CAIRO President Mohamed Mursi suspended planned tax increases on Monday, shortly after they were formally announced, in a policy shift that could imperil Egypt's ability to secure a $4.8 billion loan from the IMF.
Opposition groups, locked in a battle with the government over a constitutional referendum scheduled for Saturday, began attacking the tax increases on social media immediately after they were published in the official gazette at the weekend.
They include increases on the sales tax on goods and services that range from alcoholic beverages, cigarettes and mobile phone calls to automobile licenses and quarrying permits.
The taxes are thought to form part of an austerity package included in a program the government has presented to the International Monetary Fund to win approval for the loan it is seeking to shore up finances battered by political turmoil.
"The next days are going to be decisive, not only about the political situation, but also whether the IMF loan can be secured," said a Western diplomat who follows the loan talks.
The IMF wants assurances that Egypt is acting to cut a budget deficit running at 11 percent of gross domestic product. It is also worried about a decline in foreign currency reserves, which have plunged by $21 billion since the uprising that ousted Hosni Mubarak in February 2011.
Egypt has been spending reserves and borrowing from foreign governments to help support its currency. In November, reserves fell by $448 million to $15 billion, equivalent to barely three months' imports.
Mursi "has decided to halt these decisions from taking effect," his official website said. "He has commissioned the government to hold an open social discussion led by specialized experts to find out how much popular support they have."
IMF CRUNCH TIME
The IMF board is due to meet on December 19 to decide on the loan, which was agreed at the technical level on November 20.
"Consideration of the agreement by the IMF Executive Board will require that there is no major change in the economic outlook and implementation plans," an IMF spokeswoman said last month, a week after many thousands of people took to the streets to protest at a decree by Mursi giving himself wide powers.
These plans include the passage of a revised 2012/13 budget that reflects planned tax and spending measures, she said.
"What we have seen today, with the postponement of these reform measures, in principle this would violate what the IMF has stated as a kind of precondition for moving ahead," the Western diplomat said.
If the government is successful in pushing through the constitutional referendum it would only have a four-day window to reconfirm the tax measures before the IMF board meets.
"Even in this positive scenario, it would remain doubtful whether the government has the reform capacity, because the measures we are seeing now are the low-hanging fruit," the diplomat said.
"The more intense measures - the rationalization of energy subsidies - are supposed to go ahead in April. In principle, we thought this would be a real test, whether the government can push through reform. What we've seen is very swift resistance to the first generation of measures."
The IMF has stressed in the past that it wanted broad political support for any reform program. This seems to have been broken amid the bitterness in recent weeks between the Islamist-led government and Egypt's liberal opposition.
Simon Kitchen, strategist at EFG-Hermes, said he thought the IMF would be understanding, given Egypt's circumstances.
"Egypt has already made some small reforms on electricity and fuel pricing in the past few months, so they are moving in the right direction, and the agreement is for 22 months," he said. "But the IMF will be looking for these tax reforms to be reinstated once the political temperature has cooled."
Egypt has said it plans to rein in its budget deficit to 8.5 percent in the financial year that ends in June 2014 by better targeting subsidies and expanding the tax base.
(Additional reporting by Edmund Blair; Editing by Alistair Lyon; editing by Ron Askew)