CAIRO – 10 March 2024: Egypt has signed an agreement with the International Monetary Fund (IMF) to increase its existing $3 billion deal to $8 billion. During a press conference, Prime Minister Mostafa Madbouly announced the signing of the agreement between Egypt and the IMF.
The IMF statement mentioned that the increase in the loan was prompted by "significant macroeconomic challenges" that have become more complex to manage due to the impact of the recent conflict in Gaza on tourism and Suez Canal receipts.
IMF Mission Chief, Ivanna Vladkova Hollar, stated that the Egyptian authorities have demonstrated a strong commitment to promptly address critical aspects of their economic reform program, with support from the IMF. The program reforms and policy discussions focused on six pillars.
“Ensuring a flexible exchange rate system is one of the IMF’s prerequisites for the loan, and this is what the Central Bank of Egypt is focusing on,” Economic Expert Karim Nassar stated in an interview with Egypt Today.
The six pillars of the IMF reform program include: moving towards a credible flexible exchange rate regime; tightening monetary policy to reduce inflation and reverse dollarization; fiscal consolidation to maintain debt sustainability; slowing down infrastructure spending; providing adequate social spending for vulnerable groups; and implementing reforms in state ownership policy to foster private sector growth.
Central Bank of Egypt Decisions
“With increased interest rates, Egypt will benefit from high interest rate differentials, which will attract portfolio investments by investors looking to realize carry trade opportunities and profits. Moreover, in order for an investor to enter our market, key fundamentals need to be in place, the chief of which is certainty and stability in the foreign exchange market,” Nassar explained in his conversation with us.
In response to inflation, the Central Bank of Egypt (CBE) held an unscheduled meeting and raised key interest rates by 600 basis points to combat inflation and acknowledged a potential short-term contraction in private sector credit growth.
The CBE emphasized the importance of eliminating the parallel foreign exchange market to mitigate inflation expectations and reduce underlying inflation. This move is expected to result in a gradual deceleration of headline inflation in the future.
“A unified and flexible official FX market, sufficient supply of USD, and low capital controls are all key factors that a potential investor looks for before investing in a market. In addition, Egypt’s favorable interest rates on government securities will also play a vital role over the short term in attracting portfolio investments or hot money, which will ensure a steady stream of foreign currency within the market. Egypt may also witness higher levels of Foreign Direct Investment (FDI) given the improved macro-situation and business environment; we may also see increased remittances from Egyptians residing abroad,” Nassar told Egypt Today.
So, what should Egypt do to utilize the incoming money and have a steady influx of FX?
“The expected funds will play a key role in bridging Egypt’s current account deficit and financing gap and will also stabilize the market, further reassuring both local and international investors,” Nassar said.
According to CBE data, Egypt is projected to pay $32.79 billion in debt service in 2024, with a total debt of $164.73 billion by the end of June 2023.
“Until we are able to carry out major structural reforms and ensure adequate FX inflows in the form of FDIs and export receipts, these monetary adjustments will remain short-term solutions for a long-term problem. Structural reforms take time, but the good news is that the government has already taken major strides towards measures aiming to enhance Egypt’s business climate, exports, productivity, and industrial base. These, coupled with ongoing fiscal and monetary stabilization reforms, will over the medium and long term allow for a steady influx of foreign currency and, more importantly, ensure high levels of sustained real GDP growth,” Nassar added.
Egypt has emphasized the localization and expansion of its industry sector. Prime Minister Mostafa Madbouly has stressed the priority of strengthening local industry through industrial expansion and partnerships with global companies to boost domestic production for international exports.
Last week, Madbouly oversaw the release of goods from Alexandria Port, highlighting the government's commitment to securing foreign currency. Priority was given to essential sectors such as food, medicine, fodder, petroleum products, raw materials, and production requirements for the industry.
According to the Head of the Egyptian Customs Authority, Shahat Ghatouri, goods valued at $780 million were released last Thursday and Friday.
Egypt's agreement with the IMF to raise its loan from $3 billion to $8 billion reflects the country's commitment to addressing macroeconomic challenges and implementing crucial reforms. The increased funds will help bridge the current account deficit, stabilize the market, and provide reassurance to both local and international investors.
Egypt's focus on flexible exchange rates, tightening monetary policy, fiscal consolidation, and promoting private sector growth demonstrates its determination to achieve long-term economic stability. With ongoing structural reforms and efforts to enhance the business climate, Egypt aims to attract foreign investment, boost exports, and foster sustained real GDP growth in the years ahead.
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