Egypt Seeks Region’s Biggest IMF Loan to Repair Battered Economy

Egypt in Final Stages of IMF Loan Talks
  • Government to finalize terms on $12 billion loan with IMF team
  • Stocks surged in Cairo; central bank rate decision on Thursday

Egypt plans to secure a $12 billion loan from the International Monetary Fund to ease a crippling dollar squeeze and restore confidence in the economy, an accord that would be the fund’s biggest aid package in a region pummeled by political unrest and the plunge in oil prices. 

QuickTake Egypt’s Revolution

Stocks surged after authorities said on Tuesday evening they will finalize terms with an IMF team set to visit Cairo from July 30. The government is targeting $21 billion over three years to finance its economic program. In addition to IMF aid, $4.5 billion will come from the World Bank and the African Development Bank, Deputy Finance Minister Ahmed Kouchouk told Bloomberg, while the rest would come from bilateral accords and a planned international bond sale.

"This is good news in the sense that the deal can bring a lot of liquidity to Egypt, and boost confidence in the economy," said Mohamed Abu Basha, a Cairo-based economist at investment bank EFG-Hermes. “But challenges still lie ahead. This is a three-year program, with a lot to be delivered.”

Egypt is the latest country in the Middle East and North Africa to line up for IMF advice and financial aid as refugee crises, militant attacks and low oil prices batter public finances and economic growth rates. This year alone, the Washington-based lender has approved a precautionary credit line to Morocco as well as loans to Tunisia, OPEC member Iraq. On Tuesday, it signed a letter of intent to renew assistance to Jordan.

Twice Before

Egypt reached initial accords with the IMF twice since the 2011 uprising that ousted President Hosni Mubarak to stem the plunge in foreign reserves as tourists and investors shunned the country. Authorities withdrew both requests amid a domestic debate over the fund’s past policies as well as measures required to unlock aid, including tax reforms and the restructuring of costly energy subsidies.

A deal now could help the most populous Arab country ease a dollar shortage that has stifled economic activity and fueled speculation of another imminent currency devaluation. The dollar changed hands at 12.99 pounds on the black market on Tuesday, a 46 percent premium over the official rate of 8.8, according to a Bloomberg survey.

The IMF’s visit is expected to last about two weeks, Masood Ahmed, director of the Middle East and Central Asia Department, said on Tuesday.

Stocks Gain

Egypt’s benchmark EGX 30 Index for stocks climbed 5 percent at 1:52 p.m. in Cairo, the biggest gain among more than 90 gauges tracked by Bloomberg globally. It is also the biggest intra-day increase since March 14.

William Jackson, senior emerging-markets economist at London-based Capital Economics, said that an “apparent shift towards more orthodox policy making in the government and at the central bank” had increased chances for an accord with the IMF.

Central bank Governor Tarek Amer said this month that defending the pound had been a “grave mistake,” signaling a preference for a weaker currency. In March, the bank devalued the pound by the most in more than a decade and vowed to implement a more flexible exchange rate, a promise that is yet to materialize.

Authorities “will have to take some tough measures before the economy starts witnessing serious inflows from abroad,” said Abu Basha, of EFG-Hermes.

The central bank’s monetary policy committee is scheduled to meet on Thursday, with five out of six analysts in a Bloomberg survey expecting it to hold rates at 11.75 percent. The bank has raised the benchmark rate by 2.5 percentage points this year to the highest in a decade, as inflation surged following March’s devaluation.

Controversial Measures

Since removing his Islamist predecessor in an army takeover and becoming president, Abdel-Fattah El-Sisi has pushed through some controversial measures, including cuts in fuel and electricity subsidies, that previous governments avoided. Lawmakers are discussing the introduction of value-added taxation to increase revenues and cut the budget deficit, which reached 11.5 percent of economic output in the last fiscal year.

El-Sisi’s rule also saw a crackdown on the Islamists he ousted from power, along with an increase in militant violence in Sinai and attacks in the capital.

“We expected an imminent devaluation, as soon as the value-added tax is done,”  said Reham El-Desoki, senior economist at Dubai-based investment bank Arqaam Capital. The announcement on an IMF accord “will narrow the gap between the official and parallel rates significantly over the coming days.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE