Improving foreign-exchange flows

Sherine Abdel-Razek , Wednesday 12 Jun 2024

As the IMF closes its third review of its loan to Egypt, foreign-exchange inflows to the country are showing a marked improvement.

Improving foreign-exchange flows


The International Monetary Fund (IMF) has reached a staff-level agreement with Egypt on the third review of the loan programme signed in December 2023, giving Cairo access to $820 million in funds upon the IMF board’s approval.   

The IMF sent Egypt a similar tranche of the loan in April on the heels of the agreement in March to increase its value from $3 billion to $8 billion after the IMF concluded its delayed first and second review.

An initial tranche of $347 million was dispersed when the loan was first signed in December 2022.  

On Thursday, an IMF statement presented the findings of a Fund mission that visited Egypt from 12 to 26 May. It noted that Egypt is realising progress in its restoration of macroeconomic stability despite the adverse effects of the war on Gaza and the disruptions in the Red Sea on the economy.   

A local financial daily quoted an unidentified source last week as saying that Suez Canal revenues had declined by 64 per cent year-on-year in May to reach $338 million.   

“While geopolitical tensions and their impact on Egypt remain challenging, the authorities have stayed the course to preserve macroeconomic stability through fiscal discipline, tight monetary policy, and a shift to a flexible exchange-rate regime,” IMF Egypt Mission Chief Vladkova Hollar said in a statement.  

In March, the government devalued the pound by 40 per cent, saying that it was allowing its value to be determined by market forces, increased interest rates by six per cent, and said it was putting a limit of LE1 trillion on its investments to reduce public spending.  

These policies have helped to increase the availability of foreign currency, put brakes on inflation, and prompted recovery in the private sector, noted the statement.  

According to the Central Bank of Egypt (CBE), Egypt’s net international reserves reached $46.1 billion at the end of May compared to $41 billion a month earlier, with part of the Ras Al-Hekma revenues being directed to augment the reserves.

“This has vastly improved Egypt’s external position and allays fears of foreign-exchange liquidity crunches or sharp falls in the pound. Coupled with the tight fiscal stance, concerns of a sovereign default have disappeared,” said Capital Economics, a London-based macroeconomic think tank.   

The availability of foreign currency has led to the release of billions of pounds worth of imported commodities stuck in the ports, resulting in the increased supply of some commodities and thus reducing their prices.   

The May inflation figures released on Monday showed a decline in the annual urban inflation rate for the third consecutive month to reach 28.1 per cent from 32.5 per cent in April, its lowest level since the beginning of 2023. The decline exceeded the forecasts of a Reuters poll of 19 analysts, which expected it to edge down to settle around 30.4 per cent.   

The drop resulted from a slowdown in food and beverage inflation from 40.5 per cent year-on-year in April to 31 per cent in May, its weakest reading in 18 months, according to Capital Economics.   

The figures do not show the effect of the 300 per cent hike in the price of subsidised baladi bread that was introduced in the first week of June.

“The hike in the price of subsidised baladi bread and suggestions that fuel and electricity prices will be raised in July will lead to inflation ticking back up in June and July,” according to James Swaston of Capital Economics.   

He added that while the headline rate should slow heading into 2025, it will remain above the CBE’s target range, which makes an interest rate cut unlikely until early next year. Egypt’s inflation target lies between five and nine per cent.   

In its statement, the IMF called for sticking to an “inflation-targeting regime” by maintaining the government’s monetary tightening policy to reach the CBE’s inflation target.  

Hollar said that new privatisation deals would help the country to manage its debt better, improve efficiency, and attract new investment, while generating additional resources for the treasury.

News on the privatisation front has been slow, however. Minister of Planning Hala Al-Said said two weeks ago that there are seven bidders showing interest in buying shares in fuel retailer Wataniya. There is also speculation about a US entity submitting an offer to buy the Gabal Al-Zeit Wind Farm.

The country has witnessed an improvement in foreign-currency liquidity since the Ras Al-Hekma deal, which helped the government float the pound and contributed to the unification of the exchange rate.

By including the $35 billion inflows from the deal, the country has received pledges of $57 billion of aid agreements from international institutions including the IMF, the World Bank, and the EU.    

“Portfolio inflows between March and May have been rapid and sizable at $13.8 billion into bills and bonds via the secondary market,” according to the Swiss investment bank UBS. In a recent report, the bank said its analysis shows excess foreign-exchange inflows into the Egyptian economy (and available for reserves build-up) of around $7 to $8 billion over the four quarters ending in the second quarter of 2025.   

This figure would increase to $19 to $20 billion if both foreign direct investment and portfolio investment increased by 30 per cent and remittances return to their levels in 2021-22.  However, if Suez Canal inflows do not recover from their levels in the first half of the year, this figure turns into a small net outflow of $2 to $3 billion.

The bank advises investors to invest in Egypt’s treasury bills without hedging for fluctuations in the dollar-pound exchange rate, which it put at LE46 to LE51 for the remainder of the year.    

On a different note, the government is trying to secure more foreign funding. Local media outlets said that several officials were in London last week to gauge the idea of new debt issuance in the international markets.   

In April, Finance Minister Mohamed Maait said that the government would decide about tapping the international debt market during July and August.   

In 2023, Egypt sold around $1 billion in bonds denominated in Chinese yuan and Japanese yen.

* A version of this article appears in print in the 13 June, 2024 edition of Al-Ahram Weekly

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