Egypt will receive a considerably larger loan, will not need to entirely float the pound, and does not need to rush to sell state-owned assets. This was the sum of recent statements made by International Monetary Fund (IMF) Managing Director Kristalina Georgieva during a conference held in Dubai this week. 

“A large amount” is how Georgieva described the additional loan package that the IMF is currently negotiating with the Egyptian government. The increase in the size of the support extended to Egypt aims to “give a dose of confidence to the Egyptian economy”, she said, neither giving the date of the disbursing of the loan or its exact size. 

Speculation had put the value of the new deal anywhere between $6 and $12 billion, and analysts expect the deal to be finalised and a new devaluation to take place in the coming weeks. The good news in Georgieva’s statements is that the negotiations are about a more flexible exchange rate and not a complete floating of the pound.

The Central Bank of Egypt (CBE) is believed to have been intervening in the market to support the pound against the dollar to fix the exchange rate at LE30.95 against the dollar since March. Meanwhile, the dollar has been changing hands in the parallel market at as high as LE72 to the pound two weeks ago before plunging by LE15 to LE20 last week amid news of an imminent deal with the IMF.

US investment bank Goldman Sachs believes that following the deal policymakers will continue to manage the official exchange rate but possibly with more flexibility than has been the case in recent years. Farouk Soussa, author of a Goldman Sachs report, attributes this conservative approach to fears that the exchange rate would overshoot or even exceed the parallel market rate in the event of a full floatation.

According to Amr Adly, an assistant professor in the Department of Political Science at the AUC, a free floatation was ruled out due to several factors, the most important of which is the long tradition of state control over the exchange rate through the CBE and large state-owned banks. 

“This approach stems from the fact that the exchange rate is linked to local inflation rates and in the light of Egypt’s great dependence on imports, especially food and fuel, this makes the exchange rate a socially sensitive and security issue,” he wrote on the Al-Manasa website.

Lowering inflation was one of the points Georgieva said the government should work on, reiterating her previous statements that it should target inflation to alleviate pressures on Egyptian households. 

Inflation rates rose for most of last year, and even after cooling down for the last two months they are still at the highest level in five years. 

Last week, the government revealed a set of measures at a cost of LE180 billion aimed at helping people face the rising inflation. This includes a 50 per cent hike in the minimum wage for state workers and a 15 per cent increase in pensions.

Georgieva also said that the long-delayed first and second reviews of the IMF’s loan programme to Egypt are to be concluded in a matter of a “few short weeks”. These reviews should have taken place in March and September last year but were stalled due to Egypt’s reluctance to adopt a durable flexible exchange-rate regime as well as the slow pace of the government’s privatisation programme.

In addition to selling a 51 per cent stake in the holding company owning Egypt’s seven historic hotels, the state also divested stakes in four companies during 2023. The deal to sell three chemical companies, the Egyptian Ethylene and Derivatives Company (Ethydco), the Egyptian Linear Alkyl Benzene (ELAB), and the Egyptian Drilling Company (EDC), is still being negotiated with the Abu Dhabi Investment Fund. 

Georgieva’s statements included a surprising shift in the fund’s previous recommendations to the government to secure needed funds through selling stakes in state companies. She pointed out that Egypt should not rush to sell state assets under the current circumstances, referring to the war on Gaza.  

The recent report by Goldman Sachs highlights the fact that the local banking sector lacks the needed dollar liquidity to cover the wide backlog in dollar financing. It noted that the expected supply inflows following a devaluation should be in line with the current high demand for dollars in the banks. 

The CBE seems to be thinking in the same way. Last week, it ordered the banks to inform it of all their open dollar positions to know the exact value of unmet dollar needs. It also launched a crackdown on many illegal currency traders to limit activities in the parallel market.

Goldman Sachs advised the government to act both to curb demand for the dollar and to build dollar buffers before any devaluation. 

To do so, it prescribed continuing to raise interest rates to reduce demand and lower inflation and to limit expenditures to tighten the budget deficit and consequently reduce the need for foreign borrowing, which is blamed for the increase in demand for dollars to repay previous dues. 

The CBE increased its overnight interest rates by two per cent on 1 February after holding them steady since September. A day earlier, the cabinet announced that it is tightening its belt and will decrease public spending by 15 per cent.

As for increasing foreign-currency inflows, Goldman Sachs called on the government to borrow from external lending partners and to continue selling assets.  

Statements by different IMF officials point out that the new loan would be paired with funding from other international partners without specifying if these would be international institutions or Gulf governments. 

Ziad Daoud, chief emerging markets economist at the US investment firm Bloomberg, wrote in a note that “as the situation turns more dire for Egypt, there’s one silver lining. External funders — the Gulf Cooperation Council, the IMF, and Europe — are likely to intervene in a desperate situation to avoid another pocket of instability in the Middle East.”

A $22 billion deal currently in the making with the UAE to buy and develop the Ras Al-Hekma area would provide the CBE with some of the needed liquidity to buffer for a new devaluation. 

* A version of this article appears in print in the 15 February, 2024 edition of Al-Ahram Weekly