Egypt will be banking on its value as an ally of the United States when it seeks continued loans - but on softer terms - from the International Monetary Fund at a Cairo negotiating session beginning May 21. The most populous Arab country and the only one having diplomatic relations with Israel, Egypt had credits worth more than $150 million withheld by the Fund for failing to implement fast enough a slate of economic reforms agreed to last year.
Diplomatic sources say that the dispute could end with the Fund abrogating its agreement with Egypt, and that the Fund technicians, who have visited Egypt several times since the stand-by agreement of last May, are hardening their stance.
``The people of the Fund are furious'' about Egypt's alleged failure to implement reform, a diplomat says. ``Egypt committed itself in writing to the program. The Fund's discussions on Egypt will be negative and by the end of May there will be a crisis. There will be rupture.''
Diplomats here expect the US to weigh in on Egypt's side in pressing the Fund to be lenient and to approve new credit.
``The US can't afford to have an Egypt on the verge of collapse,'' a European diplomat says.
``The Americans are doing their best,'' says Atef Ebeid, Minister for Administrative Development and Cabinet Affairs. ``They know how serious we are and they know the limitations.''
Egyptians are bitter about what they say is the Fund's insensitivity to the threat tough economic measures pose to the regime.
One government minister is said to have remarked that he thinks the Fund ``wants to erase Egypt off the face of the globe.''
Egyptian officials frequently cite the 1977 riots, triggered when President Anwar Sadat increased food prices, as proof that the population will not accept price hikes.
The average Egyptian government worker makes about $50 dollars a month. But because of direct and indirect subsidies, food, transport and electricity prices are rock bottom. No Egyptian is destitute. Political scientists stress Egypt's so-called social contract: the people allow the government a free hand in return for food.
Government advisors here maintain that after they began to implement the Fund's program - by moving to unify the exchange rate system and raising the price of energy - consumers became irate.
According to some reports, food staples in Alexandria were distributed, for a while, through police stations to enable the regime to maintain calm.
``The Fund didn't do its job,'' Mr. Ebeid says. He says that the Fund failed to raise $800 million from donor nations as it had promised to do and that, contrary to the decision of the 18-nation Paris Club to reschedule Egypt's debt, the US insisted that Egypt pay $400 million in interest on its military debt at the end of 1987.
(US law requires that these loans be repaid on time, else all aid is cut off. Egypt is to receive $2.2 billion in aid from the US this year, but must service a debt of $4.5 billion in US military sales.)
Under the May 1987 agreement, the Fund extended $325 million in stand-by credit to Egypt and paved the way for it to reschedule $7 billion of its $42 billion foreign debt through the Paris Club.
In return, Egypt said it would reduce its budget deficit by 2 percent a year until it reached 5 percent of Gross Domestic Product (GDP). The government promised to raise energy prices, hike interest rates, and unify the nation's three-tiered exchange rate system in order to rectify price distortions that had inflated consumer demand and fueled imports, now four times the value of exports.
But after initial moves toward reform, the government stopped dead in its tracks as prices began to rise. The Fund, in return, suspended installments of its loan.
If the Fund refuses to bend and issue new stand-by credit, the Mubarak regime will most likely be banned from seeking new rescheduling through the Paris Club. By December 1988, as $2 billion worth of foreign debt - principal and interest - becomes due, Egypt would be faced with the crisis it escaped one year ago.
``Life without the IMF will be difficult,'' the European diplomat says.
Egyptian officials say they have submitted new proposals to the Fund but refuse to reveal the details. Reports in the government-owned press say the regime wants to implement in a second 18-month period the measures it was supposed to begin in the first phase.
According to reports here, the government will move toward final unification of the exchange system this summer by eliminating a rate used to calculate the cost of imported food staples that served as an indirect government subsidy. Food prices, as a result, will rise.
But the government will also boost the salaries of public sector employees by 20 percent in order to soften the blow, a move that will surely displease the Fund.