Egypt and IMF agree $12bn loan in bid to restore confidence in economy

Posted on August 11, 2016

Egypt has agreed a $12bn loan with the International Monetary Fund in bid to restore confidence in its lacklustre economy and tackle severe foreign exchange shortages.

The economy has been struggling since the 2011 revolution that forced Hosni Mubarak from office and foreign investors have largely shunned the country.

The staff level agreement will be presented in a few weeks to the IMF board for approval. But Chris Jarvis, head of the IMF delegation, told the Financial Times that the IMF funding was contingent on Egypt securing between $5bn and $6bn in additional loans from bilateral partners — before the agreement was taken to the fund’s board.

The extra financing would help provide a cushion for the country’s foreign reserves ahead of any devaluation of the Egyptian pound, he said.

‘It is important that we secure financing assurances for the year before we go to the board,” Mr Jarvis said. “We are looking for additional finance from bilateral sources. The argument we would like to make is that if there is a moment to provide balance of payment support to Egypt, this is it.”

People briefed on the talks said both Cairo and the IMF were hoping the United Arab Emirates and Saudi Arabia would provide the additional funding. Egypt has received billions of dollars in bilateral support, mainly from the oil-rich Gulf, since President Abdel Fattah al-Sisi led a 2013 popularly backed coup that ousted an elected Islamist government.

Mr Jarvis said that if everything went as planned, the first IMF tranche of $2.5bn would be disbursed to Egypt immediately after the board meeting.

He added that the government recognised the need for “quick implementation of economic reforms for Egypt to restore macroeconomic stability.”

Economists say expected reforms will include a further devaluation of the pound and a reduction of fuel subsidies. The government has also recently introduced a VAT law to parliament and this week it hiked electricity prices.

“The biggest reforms we are likely to see in the next few months will be the VAT and in the transition to a flexible foreign exchange regime which should mean a weaker pound,” said Mohamed Abu Basha, economist at EFG-Hermes, the Cairo-based investment bank.

Mr Jarvis said the reforms to be supported by the IMF loan, which would be disbursed over three years, were aimed at improving the functioning of Egypt’s foreign exchange markets, narrowing the budget deficit and boosting growth and job creation.

He said that over the three years of the programme, government debt should decline from 98 per cent of gross domestic to 88 per cent. The government is also grappling with a fiscal deficit that is expected to be 12 per cent of GDP for the financial year that ended in June.

Egypt has been in the grip of a severe dollar shortage since the end of last year, largely because of the decline in tourism, a vital source of foreign currency.

The number of visitors to the country declined sharply after an Isis bomb downed a Russian airliner shortly after it took off from an Egyptian airport, killing 224 tourists and crew, last October.

The dollar has been trading on the black market at a 40 per cent premium over the official price despite a 13 per cent devaluation of the pound in March.

The dollar shortage is hurting importers and manufacturers, who also complain about central bank measures to rationalise the allocation of foreign currency.

Amr al-Garhy, the finance minister, said Egypt had resorted to the fund “not just to get by” in a crisis but to signal the government’s seriousness about reform.

Egyptian officials said last month that the state’s needs amount to $7bn a year, and they are hoping the IMF deal will ease access to lending from other donors, such as the World Bank and the African Development Bank.

Mr Jarvis said it was agreed that some of the savings made as a result of reforms would be pumped into strengthening Egypt’s social protection network.

In a country where 40 per cent of the population are considered to be living in poverty, the inflationary impact of the new measures is likely to make life harsher for the poor — a reason the government, fearful of social unrest, had previously balked at resorting to the IMF.

Inflation is running at 14 per cent and one of the aims of the reform program is to bring that down to single digits.

Mr Abu Basha, the economist, said that after an announcement two weeks ago that Egypt was close to a deal with IMF, bond yields and the cost of insuring Egyptian debt against default fell.

“It helped improve Egypt’s risk profile,” he said. “Once we see foreign exchange reform, that should be the biggest trigger for foreign investment.”

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