Egypt's fiscal crisis is adding to pressure from protesters and politicians for the ruling military council to hand over substantial powers to a civilian government long before mid-2012, when the army has said it would return to barracks.
Rising debts now worth 85 percent of gross domestic product, a surging budget deficit and foreign reserves tumbling to a level that by January may provide just two months import cover provide all the ingredients for a text book fiscal crisis.
That is a combustible mix for any cabinet and may encourage the army to seek to distance itself from Egypt's economic woes and give the new government far more powers before it becomes too tarred with the brush of a financial crisis.
For now, the army insists it will keep sweeping powers until a presidential election now set for June. But pressure for a swifter transfer began building up during last month's protests against army rule and is echoed by politicians who say they want more powers after the first round of a parliamentary election.
Egypt's economic travails may prove a final straw for the Supreme Council for the Armed Forces.
The (economic) gyration you've seen ... creates a lot more pressure on the Supreme Council to act in a manner which sustainably resolves these tensions, said Raza Agha, RBS's senior Middle East and North Africa economist.
Even if it's not well understood on the street, it is understood very well by the government, he added.
In recent days, the Egyptian pound weakened to its lowest level in nearly seven years against the dollar, the cost of government borrowing rose to its highest in three years and Standard & Poor's lowered its credit rating on Egypt, saying a weak political and economic profile had worsened.
All this is happening in a policy vacuum. Street protests calling for a swift end to military rule turned violent last month, leaving 42 dead. As one of its concessions, the army accepted the resignation of the cabinet, though the move was not enough to get demonstrators to pack up tents in Tahrir Square.
The prime minister-designate, Kamal al-Ganzouri, has yet to announce his cabinet and admitted it was a thankless job to hold office, given the challenges.
AVOIDING FOREIGN BORROWING
The new cabinet could mark the third change at the Finance Ministry since Mubarak was ousted in February.
A previous minister complained about meddling in policy. When Egypt rejected a facility from the International Monetary Fund in the summer, the minister said it was in part because the army was worried about piling up debt.
A top army official repeated those concerns on Thursday.
We prefer not to borrow money from abroad. The loans come with strings attached that undermine state sovereignty, said Mahmoud Nasr, a senior army financial official.
A staggered parliamentary election, whose first round was on Monday and Tuesday, adds to uncertainty. Islamists expect to do well, unnerving some Western investors. The Muslim Brotherhood's party said parliament's majority should form the next cabinet, perhaps pointing to yet another cabinet in months or even weeks.
Whether or not (Egypt's military rulers) can last through these elections remains to be seen. If political tensions continue to rise, I think it's very difficult to see them lasting until early March, said Khan.
The economic fallout could radicalise the political debate, with politicians and the military seeking to blame each other.
In the meantime, Egypt needs a quick fix.
Economists say the budget deficit is unsustainable without a change in policy. The army said on Thursday the deficit could rise from 8.6 percent of GDP to about 11 percent by June 2012, much more in line with what economists have said for months.
The political process still has a long way to run, and funding the large and rising budget shortfall is going to remain a major policy challenge, said HSBC economist Simon Williams.
Even before the uprising, the government often had problems delivering subsidised consumer goods to the poor, particularly butane cooking gas, which it buys in dollars from abroad. Now the army says it may need to review such sensitive support.
There are several solutions (to dealing with the deficit). One of them is reviewing subsidies, particularly petrol subsidies, said Nasr, assistant for financial affairs to Field Marshal Mohamed Hussein Tantawi, the head of the army council.
Egypt's bid for Gulf cash has yielded big promises but just $1 billion (637 million pounds) in actual funds, provided from Qatar and Saudi Arabia, to provide budgetary support.
Economists say local banks are stretched to the limit of their lending, forcing the government to pay higher yields. In the last three months, the average yield on 91-day treasury bills climbed more than 2.25 percentage points to 14.25 percent.
When interest rates go up it means they have to borrow more, which in turn pushes rates up, said Youssef Kamel, a Cairo-based fixed-income analyst at Rasmala. The more they borrow the more they have to borrow.
The government needs to raise an additional 10 billion pounds a month on top of debt it needs to roll over, according to a Reuters calculation.
Securing an IMF facility could reassure investors who prefer to follow the lead of such an institution.
The outgoing finance minister, Hazem el-Beblawi, said the government was now going back to the IMF, with a deal expected along the same lines as the $3.2 billion facility Egypt turned down. With a cabinet change that may be in doubt.
However, Ganzouri, who was prime minister under Mubarak in the 1990s, was credited at the time with improving ties with the IMF and World Bank, experience could prove valuable.
The IMF loan will definitely have an impact on financing the deficit, but it would have been much greater if it had come three months earlier, said Kamel, adding that it would have eased pressure on interest rates.
Devaluing the currency could provide a swift fix, helping make Egypt more attractive for foreign T-bill buyers, many of whom have been waiting for the currency's exchange rate to get closer to its market value before returning.
But it could stoke inflation, which has in recent months dipped into single digits, after years roaring away. Surging prices were among the complaints of anti-Mubarak protesters. The army may not want to be stuck with the stigma of devaluation.
Meanwhile, the government has limited firepower to keep defending its currency, which has slipped some 5 percent against the U.S. dollars since January. Foreign reserves meanwhile have tumbled by $16 billion to $20 billion at the end of November.
The army official said they could fall to $15 billion by end-January. Nasr said that would be enough for about two months import cover, as only $10 billion would be readily available and the rest was tied up with other commitments.
(Reporting by Patrick Werr; Editing by Jon Boyle)