Egypt on Cusp of $12 Billion IMF Aid Seen Prelude to Devaluation

Egypt and IMF Reach Initial $12 Billion Deal
  • IMF announces three-year extended fund facility in Cairo
  • Government’s economic program includes VAT and spending cuts

Egypt moved closer to securing $12 billion of International Monetary Fund support designed to restore the confidence of foreign investors and ease a crippling dollar shortage hampering economic growth.

Authorities reached an initial accord with an IMF delegation after more than a week of talks in Cairo. If approved by the fund’s executive board and Egyptian lawmakers, the agreement will be the IMF’s second-biggest active traditional loan program after Ukraine.

The deal paves the way for a series of measures that economists say will likely include a new round of currency devaluation or flexible exchange rate to attract foreign investments to the nation’s economy, bond and stock markets. Critics of the agreement say the poor will bear the brunt of the pound’s weakness and a reduction in subsidies.

The three-year Extended Fund Facility aims to “improve the functioning of the foreign exchange markets, bring down the budget deficit and government debt, and to raise growth and create jobs,” said Chris Jarvis, the IMF Egypt delegation head. He said Egypt’s government recognizes the need for the “quick implementation” of measures to restore economic stability.

Egypt’s Struggle

Egypt has struggled to spur economic growth and attract foreign investments since the 2011 uprising that ousted President Hosni Mubarak, with foreign reserves tumbling more than 50 percent. Authorities reached initial accords with the IMF twice since then, but withdrew the requests amid a debate over the fund’s past policies as well as measures required to unlock aid such as tax reforms and subsidy cuts.

The government’s economic program includes plans to introduce value-added taxation, cut electricity subsidies and curb wage increases.

“It is a positive development for Egypt,” said Razan Nasser, a senior Middle East and North Africa economist at HSBC Holdings Plc in Dubai. “In addition to providing some much needed short-term financing, it has the chance to positively change the narrative.”

The IMF Executive Board is expected to consider Egypt’s request in the coming weeks, Jarvis said. The benchmark EGX 30 Index rose 1 percent to the highest level since June last year, propelled by Commercial International Bank, which gained 2.7 percent to a new record high at the close in Cairo.

No Excuse

Central bank Governor Tarek Amer said securing IMF funds is one step toward reviving the economy.

“Reform will not come in a day or two, but we have the ability and faith to improve things,” he told reporters in Cairo. “Investors will have no excuse to not invest in Egypt.”

Jarvis said Egypt’s monetary and exchange-rate policies under the program “will aim to improve the functioning of the foreign exchange market, increase foreign reserves, and bring down inflation to single digits during the program.”

“Moving to a flexible exchange rate regime will strengthen competitiveness, support exports and tourism and attract foreign direct investment,” he said. “This would foster growth and jobs and reduce financing needs.”

Under the program, authorities will also continue to rationalize the cost of energy subsidies, Jarvis said. The plan also aims to reduce the government’s debt to 88 percent of gross domestic product in the 2018-19 fiscal year, from about 98 percent in 2015-16.

Little Discussion

Wael Gamal, a prominent Egyptian economic commentator and a critic of past IMF negotiations, said there was little public discussion of the government’s program or of its economic and social consequences on inflation and income inequality.

But economists and investors, including Egyptian billionaire Naguib Sawiris, have long argued that an overvalued currency was a major obstacle blocking foreign inflows. The central bank weakened the currency by more than 10 percent in March, the biggest one-time devaluation since 2003.

Higher Inflation

The move has failed to crush a black market for dollars, where the pound is trading at a discount of about 30 percent to the official rate. Inflation has accelerated to the highest level in seven years.

“The Egyptian pound is on a one-way trajectory -- significant depreciation will occur in the next two years,” Edward Coughlan, head of Middle East North Africa Analysis at BMI Research, said in reference to the IMF accord.

Coughlan said he expects a 10 percent currency devaluation “over the next two or three quarters. By the end of 2018, I think the currency will be about 20 percent to 30 percent lower than current levels,” he said.

Other Countries

The IMF was criticized for praising the policies of autocratic governments before the Arab Spring while ignoring the impact of those measures on poverty, key drivers for the revolts.

Now, Egypt is joining other Arab countries that have sought IMF financial assistance and technical advice in the past two years, as political unrest and the plunge in oil prices strained public finances and deterred tourists as well as investors.

This year alone, the Washington-based lender has approved a precautionary credit line to Morocco, as well as loans to Tunisia and OPEC member Iraq. Last month, it signed a letter of intent to renew assistance to Jordan.

Gamal questioned how much interest the IMF agreement would generate among foreign investors at a time of sluggish global economic growth.

“Foreign direct investment peaked in Egypt at $13 billion before the global financial crisis,” he said by phone. “Now the global economy is struggling. How much FDI can you get? Nobody is providing an estimate.”

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