Egypt and the International Monetary Fund have reached a deal for a $3 billion loan from the Washington-based lender, lasting three years and 10 months.
The announcement in Cairo on Thursday by Egyptian officials and IMF representative in Cairo Ivana Holler came only hours after Egypt raised its key interest rates by 2 per cent and devalued its currency.
“We are happy to announce that the Egyptian authorities and the IMF team have reached a staff-level agreement on the economic policies to be supported by a 46-month arrangement under the Extended Fund Facility,” the IMF said in a statement.
The Egyptian pound had slid to a record low by Thursday afternoon, trading at about 22.75 to the dollar, down from 19.67 when banks closed on Wednesday. The pound was devalued in March by about 14 per cent and had since shed another 6 per cent of its value before Thursday's adjustment.
In a statement, the IMF confirmed the $3bn, 46-month Extended Fund Facility.
“The agreement aims to protect the stability of the economy and improve the ability of the Egyptian economy to deal with external shocks caused by world crises, bolster the network of social support and protection as well as doubling the structural reforms that will boost growth and create jobs in the private sector,” Egyptian Prime Minister Mostafa Madbouly told a news conference.
A flexible exchange rate regime should be “a cornerstone policy for rebuilding and safeguarding Egypt's external resilience over the long term”, the IMF said.
It added that the deal, which is subject to approval by the IMF’s executive board in December, was expected to enable a large, multiyear financing package, including about $5bn in the fiscal year ending June 2023, reflecting “broad international and regional support for Egypt”.
Negotiations between Egypt and the IMF began shortly after the February outbreak of the Russia-Ukraine war, whose fallout has had a devastating effect on Egypt's economy. The conflict has sent an already heavy import bill for food and fuel soaring and caused inflation to rise to 15 per cent.
About $25bn invested in Egypt's once-lucrative debt market was withdrawn because of uncertainty over emerging markets due to the war in Ukraine. The country's vital tourism sector was also badly hit but has since rebounded as the world learns to live with the conflict.
The crisis has forced the government to spend billions of dollars on social support programmes to shield the most vulnerable among the country's 104 million people from the shocks of price increases. The latest programme was announced by Mr Madbouly on Wednesday and includes raising the minimum wage for government employees and the earnings exempted from income tax.
Egypt will allow the value of its local currency to be decided by demand and supply, effectively floating the Egyptian pound.
“The Central Bank of Egypt (CBE)’s move to a flexible exchange rate regime is a significant and welcome step to unwind external imbalances, boost Egypt’s competitiveness, and attract foreign direct investment,” the IMF said.
Egypt's overnight lending rate had been set at 14.25 per cent and the deposit rate at 13.25 per cent.
The devaluation and interest rate hikes came days after Mr Madbouly said Egypt and the International Monetary Fund were “putting the final touches” on an economic restructuring deal that will also secure Egypt a loan to shore up its finances.
The UAE, one of Egypt's closest Arab allies and main economic backers, welcomed the agreement.
“The UAE affirmed its support for efforts by the Arab Republic of Egypt to implement the necessary economic and structural reforms to ensure the preservation of strong, balanced, and sustainable growth in a manner that ensures Egypt's economic and financial stability and promotes additional investment opportunities, growth, and prosperity,” said state news agency Wam.
IMF officials have said they wanted to see Egypt adopt a more “flexible” foreign exchange system, meaning the lender believed the Egyptian pound had remained overvalued despite losing about 20 per cent of its value from March until Thursday's devaluation.
“The government’s fiscal policy under the EFF will be anchored to the reduction of general government debt and gross financing needs. Continued fiscal consolidation will be supported by the implementation of the government’s medium-term revenue strategy that aims to improve the efficiency and progressivity of the tax system,” the IMF said.
“The rapidly changing global environment and spillovers related to the war in Ukraine are posing significant challenges for countries around the world, including Egypt. The IMF welcomes the authorities’ recent actions to expand targeted social protection.”
Separately, the bank said it would begin to gradually repeal a directive introduced in March that mandated the use of letters of credit to finance imports and would aim to remove it entirely by December.
That directive significantly reduced imports, hitting local manufacturers dependent on foreign components and contributing to the increase in prices.
Thursday's devaluation was likely to add to inflationary pressures in the short term, Goldman Sachs said in a research note. It said it expects year-on-year inflation to peak at 19 per cent by January before it eases down.
“Given the transient nature of the ... inflationary trajectory, we don't anticipate further interest rate hikes by the Central Bank of Egypt at this stage,” it said.
“That said, global uncertainties remain high and the possibility of further foreign exchange weakening in the near-term means risks to rates remain to the upside.”