CAIRO: The clarity surrounding Egypt’s economy and its agreement with the International Monetary Fund (IMF) has become increasingly uncertain, as the latter’s first review was postponed due to the country’s urgent need for dollar liquidity and its inability to fulfill the agreed-upon requests, particularly the implementation of a flexible exchange rate and a program for privatizing state-owned companies.
Adding to the complexity, Egyptian President Abdel Fattah El-Sisi’s recent statements on the exchange rate have further muddled the situation. He referred to the exchange rate as a matter of “national security” and emphasized that his government cannot make decisions that would negatively impact the lives of Egyptians. This has created confusion in the Egyptian international bond market, especially among currency speculators using non-deliverable Egyptian pound contracts.
During his speech, El-Sisi indirectly addressed the pressures placed by the IMF on Egypt without explicitly mentioning the organization’s name. He stressed that while Egypt is open to exchange rate flexibility, the government must prioritize the well-being of its citizens, even if this means deviating from certain expectations. Failure to do so could potentially lead to an unprecedented crisis.
Following President Abdel Fattah El-Sisi’s recent remarks, Managing Director of the IMF Kristalina Georgieva expressed that the IMF is engaged in positive discussions with the Egyptian government, which is taking appropriate measures to support the economy. She commended the recent agreement with the International Finance Corporation (IFC) to leverage the expertise in expediting the process of privatizing state-owned companies.
Since February 2022, Egypt has devalued the Egyptian pound by approximately 50 percent due to the impact of the Russian-Ukrainian conflict, which led to an outflow of foreign investors from the Egyptian treasury market and a severe shortage in foreign currency.
In December, the International Monetary Fund (IMF) approved a 46-month program for Egypt with a value of $3 billion. The program is set to undergo two reviews each year until mid-September 2026, totaling eight reviews. The first review, which determines the disbursement of the second tranche of the loan, was originally scheduled for mid-March but has been delayed, as the government has not implemented the offerings program and has not achieved the necessary flexibility in the exchange rate of the Egyptian pound. The first payment of $347 million was received by Egypt from the IMF in December, and the remaining payments were scheduled to be received in March and September of each year from 2023 to 2026. The due payments have not yet been received, and the upcoming review is expected to take place in September.
While the official exchange rate has remained stable at around EGP 30.90 to the dollar for over three months, the Egyptian pound has depreciated on the black market, reaching approximately EGP 37 to EGP 39 to the dollar.
Georgieva emphasized that Egypt has taken significant steps in the right direction but needs to assess the evolving global situation to enhance its economy’s competitiveness in three key areas. Firstly, the government should distance itself from economic activities as it is not the appropriate entity to undertake them. The Egyptian government understands that strengthening the private sector’s position in the economy and enabling it to create more employment opportunities are crucial objectives.
Secondly, Egypt should exert more extensive efforts to increase the subsidies that benefit the vulnerable groups, and reduce those that primarily benefit the wealthy. Georgieva commended Egypt’s substantial efforts in this regard but noted that more work needs to be done. Lastly, it is essential to explore avenues to enhance Egypt’s foreign exchange reserves.
The IMF has engaged in discussions with Egyptian authorities on this matter, and Georgieva expressed confidence that progress would be made as the review of Egypt’s financing program approaches.
Georgieva also highlighted the issue of multiple exchange rates, which privileges some while leaving others disadvantaged. She further underscored the importance of supporting the currency with adequate foreign currency reserves to avoid harming the economy by depleting these reserves.
Georgieva concluded by affirming the IMF’s readiness to continue discussions with the Egyptian authorities. She expressed deep respect for President Abdel Fattah El-Sisi and voiced confidence that their cooperation would lead to the right decisions for the country’s benefit, considering both the economic and political factors.
These statements were followed by a meeting between Georgieva and President Sisi during the Global Finance Summit in Paris to further highlight the ongoing challenges associated with Egypt’s economic situation.
On her official Twitter account, Kristalina Georgieva expressed her pleasure to have met with Egyptian President Abdel Fattah El-Sisi on the sidelines of the Paris summit to discuss the fundamental aspects of their partnership. She commended the progress the Egyptian government is making in the ongoing economic reform and restructuring, which aims to enhance economic growth and maintain stability.
Expectations for the Egyptian pound
According to Capital Economics, the Egyptian government remains committed to tight fiscal policy, but Finance Minister Mohamed Maait echoed El-Sisi’s earlier statement that a devaluation of the pound is not planned. Although the pound has strengthened on the black market, it still trades at a 20 percent discount compared to the official rate. Minister Maait emphasized that previous devaluations led to increased inflation and hardships for the Egyptian population, indicating the government’s concern about potential social unrest if the currency were to further depreciate.
Capital Economics believes that, for the time being, the government can justify maintaining a stable currency. The pound currently appears undervalued when considering its real trade-weighted value, and the country’s current account position has improved in recent quarters. However, the risk lies in officials holding onto the currency for too long, potentially necessitating a sharp adjustment in the future.
This scenario would likely lead to prolonged inflation, higher interest rates, and an increased risk of a sovereign default.
For its part, Deutsche Bank views that devaluing the Egyptian pound is not the appropriate path for Egypt at this time. However, it acknowledges that exchange rate flexibility remains a key aspect of the IMF program and the support from GCC countries.
The bank anticipates that as Egypt progresses with privatization efforts, pressure on the exchange rate will ease during the summer. It suggests that the next flotation may occur once the delayed first review of the IMF program is completed, assuming there are no changes in the demands of the international institution.
While there is no specific timetable provided, the bank suggests that the review could be finalized in the late third quarter of 2023.
Deutsche Bank expects the exchange rate to stabilize around EGP 31 to the dollar until mid-year, with a projected increase to EGP 37 to the dollar in the second half of the year.
The bank’s report provides insights into the Egyptian economy and the ongoing debate surrounding the exchange rate and flotation, and comes as the first international report that supports the government’s stance on exchange rate flexibility and determining the value of the Egyptian pound against the dollar.
The report presents two perspectives on floating the pound and determining its real value, and concludes that another devaluation of the pound is unlikely to achieve what previous attempts failed to accomplish since March 2022 when the Egyptian pound lost over 50 percent of its value against the dollar.
Furthermore, the report cautions that resorting to a new flotation may result in a significant devaluation of the currency, exacerbating high inflation, tightening monetary policies, and increasing financing costs. It suggests that such a step would not effectively encourage inflows.
In light of these assessments, Deutsche Bank identifies the main challenge for Egypt as the need to attract inward flows once again. It proposes increasing the maturities of the country’s debt balance as a long-term solution to address this challenge.
Economist, Dr. Mohamed Fouad, commented on the Deutsche Bank report, saying that it fails to grasp the fundamental issue, as flotation itself is not the ultimate goal and fixating on a specific exchange rate is not the objective in itself, explaining that the primary focus should be on ensuring the availability and free circulation of currency.
Fouad wrote an article to a local news platform, reiterating that the key consideration is achieving a fair and realistic exchange rate that allows the currency to be readily accessible based on market needs. Discussions about flotation or alternative options often overlook this essential point.
“The report dismisses the need for flotation and suggests debt rescheduling instead. This raises the question of the feasibility of postponing owed debts, particularly that a significant portion of Egypt’s foreign debt is owed to the IMF, similar institutions, and the Gulf Cooperation Council countries,” he added.
The government’s strategy involves entering into agreements with Gulf sovereign funds and attracting Gulf investors to purchase shares in state-owned enterprises. It aims to showcase sectors that may pique investment interest, such as container shipping, telecommunications, and hospitality. As per its agreement with the fund, the government is expected to raise $2 billion from these investments.
According to Fouad, while the bank advises against implementing the IMF’s flotation requirements, which are tied to the continuation of the support program for the Egyptian economy, postponing debts to the IMF is illogical and impractical. Resolving the crisis without honoring these debts would necessitate borrowing from other sources to repay the IMF. This alternative would be more expensive and does not provide a genuine solution, exacerbating the existing predicament.
“The current situation of ‘neither peace nor war’ leaves the economy in a state of uncertainty. The absence of flotation, scarcity of dollars, and lack of a fair price all have detrimental effects on the economy, which impact the individuals with limited income and those with greater financial resources alike. If flotation and flexible pricing were pursued, there would be a need to expand social protection programs to mitigate the inflationary consequences on low-income individuals,” Fouad wrote.
Meanwhile, Economist, Dr. Mohamed Anis, told Egypt Today that if a reduction in the value of the Egyptian pound or a complete liberalization of the exchange rate were to take place, the government must ensure the availability of cash flows to fill the financing gap, and that this is a crucial condition.
Anis added that the reduction of the Egyptian pound’s value or the complete liberalization of the exchange rate would lead to high inflation, with overall inflation rates exceeding 35 percent and core inflation surpassing 40 percent. “To tackle this, the government would need to implement fiscal measures related to social welfare programs, and potentially raising interest rates, which would impose significant burdens. Therefore, it is imperative to ensure cash flows to bridge the gap in such a scenario,” he stated.
Annual urban headline and core inflation recorded 32.7 and 40.3 percent in May 2023, respectively.
“In the case of complete liberalization without guaranteed cash flows to fill the financing gap, control over the exchange market would shift from the Central Bank of Egypt (CBE) to major currency speculators. This could result in the currency devaluing rapidly, similar to the situation seen with the Turkish lira,” explained Anis. He also confirmed that both scenarios require a guarantee of cash flows to fill the gap.
Can the financing gap be filled and what can be expected in the next six months?
According to Anis, the financing gap reached its peak in the fourth quarter of 2022 and the first quarter of 2023. However, Egypt managed to meet all international payments without any delays, and despite the wide financing gap during that period, there were no payment issues.
Anis attributes the shrinking financing gap to four factors. Firstly, there were non-routine inflows, such as the $1 billion from the Egyptian automotive industry entry initiative. Secondly, tourism rates in Egypt are at their highest, with expectations of exceeding $13 billion in total tourism revenues in 2023 compared to the previous year. Thirdly, Egyptian exports have been increasing and are projected to continue growing annually by about 20 percent. Lastly, revenues from the Suez Canal have also been increasing by 10-15 percent annually.
In summary, out of the four factors that contribute $10 billion, the financing gap is approximately $12 billion, leaving $2 billion to be gathered from government offerings and sales.
As for the decrease in remittances from Egyptians abroad, it corresponds to the decline in the import bill, effectively balancing revenues and expenses, and closing the gap.
Remittances from Egyptian expatriates recorded $12 billion during the second half (H2) of 2022, compared to $15.6 billion during the same months of 2021, according to the Central
Bank of Egypt (CBE).