The IMF said it had reached a $3bn loan deal with Egypt after Cairo agreed to a key bailout condition and floated its currency.
The Egyptian pound slid 14.5 per cent to 23 to the US dollar on Thursday after the country’s central bank said it was moving to a “durable flexible exchange rate regime that leaves the forces of supply and demand to determine the value of the Egyptian pound against other currencies”.
This means abandoning a policy of drawing on its reserves to support the pound, which was aimed at reducing the cost of imports and maintaining social stability in a country where 60 per cent of the population are poor or vulnerable to price shocks.
Egypt has been in talks with the IMF for months amid soaring commodities prices and a foreign currency crisis stemming from Russia’s invasion of Ukraine, which accelerated billions of dollars of outflows as foreign debt investors exited the country.
The pound had already been allowed to fall by roughly 22 per cent since March, but Cairo was understood to have been resisting fully floating the pound in order to contain the impact on prices.
The fund said that, as well as the $3bn, the deal would “catalyse a large multi-year financing package” from other donors, including about $5bn in the financial year to the end of June next year, reflecting “broad international and regional support for Egypt”.
It said Cairo had also requested financing under its new Resilience and Sustainability Facility, which could unlock up to $1bn.
Analysts noted that Egypt had committed to floating its currency when it secured a $12bn loan from the IMF in 2016, but subsequently reverted to controlling the exchange rate.
Jason Tuvey, senior emerging markets economist at Capital Economics in London, said it was likely “both the government and the IMF learnt from their mistakes. The government kept too tight a grip on the currency for too long, and the IMF did not push.”
He added: “I don’t think investors will give them the benefit of the doubt. They will only return if there is a firm commitment to exchange rate flexibility.”
The central bank also raised its key interest rates by 200 basis points to 13.25 per cent. It said it would “give priority to its main aim” of targeting inflation in order to achieve price stability. Inflation was at 15 per cent in September and analysts expect that at least in the short term it will rise further as a result of the fall in the pound.
Tuvey agreed this would “add to inflation pressures”, but was nonetheless “a welcome step, and with an IMF deal . . . will go a long way to restoring macroeconomic stability in Egypt”.
Cairo this week announced a $3bn “social protection package”, which includes increasing the minimum wage and a rise to pensions, civil service and public-sector salaries.
The IMF said the reform programme it agreed with Egypt was also aimed at pushing “forward deep structural and governance reforms to promote private sector-led growth and job creation”.
Egypt is the second-biggest debtor to the IMF after Argentina and this is its fourth loan agreement since 2016. The economy has grown even during the pandemic, but state and military investments in infrastructure projects have driven the expansion while private sector investment and manufactured exports have continued to lag behind.
Analysts and Egyptian entrepreneurs argue that the state needs to improve the environment for business and scale down competition from the military to allow space for the private sector to thrive.