UPDATE 2-Egypt begins talks with IMF over $5 bln loan, minister says

Egypt's central bank has started negotiations with the International Monetary Fund over a $5 billion loan.

Central Bank of Egypt's headquarters is seen in downtown Cairo, Egypt March 8, 2016. Image used for illustrative purpose.

Central Bank of Egypt's headquarters is seen in downtown Cairo, Egypt March 8, 2016. Image used for illustrative purpose.

REUTERS/Mohamed Abd El Ghany
(Adds central bank comment)

By Ehab Farouk

CAIRO, June 27 (Reuters) - Egypt's central bank has begun negotiations with the International Monetary Fund over a $5 billion loan, a minister from Egypt's economic group of ministers told Reuters on Monday.

The negotiations, which started last week, are headed by the central bank, the minister said. He gave no details on what kind of loan Egypt is seeking.

"Egypt started negotiations through the central bank last week with the IMF for a loan of $5 billion," the minister told Reuters over the phone. "There is a delegation from the IMF that might visit Egypt next month to continue the negotiations."

Central bank governor Tarek Amer said that while the central bank is in continuous contact with the IMF over the economic situation locally, regionally and globally, Egypt has not requested any aid program from the IMF, the state news agency reported on Monday.

The IMF and Egypt have sporadically discussed a possible loan worth up to $4.8 billion. But talks have faltered since 2013, after former President Mohammed Mursi was ousted and Gulf nations began pouring of billions of dollars in aid into Egypt.

Egypt's economy has been struggling since a mass uprising in 2011 drove away tourists and foreign investors. Pressure on its foreign reserves has caused them to dwindle from $36 billion before the revolt to around $17.5 billion in May.

A foreign-currency shortage has crippled some businesses in the country of around 90 million, and the government has been implementing a series of reforms aimed at reviving its economy.

But IMF deal would be likely to require commitments to reforms that the government might find politically risky. Subsidies for energy would probably need to be cut; a value-added tax would have to be imposed.

"Egypt will have to proceed with some painful reforms to guarantee that the loan will work this time," said Hany Farahat, an economist at CI Capital. "The reform process in Egypt is moving slower than would be accepted by the fund, in my view."

Egypt's central bank introduced capital controls in February 2015, which it partly eased earlier this year. The central bank also devalued the pound by around 13 percent to 8.78 per dollar, but economists say more needs to be done.

"We still haven't approved the FY16/17 budget, or the VAT. We need another devaluation round for the Egyptian pound ... we need the investment environment to be reformed and capital controls to be eased for foreign investors," Farahat said. "An agreement with the IMF would put pressure on Egypt to pursue such reforms.

The negotiations will face obstacles, not least the global economic environment after Britain voted last week to leave the European Union. The world's stock markets lost about $2 trillion in value on Friday, the day after Britain voted, and the pound plunged to a 31-year low.

"I don't think the road toward a loan agreement with the IMF is going to be free of road bumps," Farahat said. "The timing is not on Egypt's side, as the Brexit vote is likely to augment global uncertainty and challenge the negotiation process between Egypt and the IMF."

(Reporting by Ehab Farouk; Writing by Asma Alsharif; Editing by Larry King and Dominic Evans) ((asma.alsharif@thomsonreuters.com; +20225783290; Reuters Messaging: asma.alsharif.reuters.com@reuters.net))

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