IMF reaches agreement with Egypt after first review of $5.2bn financing

The International Monetary Fund said the Egyptian economy has performed better than expected despite the pandemic

The International Monetary Fund said it has reached a staff-level agreement with Egypt after the first review of the $5.2 billion financing that was approved in June.

However, the agreement is subject to approval by the IMF’s executive board that will take its decision in the coming weeks. Upon the board’s approval, an additional $1.6bn tranche will be made available to Egypt, IMF said in a statement on late Thursday.

“The Egyptian economy has performed better than expected despite the pandemic … containment measures, supported by effective crisis management and strong implementation of policy programme helped mitigate the effects of the crisis,” Uma Ramakrishnan, IMF’s mission chief for Egypt, said.

“After recording a growth rate of 3.6 per cent in the financial year 2019-20, growth is projected to reach 2.8 per cent in the financial year 2020-21 … with a modest recovery in all sectors except tourism, as the pandemic continues to disrupt international travel,” she added.

IMF said the pandemic-related risks still exist in light of the second global wave of Covid-19 cases.

While domestic activity shows early signs of recovery and financial market conditions improve in Egypt, key sectors like tourism “remain at an almost standstill” and risks linger, it added.

The fund approved a 12-month $5.2bn loan in June to help Egypt deal with pandemic-related challenges and finance its budget deficit and balance of payments shortfalls.

In May, it approved a request from Egypt for emergency financial assistance to help cope with the economic fallout from the Covid-19 pandemic. The $2.77bn borrowed through a Rapid Financing Instrument was intended to address pressing financial needs in the most affected sectors.

Earlier this month, S&P Global Ratings affirmed a 'B' rating on Egypt's short and long-term sovereign debt and maintained a stable outlook, despite elevated external risks to the economy due to the coronavirus pandemic.

Egypt’s economy, like other countries in the world, has suffered due to the coronavirus pandemic. However, the impact has been “less severe” than that faced by many emerging market sovereigns due to the limited lockdown measures taken and a ramping up of healthcare capacity, the ratings agency said in an update.

The Central Bank of Egypt’s monetary policy remains appropriately accommodative, said IMF, adding that the Egypt's banking system remains “liquid, profitable and well capitalised”.

“We welcome the CBE’s recent interest rate cuts to further support economic recovery amid muted inflation,” said Ms Ramakrishnan.

“The exchange rate has modestly appreciated in the wake of an increase in capital inflows. Continued exchange rate flexibility will help absorb external shocks,” she said.

Egypt’s fiscal policy in the financial year 2020-21 remains focused on supporting the immediate priorities in health, protecting the most vulnerable and supporting sectors affected by the pandemic, said the fund.

“The government’s commitment to returning to a primary surplus of 2 per cent of [the] GDP as the economic recovery becomes entrenched will be essential to reduce public debt and support fiscal sustainability,” said Ms Ramakrishnan, adding that the recent publication of contracts awarded for Covid-19-related spending is a welcome step towards increasing transparency.