Graffiti against IMF loan on Tahrir pavement. Ahmed Hamed/Aswat Masriya
CAIRO, Nov 20 (Reuters) - Egypt reached a preliminary agreement on Tuesday with the International Monetary Fund for a $4.8 billion loan, a step seen as vital to shoring up the nation's finances.
Investors who abandoned Egypt during the political turmoil that followed the overthrow of Hosni Mubarak last year have been looking to the IMF to give its seal of approval to the government's economic programme.
Egypt's benchmark index pared losses on the news and the cost of insuring Egyptian debt against default fell sharply.
"We have a preliminary agreement with the technical team of the IMF," Planning and International Cooperation Minister Ashraf al-Araby told a news conference with the head of the IMF delegation, Andreas Bauer, and other Fund officials.
Egypt said the deal included agreement to rein in Egypt's budget deficit to 8.5 percent of gross domestic product in fiscal 2013/14 after it hit 11 percent in the financial year that ended June 2012.
Tax changes would target the wealthy but the 25 percent top rate for income and corporate tax would not change, the cabinet said in a statement issued after the deal was announced.
The government has repeatedly said its programme would protect the poor, many of whom rely heavily on subsidised food and other essentials. The uprising that ousted Mubarak was driven as much by demands for social justice as it was by calls for political freedom.
The agreement would go to the IMF board to be finalised on Dec. 19 with the first tranche of the loan to be released immediately the board approved the deal, IMF officials said. Officials did not say how much that first tranche would be.
"Even though the preliminary agreement is non-binding, it still sends a signal to investors that we are on the right track which should have a positive effect on sentiment," said Youssef Kamel, an analyst at Egypt's Rasmala.
The EGX30 stocks index recovered from about 1.6 percent down before the IMF deal was announced to close the session hardly changed. Egypt's five-year credit default swaps fell 25 basis points from Monday's close to 400 bps, according to Markit.
Egypt's spread on JPMorgan's EMBI Global benchmark sovereign emerging debt index tightened 18 basis points to 417 bps over U.S. Treasuries after the deal emerged.
"I expect that the board will agree on the deal," Abdel Shakour Shalaan, Middle East representative on the IMF board, told the news conference.
The loan carries an interest rate of 1.06 percent, Bauer said, adding that there were also fees attached. The loan would be disbursed over 22 months, the IMF said.
"We are happy that the IMF is supporting our programme at this stage," Araby said, adding that the economic programme "would achieve social justice and targets those on limited incomes."
As well as agreeing to cut the budget deficit, the cabinet statement said it had agreed to cut the state debt ratio to about 70 pct of GDP in 2016/17.
On corporate tax, the cabinet said all companies would pay tax at 25 percent, instead of the current split level system where the ceiling was 25 percent. A system of value-added tax would replace the existing sales tax in 2014, the cabinet said.
It did not give details of its income tax plan, beyond saying the top rate would stay at 25 percent.
But Prime Minister Hisham Kandil told Reuters on Monday that a new rate would be inserted between the 20 and 25 percent bands that affect the highest earners. He did not say at what salary level any new rate would kick in.
The government has already outlined measures to cut back on fuel subsidies, one of the biggest drains on state finances.
They include ensuring subsidised cooking gas cylinders are targetted more effectively to reach the needy, ending subsidies on 95-octane gasoline, the highest grade available in Egypt, and plans to issue fuel smart cards that will limit the amount of subsidised gasoline drivers can buy.