The International Monetary Fund (IMF) on Friday approved a new $5.2 billion one-year stand-by arrangement (SBA) for Egypt almost a year after the latter had received the last tranche of a $12 billion loan agreed in November 2016.
The new arrangement aims to help Egypt cope with the challenges posed by the coronavirus pandemic by providing resources to meet balance of payments needs and to finance the budget deficit, the IMF said.
The IMF’s approval allowed Egypt to obtain $2 billion of the loan immediately, while the remainder will be phased over two reviews.
The agreement comes in support of Egypt’s efforts to mitigate the economic and social repercussions of the pandemic, maintain its macroeconomic stability, and preserve the gains from previous reforms.
Egypt has been suffering from a decline in its sources of foreign currency since the outbreak of the coronavirus brought to a halt activities attracting foreign currency, such as tourism, remittances from expatriates abroad, the Suez Canal, and foreign direct investments.
According to Central Bank of Egypt (CBE) data earlier in June, the country’s foreign reserves retreated to $36 billion at the end of May, down from $37 billion a month earlier. This is the third month in a row that the foreign reserves have declined, going down by $9.4 billion in three months.
In May, the IMF’s executive board approved Egypt’s request for emergency financial assistance of $2.77 billion under its Rapid Finance Instrument (RFI) in order to meet the urgent needs regarding balance of payments owing to the outbreak of the Covid-19 pandemic.
The assistance also aims to support the most vulnerable groups and the health sector and allocate more revenues for social care.
“The IMF didn’t tie the $2.77 billion loan — disbursed during exceptional circumstances as a quick fix — to any reforms the Egyptian government should undertake, but rather to meet the needs of the balance of payments and maintain the structural reforms Egypt had earlier achieved,” said Alia Mamdouh, a macroeconomic analyst at Beltone, an investment bank.
The CBE said last month that the repercussions of the pandemic on global markets were ongoing for the second month, which had led to continued exits of foreign investments from emerging markets, Egypt included, in April. However, this had been at a lower rate than in March, which saw a surge in the exit from investment portfolios.
“The fund-supported programme will also help the authorities preserve the achievements made over the past four years, support health and social spending to protect vulnerable groups, and advance a set of key structural reforms to put Egypt on a strong footing for sustained recovery with higher and more inclusive growth and job creation over the medium term,” the IMF stated.
As the coronavirus outbreak began to take its toll, the IMF said it had a $1 trillion loan capacity under the RFI available to member states. Some 102 countries, including Egypt, have applied for loans.
“Over the past few years, Egypt saw strong growth, falling unemployment, moderate inflation, the build-up of strong reserve buffers, and significant reduction in public debt. The authorities were looking to broaden and deepen structural reforms begun [when it acquired the $12 billion loan] under the Extended Fund Facility, but the Covid-19 pandemic has temporarily refocused government priorities to address the economic and health crisis,” said Antoinette Sayeh, deputy managing director and acting chair of the IMF.
“The government has responded decisively to the crisis with a comprehensive package that supports healthcare needs, the economy, and the most affected individuals and sectors,” she added.
“Policies supported by the SBA will focus on addressing the immediate crisis needs, including critical spending on health, social programmes to protect the most vulnerable, and assist directly affected sectors while safeguarding medium-term fiscal sustainability, anchoring inflation expectations, and preserving exchange rate flexibility.”
“The CBE aims to continue to provide a stable anchor for inflation expectations and financial stability while rebuilding reserve buffers and allowing orderly exchange rate adjustments,” Sayeh said.
Fitch Ratings, a US credit-ratings agency, said last month that the IMF loan would boost investor confidence in Egypt’s economy and aid in the return of foreign portfolio investments seized up with the spread of the coronavirus.
The Ministry of Finance said the new IMF loans would help to minimise local borrowing and hence lower the cost of debt-servicing.
“The loans increase Egypt’s foreign debt burdens, particularly with the decrease in GDP and rising foreign debt. But the state had no other choice,” said Mamdouh, who added that one merit of acquiring loans from international institutions was the low interest rate charged, meaning that such loans do not put additional pressure on the government or the local currency.
Egypt’s foreign debt makes up less than 33 per cent of GDP, which falls within safe limits, according to international standards, even with the new IMF loans.
The CBE announced early in May an increase in Egypt’s foreign debt by $3.3 billion during the second quarter of this fiscal year to record $112.67 billion at the end of December and up from $109.36 billion at the end of the first quarter of the year.
On an annual basis, the country’s foreign debt increased by $16.1 billion, having recorded $96.6 billion in the second quarter of the last fiscal year.
According to the Middle East News Agency (MENA), Egypt has recently paid off more than $20 billion in debts to international financing and investment institutions. It is expected to repay $5 billion in debts within the coming year.
*A version of this article appears in print in the 2 July, 2020 edition of Al-Ahram Weekly