freedom and Justice Party won nearly half the seats in the new parliament.
Shater said he was not opposed to a deal in principle, but only to the plan to disburse part of it while the army-backed transitional government remained in power.
He said the Brotherhood might accept an IMF deal if the loan's first installment was reduced to $500 million from the current plan of paying out more than $1 billion immediately upon signing.
Economists say the central bank still has enough foreign reserves to hold on well past the presidential election without having to devalue the pound.
"Capital flight has already taken place, and that's going to leave the central bank having to cover a shortfall of around $600-750 million a month from here on," said Williams, who estimated the government could hold out for another six months.
But other economists warn that an outbreak of political violence could provoke capital flight and disrupt tourism, which has yet to recover since last year's uprising. Similarly, a spike in oil prices could drive up the cost of imported fuel.
The next three months hold potential political minefields, including the increasingly polarized presidential election, a heated battle over the wording of a new constitution and the verdict in the politically charged trial of Mubarak, which is due to be read out on June 2.
Any resulting drain on dollars could exhaust the ability of the central bank to defend the pound, which it has allowed to weaken by only 3.5 percent against the U.S. dollar since the uprising.
"Failure to secure help from the IMF would make a disorderly devaluation more likely. In this scenario, the pound could overshoot, falling by perhaps 50 percent or more against the U.S. dollar," Said Hirsh of Capital Economics wrote in an April 5 research note.
"The costs to the economy would be severe. This is likely to lead to a spike in inflation, sharp hikes in interest rates, a potential banking crisis and rapid fall in asset prices."
The government has been searching for ways to earn foreign exchange to take the pressure off its reserves.
In November it began selling one-year treasury bills denominated in U.S. dollars, an instruments that has now raised a total $4.75 billion, and on March 24 it began selling parcels of residential land to Egyptians living abroad, a measure it hopes will eventually earn it $2.5 billion.
It also wants to sell $1 billion in certificates of deposit to Egyptians living abroad, but the plan has been delayed by technical problems over their issue in one Gulf country, the planning minister said last week.
Another option would be to implement capital controls to block major shifts in funds.
One currency trader said rising concerns that the currency is headed toward a devaluation has dried up the trade in Egyptian non-deliverable forwards (NDFs).
"The NDF market is totally broken. Hardly anything trades now," said the trader said. "There is no confidence in a remedy or timing of it, so no one is providing liquidity."
"The large majority of players believe that it's all but inevitable that the currency will go unless there is a serious action plan, so why bother selling U.S. dollars further than three months?"