IMF countdown begins

Nahla Abul-Ezz, Thursday 20 Oct 2022

Egypt is anticipating its fourth loan from the International Monetary Fund in order to boost the economy, increase foreign-currency reserves, and cushion the effects of the global inflationary wave.

IMF countdown begins
Georgieva with the CBE governor and the minister of finance


Egypt will be able to access the long-awaited International Monetary Fund (IMF) loan “very soon”, according to statements by senior IMF officials and Egypt’s Ministry of Finance.

They came after a meeting between IMF officials and an Egyptian delegation including the Central Bank of Egypt (CBE) governor as well as the minister of finance on the sidelines of the annual meetings of the World Bank and the IMF in Washington.

IMF Chief Kristalina Georgieva said at a press conference on Friday that the package could be finalised within days, as all the main “big policy issues” had been agreed upon and only small details were still under discussion.

Gerry Rice, director of communications at the IMF, released a statement on Sunday noting that both sides had agreed on policies related to continued fiscal consolidation to safeguard public-debt sustainability and ensure a steady decline of the debt-to-GDP ratio over the medium term as well as further expansion of the social safety net for the most vulnerable and improvements in the budget composition.

On foreign-exchange policy, a thorny issue in the negotiations, the IMF said it had agreed with Egyptian officials on “monetary and exchange-rate policies that would anchor inflation expectations, improve the functioning of the foreign-exchange market, and bolster Egypt’s external resilience.”

“This would enable Egypt to gradually and sustainably rebuild its foreign reserves,” it said.

Cairo is hoping to receive its fourth IMF loan in six years to overcome the negative impacts of the global economic crisis triggered by the war between Russia and Ukraine.

In 2016, Egypt received a $12 billion loan under the IMF’s Extended Fund Facility to implement its economic reform programme, which was announced as successful upon its completion in July 2019.

In 2020, Egypt received two loans, one for $2.8 billion under the IMF’s Rapid Finance Facility and the other for $5.2 billion under the fund’s Stand-By Arrangement, to cope with the repercussions of the Covid-19 pandemic.

Mustafa Salem, deputy head of parliament’s Planning and Budget Committee, expects the loan to range between $3 and $6 billion and to be repaid over three years. He anticipates the first tranche to be delivered in November following the fund’s approval of the loan, which will contribute to the stabilisation of the economic outlook and the stability of the exchange rate, he said.

Egypt devalued the pound by 16 per cent in March and has been following a gradual devaluation since then with the decline accelerating in the past month. The pound is currently traded at LE19.7 to the dollar compared to LE15.7 in March.

Mustafa Shafie, head of research at Al-Arabiya Online, expects the loan will be conditional upon the implementation of measures concerning the state’s general budget and the reduction of the debt-to-GDP ratio.

A Ministry of Finance statement quoted Minister of Finance Mohamed Maait as saying that Egypt’s reform programme includes three main pillars: fiscal policy reforms; monetary policy reforms; and structural reforms.

He explained that the government had agreed with the IMF to reduce local debt to less than 80 per cent of GDP in the medium term, prolong the life of local debt, diversify sources of funding, improve the efficiency of revenues and spending in the public budget, increase spending on human development, and continue to expand the financing of social-protection programmes, especially those aimed at increasing the incomes of public-sector workers.

Shafie added that one of the fund’s conditions was the complete floatation of the Egyptian pound, in addition to other measures concerning interest rates and the means to control inflation.

Inflation in urban parts of Egypt rose by 15 per cent in September compared to its level a year earlier. This is compared to 14.6 per cent in August and is the highest increase in almost four years.

The Monetary Policy Committee (MPC) of the CBE last month kept interest rates unchanged at its third consecutive meeting. It said that it would “temporarily tolerate” the inflation rate going beyond its target of seven per cent (± two per cent) as the price hikes are the result of external supply-side pressures resulting from the war in Ukraine and not due to increased local demand.

Banking expert Mohamed Al-Beih said that Egypt’s net foreign reserves had lost 25 per cent of their value since the end of 2019, when they fell from $45.4 billion to $33.37 billion in June 2022, with Egypt thus losing more than $12 billion in three years.

As a result, it has become necessary for Egypt to acquire another loan from the IMF. The fund’s approval acts as a credit certificate making it possible to obtain other loans and grants from other institutions, he added.

Al-Beih said that the recent discussions had resulted in an agreement on the policies needed for Egypt’s new economic reform programme, which will be supported by the IMF.

Ahmed Kouchouk, deputy minister of finance for fiscal policies and institutional reform, said IMF loans are usually dispersed through the CBE, whose cash reserves are strengthened.

He said that Egypt is inclined to carry out structural reforms to cement the economy’s competitive edge and make more room for the private sector. Egypt has a political leadership that wants to encourage the private sector, he added, together with a strong infrastructure. It can open its doors to local and foreign investments to attain comprehensive and sustainable development.

Kouchouk said that Egypt’s new State Ownership Policy Document is a strategic guarantee to empower the private sector and increase its participation in economic activity. The document will also send a reassuring message to local and foreign investors and fortify the confidence of international institutions in the Egyptian economy.

The government plans to exit from 79 sectors of the economy and decrease its investments in 45 other sectors, he said.

The new IMF loan is meant to raise the efficiency of public spending, ensure the optimal utilisation of state resources, improve the budget structure, and enhance financial transparency to achieve economic and development goals, Maait said.

It also aims to mitigate the effects of global economic conditions on people’s standard of living and upgrade the services provided to them, as well as to expand the fiscal and structural policies that help cement the social safety net for impoverished groups and cushion the effects of the global inflationary wave.

*A version of this article appears in print in the 20 October, 2022 edition of Al-Ahram Weekly.

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