What Egypt needs to do to please its $60bn backers

Reuters/Amr Abdallah Dalsh

• Egypt must stay onside with IMF
• Six pillars of economic reform
• ‘Jury still out’ on currency regime

A fast-paced four weeks may have transformed Egypt’s short-term economic prospects – but only if the country abides by the programme agreed with the International Monetary Fund, observers say.

Egypt’s international partners have pledged almost $60 billion in loans, grants and investment. The central bank has allowed the pound to slide for the first time in over a year, attracting foreign liquidity back into the market, and the government has agreed a long-delayed extended fund facility (EFF) with the IMF.

Analysts who spoke to AGBI say they are optimistic that these new developments can provide a turning point for Egypt, which has spent the past two years battling a foreign currency crisis while inflation has soared.

---

---

But according to Ramona Moubarak of Fitch Solutions, “all this positive hype will just disappear if Egypt does not abide by the IMF programme.”

The EFF depends on six pillars of reforms: tightening monetary policy to reduce inflation; fiscal consolidation to preserve debt sustainability; a slowdown in infrastructure spending; social spending to protect the most vulnerable; support for the private sector with a slimming down of the state-owned economic footprint; and a move towards a flexible exchange rate regime.

The huge injection of capital on offer, equal to more than 20 percent of Egypt’s GDP, has bought the government time to breathe and created an opportunity to tackle systemic economic problems from a position of strength.

• Egypt gets $6bn from World Bank to spur growth
• Egypt secures expanded $8bn loan from IMF
• Egypt outlook revised to positive after lending deals

The new agreements include: the $8 billion EFF package, with separate talks underway for a $1.2 billion IMF loan linked to sustainability; a $6 billion aid package from the World Bank; $8 billion in grants, loans and investments from the EU; and a $35 billion deal with the UAE consisting of $11 billion in debt relief and $24 billion of investment.

In total, the government is looking at $40 billion in fresh cash injections with a likelihood of more to follow.

On Friday the government raised fuel prices, although they remain heavily subsidised. 

James Swanston, a London-based Mena economist at Capital Economics, says: “There’s a bit more credibility around what Egypt’s doing.” The finalisation of the EFF in particular, he says, has ensured investors that “the IMF has trust in Egypt”.

Egypt has been in a deadlock with the IMF since early last year. Although the government devalued the Egyptian pound against the dollar three times in 2022 and early 2023, an intransigent parallel dollar market continued to soak up foreign liquidity.

The country reached an impasse with the IMF, which saw a flexible exchange rate as crucial to absorbing external shocks. Unwilling to suffer the inflationary effects of devaluation, the government dug in its heels.

Reuters/Nasser Nuri

The first of two major turning points came in October, when war broke out in Gaza, threatening the Egyptian economy with reduced inflows from tourism and Suez Canal revenues. The IMF restarted negotiations for an accentuated EFF.

The second came at the end of last month, when the UAE surprised everyone with a multi-billion dollar agreement to develop a city on Egypt’s north coast and “other prime projects”. The liquidity injection enabled the devaluation of the pound and a subsequent agreement with the IMF, opening the door to further investment with more probably still to come.

On the first five of the reform measures, Egypt had already made progress before October. But even after the devaluation of the Egyptian pound earlier this month, it is unclear how flexible the new exchange rate regime is. 

Moubarak says: “Everyone is asking: Is it floating or is it just a currency adjustment?” She is among those expressing scepticism, pointing out that fluctuations in the price of the pound since March 6 have been “too smooth” to suggest a free float. However, she says, “at this point it doesn’t matter.”

With foreign currency pouring into the economy through loans, investments and the return of hot money inflows, the Egyptian pound has strengthened slightly since its initial devaluation, rising from more than 50 against the dollar to 46.6. 

Egyptians have stashed potentially billions of dollars under mattresses

Farouk Soussa, Goldman Sachs

Farouk Soussa, Mena economist at Goldman Sachs, says: “I think the jury is still out on whether we have shifted to a true floating regime.

“Right now, we’re in a phase where there are very significant inflows into the economy, and in those conditions there is no need to intervene to support the currency.” 

For the next few months, Soussa says, “the pressures on the currency are going to be very much for it to appreciate.”

In addition to renewed inflows, more foreign liquidity should enter the system as remittances resume their flows through formal financial networks. Egyptians, Soussa believes, may have stashed “potentially billions of dollars under mattresses” over the past two years. 

Ultimately, Soussa says, to reduce the possibility of a return to crisis further down the line, “you need to remove Egypt’s fundamental vulnerability.”

He hopes to see Egypt use this opportunity to address the structural problems reducing its economic potential, such as corruption, bureaucracy, the low enforceability of legal rights, and the “unlevel playing field between the private sector and the state sector, particularly the military”.