The International Monetary Fund (IMF) disbursed a $2.77 billion loan to Egypt last week under its Rapid Financing Instrument (RFI), with talks over another loan still under way.
Deputy Governor of the Central Bank of Egypt (CBE) Rami Abul-Naga said that the negotiations with the IMF had not ended and that the amount of the new loan might be close to $6 billion. The funds requested are under a Standby Agreement (SBA).
“Egypt’s economy is large and diversified, and we have the ability to obtain necessary financing to maintain it in balance and fill future gaps,” Abul-Naga said during an interview with Al-Arabiya TV last week, adding that external financing was still essential at this critical time.
Nearly 100 countries have filed inquiries about possible IMF funding since the coronavirus pandemic started, devastating many economies across the globe.
The news of last week’s loan came as an unnamed source told the US financial service Bloomberg the Egypt was seeking more than $5 billion from the International Monetary Fund under a SBA and $4 billion from other lenders. Overall, $9 billion loans were in the making, needed to cover the country’s “funding shortfall that’s estimated at about $10 billion in 2020 by investment banks EFG Hermes and Goldman Sachs,” Bloomberg said.
On Sunday, the World Bank approved a $50 million loan for Egypt as an emergency response under its new Fast Track Covid-19 Facility, a global effort to help strengthen the response to the virus and shorten the time to recovery. The loan will focus on immediate and critical areas of support identified under the government’s Covid-19 response plan.
According to US ratings agency Fitch Ratings, the IMF financing will provide some support for Egypt’s B+/stable rating and foreign reserves. Portfolio flows may be stabilising, it said, but the ongoing coronavirus pandemic could add further pressures on the reserves, especially if the current exchange rate persists.
Egypt’s foreign reserves currently stand at $37 billion, according to the CBE, down from $45 billion in February before the pandemic started to take its toll on the economy.
The CBE announced that about $3.1 billion of the reserves had been used to cover Egypt’s imports of strategic goods.
According to Abul-Naga, the CBE injected more than LE500 billion to secure needed financial liquidity for the market and support key sectors such as the industrial, agricultural, real estate and tourism sectors. “This helped in easing the repercussions of the coronavirus crisis,” he said.
Gross foreign reserves are still substantial, according to Fitch Ratings, but the coronavirus pandemic has been hitting Egypt’s external receipts hard, in particular tourism earnings and remittances. Experts believe that the economy is still performing relatively well, but that the loans are needed to tide it over the crisis.
“The price of the US dollar is stable, and the rate of inflation is still acceptable,” said Mohsen Adel, vice president of the Egyptian Association for Finance and Investment. He said that countries around the world had applied for loans from the IMF in order to increase their financial flexibility during the current period, and Egypt was no exception.
He explained that Egypt had applied for the loans to support economic reform measures and safeguard the gains made from reform efforts over the last few years, adding that Egypt was the only country in the Middle East with economic growth expected this year, estimated at up to 2.8 per cent in 2021.
The IMF loan will be spent on health projects, education, and infrastructure, in particular in the telecommunications sector, he added. He noted that the strong credit position of Egypt, backed by its successful economic reform programme, had helped to facilitate borrowing from international financial institutions and obtain medium-term financing.
Egypt successfully completed a three-year $12 billion IMF-backed reform programme in 2019, during which the country went through difficult changes, including the depreciation of the Egyptian pound and the lifting of energy subsidies.
The loans were needed to support and strengthen the Egyptian economy in the light of the uncertainty generated by the global financial crisis resulting from the coronavirus pandemic, Adel said. The $2.77 billion loan approved last week had an interest rate lower than one per cent, he added.
According to CBE data, Egypt’s total external debt rose 16 per cent year-on-year to reach $112.6 billion at the end of the second quarter of 2019-20. The debt rose by only two per cent on the previous quarter ending in September.
Adel added that the economic reforms had increased the flexibility of the Egyptian economy to deal with global changes. The measures taken by the government at the beginning of the coronavirus crisis to protect the economy had also helped it, including by reducing the prices of natural gas and electricity to industry, supporting exporters with LE1 billion to cover their dues, delaying due dates for taxes and loans, and increasing the stocks of strategic commodities in the market.
Adel said that now was an opportunity to rebuild local industries, stimulate small and medium-sized industries, and raise export capacities to increase Egypt’s share of exports worldwide. The country had a great opportunity now because export markets were suffering from stalled supplies from the Southeast Asian countries, meaning that Egypt could penetrate new markets.
Egypt had the opportunity to attract new foreign investment in the post-coronavirus period, he said. “We must equip ourselves by passing a new package of legislative amendments and promoting new infrastructure and economic stability for Egypt. This could turn the crisis into a real opportunity for the Egyptian economy in the coming period,” he concluded.
*A version of this article appears in print in the 21 May, 2020 edition of Al-Ahram Weekly