The new IMF loan agreement testament to the stability of the Egyptian economy: PM Madbouly

Doaa A.Moneim , Friday 28 Oct 2022

The new $3 billion loan agreement with the IMF is a testament to the stability of Egypt's economy, PM Mostafa Madbouly said in a press conference on Thursday morning to announce the deal.

In the presser, Egypt announced that it has reached a 46-month staff-level agreement with the International Monetary Fund (IMF) under the Extended Fund Facility (EFF) with a loan worth $ 3 billion.

Minister of Finance Mohamed Maait, Minister of planning and Economic Development Hala El-Said, IMF's Mission Chief for Egypt Ivanna Vladkova Hollar and the Governor of the Central Bank of Egypt Hassan Abdalla attended the press conference.

During the presser, Maait explained that the IMF’s $3 billion loan is a part of a $9 billion finance scheme that is expected to include one billion dollars from the sustainbility fund and $5 billion from the country’s development partners.

Prime Minister Madbouly added that "the government's new economic refor programme, which is supported by the IMF, primarily aims to safeguard macroeconomic stability, attain public debt sustainability and improve the economy's performance to confront external shocks triggered due to major global crises,

It also aims to strengthen the social safety nets, social protection, enhance the structural reforms to attain growth and provide jobs through the private sector, Madbouly said.

For his part, the CBE gvernor stressed during the presser that "the deal comes as part of the structural measures and policies Egypt has recently adopted under its new economic reform programme."

“This programme will enhance the country’s macro economic indicators and its ability to meet the external obligations that were exacerbated as a result of the Russian-Ukrainian conflict,” Abdalla added.

In mid-October, Egypt and the IMF reached an agreement on the three main pillars of a new economic reform programme to help the country deal with various economic challenges amid global crises.

On the monetary policy side, the governor noted that the CBE targets replenishing the country’s net international reserves (NIRs) in an incremental and sustainable manner, revealing that the bank has designed a programme that aims to bridge the gaps in the country’s financing over the coming four years.

He also asserted that the CBE places a priority over the short and medium terms on curbing the elevated inflation rates to the preannounced target of seven percent (2± percent) through end of the fourth quarter of 2022.

During the presser, Minister of Finance Maait also announced the procedures for implementing the new social protection financing package that the government announced yesterday.

The finance minister said that his ministry has allocated EGP 67.3 billion to implement this package starting 1 November, adding that the public treasury will bear an additional EGP 1.9 billion to maintain oil and gas prices through end of the 2022.

On the financial side, Maait said the deal with the IMF targets lowering the overall debt to GDP ratio to below 80 percent over the medium term.

"The programme aims to provide Egypt with balance of payments and budget support while catalyzing additional financing from Egypt’s international and regional partners to maintain economic stability, address macroeconomic imbalances and spillovers from the war in Ukraine, protect livelihoods, and push forward deep structural and governance reforms to promote private sector-led growth and job creation," according to IMF Mission Chief for Egypt Ivanna Vladkova Hollar.

"Egypt’s international and regional partners will play a critical role in facilitating the implementation of the authorities’ policies and reforms, revealing that additional financing of about $5 billion is projected to be provided through multilateral and regional partners during current FY2022/2023, which ends in June 2023, which will help strengthen Egypt’s external position," read a statement released by the IMF on Thursday.

Course changing decisions

Earlier on Thursday, in an unscheduled meeting, the Monetary Policy Committee (MPC) of the CBE announced raising the key interest rates by two percent (200 bps) to reach 13.25 percent, 14.25 percent, 13.75 percent, and 13.57 percent for the overnight deposit rate, the overnight lending rate, the rate of the main operation, and the discount rate, respectively.

In a statement, the CBE attributed its decision action to elevated global and domestic prices that are expected to keep headline inflation above the MPC’s preannounced target of seven percent (±2 percent) on average through the fourth quarter of 2022.

The decision aims to uphold the CBE’s mandate of ensuring price stability in the local market over the medium term, the statement noted.

It also aims to anchor inflation projections and also to contain demand side pressures and higher broad money growth as well as the second round effects of supply shocks, it added.

Also on Thursday, the CBE raised the exception limit of letters of credit (LCs) for imported shipments from $5,000 to $500,000 starting today after announcing that it will begin the process of phasing out gradually a February decision that mandated the use of (LCs for import finance by December 2022.

On Wednesday, the government raised the minimum wage for public employees from EGP 2,700 to EGP 3,000 in addition to an allowance to those employees and pensioners to meet cost of living increases.

The government also froze household electricity prices through June 2023.

Egypt’s annual headline inflation rose to 15.3 percent in September, up from eight percent in September 2021, the highest level seen since recording 15.7 percent in November 2018.

On a day busy with big decisions, the Egyptian pound fell on Thursday during trading hours by 17 percent against the US dollar and 19 percent against the euro as the Central Bank of Egypt adopts a "flexible exchange-rate regime" as part of the new economic reform programme.

IMF statement

The loan deal is subject to approval by the IMF’s Executive Board, which is expected to discuss the deal in December, according to Hollar.

She added that the rapidly changing global environment and spillovers related to the war in Ukraine are posing significant challenges for countries around the world, including Egypt.

“The IMF team welcomes the authorities’ recent actions to expand targeted social protection, implement a durable flexible exchange rate regime and phase out the mandatory use of letters of credits for import finance, as well as their steadfast commitment to tackle needed macroeconomic adjustments and carry out an ambitious structural reform agenda amidst a challenging global backdrop,” said Hollar.

Hollar also added that Egypt’s government’s fiscal policy under the EFF will be anchored to the reduction of general government debt and gross financing needs, adding that continued fiscal consolidation will be supported by the implementation of the government’s medium-term revenue strategy (MTRS) that targets improving the efficiency and progressivity of the tax system.

“Social protection will continue to be strengthened including through the temporary extension of the emergency support to ration card holders and measures to protect the purchasing power of vulnerable wage earners and pensioners. Broad fiscal structural reforms will also aim to further improve the budget composition, strengthen governance, accountability, and transparency, and support climate mitigation goals,” Hollar noted.

On the monetary policy side, Hollar said that the Central Bank of Egypt (CBE)’s move to a flexible exchange rate regime is a significant and welcome step to unwind external imbalances, boost Egypt’s competitiveness and attract foreign direct investment.

“The commitment to durable exchange rate flexibility going forward will be a cornerstone policy for rebuilding and safeguarding Egypt’s external resilience over the long term. The EFF will support the CBE’s efforts to improve the functioning of the foreign exchange market, increase foreign reserves and further improve monetary policy transmission.

Monetary policy, which will be firmly rooted in the CBE’s price stability mandate, will aim to gradually reduce inflation to within the CBE’s inflation target,” Hollar explained.

The EFF also aims to unlock Egypt’s enormous growth potential through broadening and deepening structural and governance reforms. The program will include policies to unleash private sector growth including by reducing the state footprint, adopting a more robust competition framework, enhancing transparency and ensuring improved trade facilitation, according to Hollar.

She added that the Egyptian authorities also plan to expand targeted social transfers and enhance spending on social assistance, health and education, stressing that these reform measures will be critical to address long-standing constraints to Egypt’s higher, more sustainable and more inclusive growth.

The IMF also announced that the Egyptian government has also requested financing under the newly created Resilience and Sustainability Facility (RSF) that aims at providing affordable, long-term financing to help build resilience, including against climate change.

“Discussions on access under this facility, which could unlock up to an additional $1 billion for Egypt, will take place in the coming months. We would like to thank the authorities and their technical teams for the candid and constructive discussions and look forward to continuing our engagement in support of Egypt and its people,” Hollar concluded.