The escalating tensions in the Red Sea are adding to Egypt’s economic challenges with the expected decline in tourism and Suez Canal receipts. In response, Egypt is currently in discussions with the International Monetary Fund (IMF) to secure additional financing for the $3 billion loan deal signed in 2022.
“The discussions are on a set of policies that would support the completion of the first and second reviews of the Extended Fund Facility [EFF] that Egypt has with the fund,” Julie Kozack, head of the IMF’s Communications Department and spokesperson for the fund, told Al-Ahram Weekly.
According to Kozack, these policies include tightening both monetary and fiscal policies as well as shifting to a flexible exchange-rate system, which would support the authorities’ commitment to reducing inflation and gradually moving to an inflation-targeting regime.
“Additional financing will be critical to ensure successful programme implementation,” Kozack said, adding that the details regarding the approval of the additional amount will be announced in due course.
Last week, the World Bank lowered Egypt’s GDP growth forecast for 2024 to 3.3 per cent from the 3.7 per cent it expected in October, according to the Global Economic Prospects Report.
The report predicted that tensions in the Middle East could further fuel the inflationary pressures Egypt is suffering from, restrict private-sector activity, and increase strains on external accounts due to anticipated contractions in both tourism and remittance revenues.
This situation has eroded Egypt’s ability to fulfil its commitments under the ongoing $3 billion EFF loan deal signed in December 2022.
Even before the eruption of the war in Gaza, Egypt was reluctant to adopt a flexible exchange-rate regime for fear that it would push up already high inflation rates. Reforming the exchange rate regime is one of the main conditions set by the IMF to extend the $3 billion facility.
A high-level delegation including Central Bank of Egypt (CBE) Governor Hassan Abdallah and Mohamed Maait, the minister of finance, was in Washington last week to discuss a potential upping of the value of the loan.
Since the IMF greenlighted the deal and handed Egypt the first tranche of the loan valued at $347 million, Egypt has failed to complete the first and second reviews of the programme with no tangible progress being attained.
During the visit, the delegation met with US Secretary of the Treasury Janet Yellen as well as with top officials of the IMF led by the fund’s Managing Director Kristalina Georgieva.
According to sources close to the ongoing discussions, a potential new loan deal, ranging between $2 and $3 billion, along with the resumption of the ongoing programme were on the negotiating table.
The IMF approved on 15 December a 50 per cent increase in its member’s borrowing quotas in response to the unprecedented challenges the global economy is experiencing.
The sources also told the Weekly that the Egyptian delegation had asserted the country’s commitment to meeting the current loan conditions, showcasing the actions Egypt has been taking with regard to monetary policy, financial policy, private-sector empowerment, the privatisation programme, supporting the social safety net, and phasing out fuel subsidies, along with the actions taken in terms of navigating the US dollar shortage.
The discussions also addressed Egypt’s request to reschedule the reviews of the ongoing EFF loan programme, a step that would extend the duration of the deal to 2028 instead of 2026.
Actions taken over the last two weeks hint that a potential hike in interest rates and a further devaluation of the Egyptian pound are looming.
The two major state-owned banks, the National Bank of Egypt (NBE) and Banque Misr, issued new high-yield one-year certificates of deposit (CDs) with 27 per cent and 23.5 per cent interest rates, respectively. The Nasser Social Bank issued a 20-per cent annual yield CD.
According to statements by the head of the Egyptian Banks Federation Mohamed Al-Etrebi, the NBE and Banque Misr had collected over LE205 billion a week after the issuance of the CDs on 4 January.
Meanwhile, the cabinet has released an economic and social strategy document that outlines the economic targets for the coming six years. Among the strategy’s ambitious goals is increasing the country’s foreign-exchange receipts to $300 billion by 2030, as well as bringing down inflation to single-digits and raising social spending.
Maait has also announced a new draft of the income tax law that will be submitted to community dialogue within the coming weeks. The government plans to increase the minimum wage for government employees and pensions — currently standing at LE4,000 and LE1,300, respectively — within two months, according to statements by Samir Sabri, rapporteur of the Investment Committee of the National Dialogue, on Saturday.
The sources added that the new social and economic strategy the cabinet has launched represents a cornerstone in the ongoing discussions with the IMF when it comes to securing additional financing and rescheduling the current programme, especially given the serious escalation in the Middle East region.
“Egypt is suffering from a huge financing gap that exceeds $8 billion for the current 2023-24 fiscal year and could amount to over $20 billion until 2026. New finances are crucial for the Egyptian economy to bridge such a gap and also to meet its financial needs,” the sources told the Weekly.
Tightening the country’s fiscal and monetary policies with a flexible exchange rate is a cornerstone of the ongoing discussions.
In 2023, the CBE hiked key interest rates by three per cent (300 bps), bringing the total hikes applied since March 2022, when the war in Ukraine erupted, to 11 per cent. Meanwhile, Egypt devalued the local currency once in 2023, with three waves of currency devaluation against the US dollar being applied since March 2022.
The dollar’s rate is currently LE30.8 in the official market, while the parallel market rate exceeds LE54.
* A version of this article appears in print in the 18 January, 2024 edition of Al-Ahram Weekly
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