Egypt has finalised a deal with the International Monetary Fund to receive $8 billion in loans, Prime Minister Mostafa Madbouly announced on Wednesday.
It came hours after the Central Bank of Egypt increased interest rates and allowed the local currency to freely float with no interventions from the state.
The flotation, which was in discussions for months, was a key condition from the IMF to approve Egypt’s loan.
The fund reached an agreement with the Egyptian government in December 2022 to loan $3 billion over 46 months, of which Egypt received a first tranche of $347 million after signing the deal.
But since then, the country’s first review, scheduled for early 2023, stalled due to a delay in Cairo introducing reforms requested by the IMF, which included reduced public spending, the sale of state assets to foreign investors and a more robust private sector presence in the economy.
The increase in the size of the loan to $8 billion was intended to ensure the Egyptian government has enough foreign reserves to withstand the economic effects of freely floating the Egyptian pound.
The flotation has already caused the pound to drop to its lowest level in history on official markets, reaching about 52 pounds to the US dollar on Wednesday afternoon.
Since 2022, Egypt has devalued its currency three times but maintained controls to fix the exchange rate each time.
Wednesday's decision is the first time the currency will be allowed to freely trade on currency markets.
The move came after the Central Bank of Egypt raised its overnight interest rates by 600 basis points at an unscheduled meeting and said it would allow the market to determine the exchange rate.
The devaluation was an attempt to unify the country's official exchange rate and the rate on its parallel market, the central bank said in a statement.
The black market rate had been double the official rate for the past few months, exacerbating a continuing foreign-exchange crunch that has crippled the country's import-heavy economy.
“The CBE is committed to continue the transition to a flexible inflation targeting regime. To ensure a smooth transition, the CBE will continue to target inflation as its nominal anchor, allowing the exchange rate to be determined by market forces,” according to the bank.
Following the flotation, the black market exchange rate has been changing at a fast pace.
On Tuesday, a US dollar was trading at 42 Egyptian pounds on the black market, one trader told The National, explaining that by Wednesday morning, it had increased to 58 pounds before receding slightly to 52 in the early afternoon.
“This sort of fluctuation, both in the official and parallel rates, is entirely expected now that the pound will be allowed to freely float. It will continue responding to various kinds of market stimuli until both rates unify, which is the main goal with this move,” says financial analyst Mohamed Ragab.
After the interest rate increase, the central bank’s overnight lending rate stands at 28.25 per cent while the overnight deposit rate is 28.25 per cent.
The central bank said the rate increase is aimed at lowering inflation, which hit a record high of 38 per cent towards the end of last year but has since eased to about 35 per cent.
Rates will remain unchanged until the desired inflation goals are achieved, it said.
The central bank’s Monetary Policy Committee had previously raised overnight rates by 200 basis points in its first meeting of this year in early February.
“Building on the decision … in February 2024, the Monetary Policy Committee decided to accelerate the monetary tightening process in order to fast-track the disinflation path and ensure a decline in underlying inflation,” the central bank said on Wednesday.
The rate increase is largely in line with what analysts predicted as several international financial institutions, including the Organisation for Economic Co-operation and Development, said 2024 would be a year of tight monetary policy in Egypt before a more pronounced economic recovery is achieved next year.
Egypt recently signed a deal with a UAE consortium to develop its coastal city of Ras El Hekma, under which Cairo will receive $35 billion.
The sizeable investment has been praised as a well-timed lifeline for Egypt’s economy, which is facing its worst economic crisis in history.
“The issue before was that the government did not have enough cash to provide dollars to clients. But after the cash inflows from the Ras El Hekma deal, parallel markets are going to be kept under control much more easily. The liquidity it provides Egypt really is fortuitous,” Mr Ragab said.
“This will mean credit limits on US dollars will be lifted, goods will be cleared from ports and prices will inevitably come down.”
