Economy

IMF Approves $12 Billion Three-Year Funding Agreement with Egypt, According to Reuters

By Lin Noueihed and Ahmed Aboulenein

CAIRO – The International Monetary Fund (IMF) has tentatively agreed to provide Egypt with a $12 billion loan facility over three years to support a governmental reform initiative. This program aims to address a budget deficit and stabilize currency markets.

The Extended Fund Facility (EFF) arrangement is pending final approval from the IMF executive committee, which is expected in the upcoming weeks.

"Egypt is a strong country with great potential, but it faces some urgent issues that need to be addressed," stated Chris Jarvis, the head of the IMF’s mission in Cairo.

The reforms slated as part of this agreement include reducing subsidies, implementing a Value Added Tax (VAT), and easing bureaucratic processes for foreign investors. The IMF is also urging Egypt to focus on resolving the ongoing dollar shortage and aim to bring inflation down to single-digit levels.

"The program seeks to enhance the functioning of foreign exchange markets, reduce the budget deficit and government debt, as well as to stimulate growth and create jobs," Jarvis added in his statement.

Following the announcement of the deal, Egypt’s dollar-denominated bond maturing in 2025 surged to its highest trading level since late September 2015. Additionally, the Egyptian stock market saw a modest increase of 1.1 percent by mid-afternoon.

Investment managers noted that while the loan could relieve financial pressures and attract foreign investment, they are hesitant to invest in stocks until there is greater assurance that the agreement will be finalized and the reforms enacted.

In late 2012, Egypt struck a preliminary deal with the IMF for a $4.8 billion loan, but this agreement fell through.

"We do not anticipate that IMF lending will result in an immediate turnaround," remarked a note from Capital Economics based in London. "In the short term, elevated inflation and stricter monetary and fiscal policies will likely inhibit a significant uptick in domestic demand. However, we are more optimistic regarding the implications this deal has for medium-term growth potential."

DEVALUATION

Although the IMF has not provided a specific implementation timeline, Egypt has already initiated a five-year subsidy reform program that began in 2014 and recently declared further increases in electricity prices. A proposed VAT law is currently under discussion in parliament.

The pressing issue remains the timing and nature of exchange rate adjustments in a country that has maintained an artificially strong currency while rationing dollars since the 2011 revolution disrupted tourism and foreign investment, resulting in a shortage of hard currency.

This dollar scarcity has severely hampered trade, making it difficult for manufacturers to import essential components, disrupting production, and stifling growth. It has also complicated profit repatriation for foreign companies, thereby deterring new investments.

Jarvis emphasized during a news conference that the objective of adjusting the exchange rate and monetary policy is to eliminate hard currency shortages and reduce inflation to single digits. He stated, "Transitioning to a flexible exchange rate regime will enhance competitiveness, support exports and tourism, and attract foreign direct investment, fostering growth and job creation while lowering financing needs."

Central Bank Governor Tarek Amer acknowledged that maintaining the Egyptian pound’s fixed rate was a mistake but asserted it would not be allowed to float until foreign reserves reach at least $25 billion. Currently, reserves stand at approximately $15.5 billion, covering less than three months of imports and being less than half of their pre-2011 level.

Economists predict that the IMF deal will necessitate interest rate hikes to stabilize the currency and curb inflation, which currently hovers around 14 percent since the last devaluation in March.

"In the short term, an agreement with the IMF is likely to trigger a devaluation of the pound along with higher interest rates," Capital Economics predicted, estimating the pound could be devalued to 9.5 against the dollar by the end of the year, down from the current rate of approximately 8.78.

Furthermore, Egypt’s reform agenda has laid the groundwork for a separate $3 billion, three-year lending agreement with the World Bank established in December, although those funds have yet to be released pending parliamentary approval of the necessary reforms, including the contested VAT.

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button

Adblock Detected

Please consider supporting us by disabling your ad blocker