Egypt turns to Islamic finance for $400m loan to close deficit

Egypt receives an offer of $400m from the Islamic Development Bank to fund imports of petroleum products and foodstuffs, as it races to fund its $21.6bn deficit.

Egypt is the world's largest buyer of wheat and pays a huge bill for subsidies on food. Amr Abdallah Dalsh /Reuters

Egypt has received an offer of a US$400 million (Dh1.46 billion) loan from an arm of the Islamic Development Bank to help pay for food andpetroleum as it races to close a budget gap after turning down emergency financing from the IMF.

The official Mena news agency reported on Saturday that the funds would be provided by the International Islamic Trade Finance Corporation, an organisation funded by 56 countries in the Muslim world to develop Sharia-compliant funding for commerce.

Egypt has struggled to raise financing since rejecting in June an IMF funding package worth $3bn, a deal it had struck only weeks earlier.

The country's deficit of 129bn Egyptian pounds (Dh79.36bn) deficit for the next financial year is equivalent to 8.6 per cent of GDP, according to the country's ministry of finance.

Egypt could afford to go it alone for only a short period of time, said Jean-Michel Saliba, an economist at Bank of America Merrill Lynch. "They're meeting their external funding requirements by drawing down [international] reserves," he said.

"They're quickly exhausting the domestic funding capacity of the banking system. Even if they could do it this year, it's very difficult for them to be able to repeat it next year," Mr Saliba said. "Sooner or later they're going to run into trouble."

Egypt's international reserves have dwindled by $14bn since the overthrow of Hosni Mubarak in February. Egypt is the world's largest buyer of wheat and pays a huge bill for subsidies on food.

The North African nation had $22.07bn of foreign reserves at the end of October, a drop of 38.6 per cent since the beginning of the year, according to data from the central bank.

Despite moves by Egypt to distance itself from western aid, members of the Group of Eight have remained supportive of Arab Spring countries, committing $38bn over three years to Egypt, Tunisia, Morocco and Libya.

The US remains committed to Egypt, even as domestic political tensions risk unsettling Egypt's relations with Israel, said Andrew Shapiro, a state department official.

"Now is not the time to add further uncertainty to the region or disrupt our relationship with Egypt. Conditioning assistance risks putting our relations with Egypt in a contentious place at the worst possible moment," he said at a speech to the Washington Institute for Near East Policy.

"The Egyptian people, not just the Egyptian government, view our assistance as symbolic of our support for their country and their transition. At this time of great change, we need to maintain the flexibility to respond to events and adjust our assistance accordingly."

Since Mr Mubarak was forced from the presidency, Egypt has received $500m from Qatar, while the UAE pledged Dh11.01bnof aid in July. Saudi Arabia has granted $500m and is in talks to provide $3.9bn more.

* with agencies