Egypt is operating at a balance-of-payments deficit of $11.2 billion in the 2011-12 financial year (which ended in June), and the country has been living far beyond its productive means. Without the confidence of financiers, there is very little that can keep Egypt afloat if the government continues the massive subsidy programs. Yet cutting subsidies and introducing new taxes would be politically difficult, especially at this stage. Oil Minister Osama Kamal warned that Egypt would not meet its goal of lowering energy subsidies by 39 percent by June 2013.

Egypt's economic outlook may seem bleak, but Cairo is not wholly dependent on the International Monetary Fund loan for its survival. Egypt still has about $15 billion in foreign currency reserves, and Cairo has received bridge financing from a variety of sources. In October, Turkey sent Egypt the first $500 million tranche of a $2 billion loan; the second tranche is due Jan. 30, 2013. The remaining $1 billion would be used to finance Turkish imports to Egypt.

In addition, Qatar has lent Egypt $1 billion, as has Saudi Arabia, which promised another $230 million in soft loans. The African Development Bank recently announced that it would transfer the first $500 million tranche of a $2.5 billion loan by the end of December. Kuwait has lent $1.8 billion. None of these has been tied to the International Monetary Fund loan. U.S. aid, including $1.3 billion in military assistance and another $1 billion in loans and debt forgiveness, has stalled in Washington, but this assistance likewise was pledged independently of the International Monetary Fund.

Even if Egypt does not take the International Monetary Fund loan, Cairo has other options. It can devalue its currency or reduce consumption, especially of imported goods. However, those options would be politically costly — but less so than subsidy cuts or new taxes. They are also short-term fixes, not long-term solutions. Ultimately, the government will have to make some difficult political decisions if it is to achieve long-term financial stability.

Unpopular Programs

Several issues will affect the government's choices in the short term. The first will be the Dec. 15 national referendum on a new constitution. Definitively holding off on any major tax hikes or the widely unpopular International Monetary Fund loan is important for the Muslim Brotherhood to rally its support base. Holding off on those unpopular programs could also help the Brotherhood win over some opposition members.

Constitutional approval would set the stage for parliamentary elections, and the government may get more leeway to implement economic reforms if the Brotherhood wins a parliamentary majority. Egypt will likely move forward with increased taxes — just not until the current political crisis has passed. Protests would persist, and the military could intervene at any time. But that will not necessarily prevent a painful adjustment. The government will also learn from its mistakes and implement reform more gradually than before. It will also likely receive the loan from the International Monetary Fund, though the timing will be an issue the longer the agreement is delayed.

The tax hike, the subsequent reversal and the decision to delay the loan highlight the challenges of an inexperienced government. The challenges come as the government is trying to push forward the constitutional referendum, which will help define a working arrangement with the military. These factors may cause the government to act incoherently as regards economic policy — a development that could have serious implications for investor confidence and a reviving Egyptian economy with or without the International Monetary Fund loan.