Egypt seeks IMF support to ease fall-out from Ukraine war

Cairo says consultations with IMF might include more funding

A street scene in Cairo, Egypt, in April 2020. AP

Egypt on Wednesday confirmed it is seeking the support of the International Monetary Fund to weather the damage from the Ukraine war on its economy.

Consultations with the Washington-based lender were focused on a “new programme designed to support the Egyptian state in its comprehensive economic reform plan," the government said in a statement. "The programme might include additional funding for Egypt."

Egypt, the most populous Arab country, is facing new economic headwinds after Russia's invasion of Ukraine, which prompted foreign investors to flee emerging markets and disrupted the global supply chain.

The IMF said it is cognisant of mounting challenges for the Egyptian economy.

IMF staff are “working closely with the authorities to prepare for programme discussions with a view to supporting our shared goals of economic stability and sustainable, job-rich, and inclusive medium-term growth for Egypt,” Celine Allard, the fund's mission chief for Egypt, said.

On Monday, Egypt’s central bank raised its key interest rates by 100 basis points in an exceptional monetary policy committee meeting. The Egyptian pound subsequently depreciated as much as 15 per cent after it had remained little changed since November 2020. On Wednesday, the currency was slightly up at 18.32 pounds to the dollar.

The first rate hike since 2017, underpins rising international commodity prices due to the Russia-Ukraine conflict and increased risk-off sentiment adding to external imbalances were key factors behind the CBE move, Abu Dhabi Commercial Bank said in a research note.

"We see this devaluation as a positive reflection of the shift in external fundamental developments, reducing the overvaluation of the EGP and supporting capital inflows," ADCB said. "We now see scope for an additional 200-300 bps of rate increases by end-2022."

Egypt this week unveiled an emergency, $7.05 billion relief programme to soften the blow on the most vulnerable Egyptians from rising food prices. About 30 per cent of Egypt’s 102 million people live under the poverty line.

A bread seller carries a tray of Egypt's traditional 'baladi' flatbread outside a bakery, in Cairo. AP

Russia and Ukraine have for years combined accounted for 80 per cent of Egypt’s large wheat imports, which were about 13 million tonnes last year.

"Egypt has been one of the countries most impacted by the consequences of Russia's war with Ukraine," Hasnain Malik, strategy and head of equity research at Tellimer Research, said.

"As a major importer of wheat – from and tourism destination for – both countries, Egypt's balance of payments has taken a big hit."

With large external financing needs and non-resident holdings in Egypt's domestic government debt market, rising global risk aversion increases the risk of capital outflows and funding constraints that could weigh on Egypt's reserve buffers, Mr Malik said.

The war is also affecting Egypt’s tourism industry, one of the biggest sources of foreign currency for the country, as hundreds of thousands of visitors from Russia and Ukraine staying away from popular Red Sea resorts.

"The rapidly changing global environment and spillovers related to the war in Ukraine are posing important challenges for countries around the world, including Egypt," the IMF said.

Macroeconomic and structural policy measures can mitigate the impact of this shock on the Egyptian economy and support the country Egypt’s medium-term growth prospects.

"To this end, the authorities’ recent actions to expand targeted social protection and implement exchange rate flexibility are welcome steps," Ms Allard said.

"Continued exchange-rate flexibility will be essential to absorb external shocks and safeguard financial buffers during this uncertain time.

Egypt has turned to the IMF three times over the past six years. It borrowed $12bn under an Extended Fund Facility in November 2016, $2.8bn under a Rapid Financing Instrument in May 2020 and $5.2bn under a Stand-by Arrangement in June 2020.

The IMF funds it received in 2020 were used to cushion the impact of the Covid-19 pandemic on the economy.

“The priorities of the Egyptian state at present are to swiftly adopt measures and policies that secure the continuity of the country’s economic and financial stability and ensure the availability of basic commodities for its citizens,” according to government statement.