Defending the IMF deal

Gamal Essam El-Din , Thursday 10 Nov 2022

Prime Minister Mustafa Madbouli says Egypt’s new deal with the IMF will shore up foreign exchange reserves and help contain inflation.



Prime Minister Mustafa Madbouli claims the $3 billion loan deal reached between Egypt and the IMF on 27 October will help stabilise the Egyptian pound, shore up foreign reserves, and contain inflation rates.

“The deal with the IMF was a necessity. It will help the country undertake a package of fiscal reforms, narrow the budget deficit, and cut public debt,” said Madbouli.

Madbouli’s remarks came in a letter sent to officials leading the National Dialogue.

The prime minister wrote: “The IMF deal and the 23-25 October Economic Conference recommended that Egypt adopt a flexible exchange rate. While adopting this new policy has led the Egyptian pound to lose more than 20 per cent of its value against the dollar in recent weeks this is a temporary reaction, after which the exchange rate and inflation levels will stabilise.”

Following the first IMF-inspired economic reform programme in November 2016 inflation rates in Egypt spiked after the pound was devalued, but Madbouli said this was a temporary development, after which prices stabilised.

Defending a flexible exchange rate, Madbouli insisted “it will help boost exports by making them more competitive and cut imports by making them more costly.”

In a TV interview on Sunday the IMF’s Managing Director Kristalina Georgieva said “moving towards a durably flexible exchange rate regime was a smart move because protecting the local currency only leads to depleting the country’s foreign reserves.”

Georgieva added that the terms of the new loan will not see Egypt begin repayments for 10 years, with a further decade to pay off the principal and interest.

A flexible exchange rate reflects supply and demand and aims to help the country absorb external financial shocks, said Madbouli. It does not restrict the movement of foreign capital and helps the Central Bank intervene to stabilise prices in a way that supports both consumers and investors.

Madbouli revealed that the government is committed to “procedural and legislative reforms that will help discipline the market and stabilise prices on the long run” and will “offer greater financial incentives to farmers to help meet the country’s need for strategic crops, particularly wheat.”

The Central Bank of Egypt (CBE) also plans an updated index that will value the Egyptian pound against a basket of currencies rather than exclusively against the US dollar in an attempt to help stabilise the exchange rate and control inflation.

Egypt’s net foreign reserves rose for the second month in a row, to $33.4 billion in late October from $33.198 billion in September, the CBE said on 3 November.

On the relationship between the government and the CBE, Madbouli said the parameters were firmly established by existing legislation. “The CBE is independent, mainly targets inflation in coordination with government authorities, and ensures that government borrowing follows international standards.”

Addressing tourism and agriculture, he said the government aims to double tourism revenues to $30 billion over the next few years through a variety of mechanisms, including increasing the number of flights and promoting yacht tourism.

“We aim to double the number of flights coming to Egypt by 2028, with a particular focus on budget options. The government would also like to simplify the licensing process for investors in tourism projects and improve the performance of tourist ports.”

On Sunday, the Senate’s Financial and Economic Affairs Committee began discussing amendments to the 2017 Investment Law that will grant tax breaks to investors who use FX to finance 55 per cent or more of their projects.

Madbouli said that the government policy of raising the delivery price of strategic crops had seen an increase in the production of wheat, from four million tons in 2021 to 4.2 million tons in 2022, and that “we plan to raise delivery prices to LE1,000 in 2023, up from LE820 in 2022, and raise production to five million tons by the end of 2025.”

Madbouli also said social protection measures continue to play an important role in containing the economic fallout of the war in Ukraine and the impact of liberalisation policies.

“We offer subsidised bread and food commodities to 64 million citizens, and disburse LE1.1 billion in monthly cash transfers to 9.1 million citizens, and there is another LE130 billion worth of new social protection initiatives, including extending the freeze on electricity and fuel prices for six months and disbursing a bonus of LE300 to state employees, public sector workers, and pensioners.”

Diaa Rashwan, general Coordinator of the National Dialogue’s Board of Trustees, told reporters that Madbouli’s comments in his letter will be referred to the dialogue’s economic subcommittees to be studied.

*A version of this article appears in print in the 10 November, 2022 edition of Al-Ahram Weekly.

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