The International Monetary Fund (IMF) announced on Wednesday that it would be expanding its current loan programme with Egypt by an additional $5 billion. This move came as the Egyptian central bank decided to allow the Egyptian pound to plummet and declared that the currency would now be able to trade freely on the market. This new agreement is an extension of the $3 billion, 46-month Extended Fund Facility that was initially established with Egypt back in December 2022. The primary objective of this programme was to transition towards a more flexible exchange rate system. However, progress had stalled over the past year as Egypt reverted back to managing its pound at a fixed rate, rather than allowing it to float freely.
The IMF’s Egypt mission chief, Ivana Vladkova Hollar, emphasized that the goal was not to devalue the pound artificially but rather to move sustainably towards a unified market-determined exchange rate. She mentioned that the central bank’s decision to let the currency float freely was a positive step in this direction. Vladkova Hollar further explained that under this new framework, there would be observable fluctuations in the exchange rate in response to economic conditions, rather than just one-way devaluations.
Policy Reforms
The IMF stated that it had reached an agreement with Egypt on the necessary policies to complete the delayed first and second reviews under the programme. These reviews are crucial as they unlock disbursements of funding pending approval by the fund’s executive board. The policy package focuses on maintaining debt sustainability, restoring price stability, and re-establishing a well-functioning exchange rate system. It also includes structural reforms aimed at promoting private sector-led growth and job creation. Commitments were made to a flexible exchange rate, monetary tightening, fiscal consolidation, social spending to protect vulnerable groups, and reforms to eliminate privileges for state-owned enterprises as part of the original programme.
Egypt faced economic challenges following the fallout from the war in Ukraine, which led to investors withdrawing $20 billion from the country in a matter of weeks. The situation was further exacerbated by spillover effects from the conflict in the neighboring Gaza Strip, which posed new risks to Egypt’s dollar revenues. These risks included disruptions to shipping in the Suez Canal, which saw a significant decline earlier this year due to Houthi attacks on vessels in the Red Sea. The country also experienced a surge in annual headline inflation, reaching a record 38% in September before slightly easing.
Egypt recently secured a deal with the Emirati sovereign wealth fund ADQ, promising $35 billion in investments by late April. While this deal was separate from the IMF negotiations, the IMF’s statement acknowledged that it helped alleviate immediate financing pressures. The statement also highlighted the importance of Egypt’s international and regional partners in supporting the implementation of the government’s policies and reforms.
The IMF’s decision to increase its loan programme with Egypt by $5 billion and the Egyptian central bank’s move to allow the currency to float freely mark significant developments in Egypt’s economic reform efforts. The focus on implementing structural reforms, restoring price stability, and promoting private sector growth will be crucial in ensuring the success of the programme. It is imperative for Egypt to navigate the external challenges it faces and leverage its partnerships with international and regional allies to drive sustainable economic growth and stability in the region.
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