Egypt’s interim government has said that it will return to the International Monetary Fund (IMF) to secure a $3bn loan in a bid ease building strain on the country’s economy after a year of political uncertainty.

The IMF offered a $3bn loan to Egypt in June 2011. Despite the low interest rate, the transitional government declined the offer citing strict conditionality attached to the offer. Behind the scenes, it also appeared keen to avoid association with the IMF due to the typical terms of the lender and its association with the old regime. Since then, Egypt’s economic situation has worsened.

According to Supply and Domestic Trade Minister, Gouda Abdel Khaleq, Egypt will resume negotiations with the IMF on 15 January to finance the country’s deficit and restore its foreign currency reserves.

One of Egypt’s major sources of revenue is tourism, a sector that has been crippled by security fears since a popular uprising unseated long-time President Hosni Mubarak. The reduction in foreign cash inflows hit Egypt’s balance of payments and forced the central bank to drain its foreign currency reserves to restore stability in the Egyptian pound.

Egypt’s foreign exchange (FX) reserves decreased by half to about $18.1bn in December 2011, leaving the country with only enough to cover two-three months’ imports. This followed a significant drop in the previous month.

At the same time, the cost of debt is rising to alarming levels. The government is borrowing heavily from local banks, which are becoming increasingly concerned by their exposure. Interest rates on seven-year bond yields are exceeding 16 per cent.

But Egypt is likely to be disappointed with any deal with the IMF. It will probably not secure an interest rate of 1.5 per cent as it was offered in June 2011. According to a Cairo-based economist, “the situation is now worse than in June … now Egypt may not even get the same deal from the IMF”.