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Egypt shows signs of recovery after landmark IMF deal

Government officials have suggested that construction will continue on Egypt's state-led mega-projects, including the New Administrative Capital city, thought to cost more than $58 billion Amr Abdallah Dalsh/Reuters
Government officials have suggested that construction will continue on Egypt's state-led mega-projects, including the New Administrative Capital city, thought to cost more than $58 billion
  • More than 100 days since agreement
  • Praise from IMF for boosting stability
  • State-led mega-projects set to go ahead

Last Friday marked 100 days since Egypt, the International Monetary Fund’s (IMF) second-biggest debtor after Argentina, agreed its latest loan.

Eased by a $35 billion development deal with the UAE and increased international concern for Egypt’s economic stability following the outbreak of the war in Gaza, the deal drew a line under more than two years of fraught negotiations. 

On June 6, the IMF announced a staff-level agreement on the third review of Egypt’s latest extended fund facility (EFF). Subject to approval from the IMF’s executive board, it will enable access to a second $820 million tranche of the $8 billion loan agreed in March.

The review praised the Egyptian authorities for bolstering “macroeconomic stability through fiscal discipline, tight monetary policy, and a shift to a flexible exchange rate regime.

“These efforts are beginning to deliver an improved outlook,” it read, “improved FX availability, inflation starting to slow down, and signs of recovery in private sector sentiment.”

In the 100 or so days since the IMF agreement, Egypt’s economic climate has shown strong signs of improvement

In the long run, however, questions remain over Egypt’s economic sustainability with a debt-to-GDP ratio of 96.4 percent and signs from the government that its broad economic strategy of the last 10 years, centred around billion-dollar, state-led infrastructure projects, are likely to continue.

In May, foreign reserves recorded an all-time high of just over $46 billion. Since receiving the first tranches of almost $60 billion in loans, grants and investments Egypt has largely managed to clear a backlog of payments on imports and blocked funds for airlines and oil companies. 

Foreign exchange

Foreign exchange has flown back into the official banking channels since the pound slid 36 percent against the dollar in March. Monthly remittances hit $2.2 billion in April, a 44 percent increase year-on-year, according to the Central Bank of Egypt (CBE). 

Early scepticism that the pound was re-pegged at a lower rate, rather than free-floated, appears to be unfounded according to Monica Malik, chief economist at the Abu Dhabi Commercial Bank.

“We are seeing flexibility on the currency,” Malik says. “We’re seeing two-way movements, including weaker as well, and so far it seems positive.”

Egypt has also implemented certain austerity measures recommended by the IMF as a way to reduce spending and meet its burgeoning debt obligations. Earlier this month, it indicated that it would raise prices on bread, fuel and pharmaceuticals.

A young man delivers bread in Cairo, Egypt; the price of subsidised bread will rise for the first time in 30 yearsDietmar Temps/Alamy via Reuters Connect
A young man delivers bread in Cairo, Egypt. The price of subsidised bread will rise for the first time in 30 years

Yet, despite previous indications that it would ease off on big spending projects, government officials have since signalled the continuation of constructing state-led mega-projects, including a $5.5 billion 100km-long monorail and the New Administrative Capital city, thought to cost more than $58 billion. 

Since signing the IMF deal in March, the state has also indicated it will build an extension to the Suez Canal slightly longer than the $8 billion channel completed in 2015.

Assets for sale

Egypt has reaffirmed its commitment to selling off government assets. Between the current and the next financial year, the IMF forecasts that Egypt will sell more than $6 billion worth of state-owned enterprises (SOEs). 

The government has announced around 40 SOEs that are offering stakes to investors, under the management of The Sovereign Fund of Egypt, including firms involved in shipping, energy and telecommunications.

While recent sales of stakes in SOEs have helped to replenish government coffers, perhaps by around $6 billion based on reports of the agreements, Egypt has been reluctant to hand over controlling stakes of companies, preferring instead to sell minority stakes mostly to sovereign wealth funds and state-owned corporations in the UAE and Saudi Arabia.

“They don’t want to give ownership control on a lot of these transactions,” says Farouk Soussa, an economist at Goldman Sachs.

According to the IMF, there are more than 300 SOEs in Egypt. In addition to selling down stakes in these companies, the fund has also called for “levelling the playing field”, eliminating preferential tax and customs on SOEs and separating the roles of “regulator and market player”.

“The emphasis, from an IMF perspective, is no longer that they need to sell these assets in order to fund themselves,” says Soussa.

“That’s no longer the conversation. It’s that they need to push ahead with the state asset sales in order to improve the business environment, level the playing field, and reduce footprint of the state and the economy.”

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