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IMF looks for Egyptian currency flexibility after December-end

REUTERS/Mohamed Abd El Ghany
Moody's does not expect Egypt's liquidity and external positions to rebound quickly

The International Monetary Fund (IMF) will be watching for a shift by Egypt to a flexible exchange rate after a requirement to finance imports through letters of credit is phased out at the end of this month, a senior IMF official said on Monday.

The IMF’s executive board on Friday approved a 46-month, $3 billion financial support package for Egypt, saying it included a “permanent shift to a flexible exchange rate regime”.

Egypt negotiated the loan over seven months as the economic fallout from the war in Ukraine brought a foreign currency shortage to the fore. Shortly before the war, Egypt’s central bank imposed the requirement for mandatory letters of credit, causing a sharp slowdown in imports and a backlog of goods in ports.

“We know that the central bank has not intervened to inject reserves into the foreign exchange market since we reached staff level agreement. But we also know that the backlog of imports has not been cleared,” Ivanna Vladkova Hollar, the IMF mission chief for Egypt, said in an interview with Reuters.

When a staff level agreement for the IMF’s extended fund facility was announced in October, Egypt said it would phase out the requirement by the end of December. The pound was allowed to fall sharply from EGP 19.7 to the dollar, but since early November has weakened much more gradually to 24.7.

Once the letter of credit requirement is lifted, “what we would expect to see is daily volatility in the exchange rate that is similar to the volatility observed in truly floating exchange rate regimes”, Vladkova Hollar said.

“We will be looking very closely at how the FX market is functioning, which would then give us the ability to have a conversation with the authorities and our board as to (whether) what we are seeing is really consistent with a flexible exchange rate regime,” she added.

Demand for dollars might be softened by a weaker pound, she said. “If I wanted to import something at 19.7 and the exchange rate is now 24.7, that’s a significant change in my costs.”

An immediate disbursement of about $347 million under the programme should be available to Egypt this week, Vladkova Hollar said.

The IMF has said the new programme should catalyse additional funding of about $14 billion from Gulf states and other sources, and that it envisages implementation of “wide-ranging structural reforms to reduce the state footprint”.

Economists say one reason Egypt has struggled to attract investment despite repeated IMF programmes and reform plans is the prominent role of the state and military in the economy.

A state ownership policy, which Egypt is due to approve soon and is meant to demarcate the parts of the economy that are open for private investment, would be a “first critical document that we need jointly to be able to develop a more concrete action plan”, Vladkova Hollar said.

Steps to boost the private sector could become “prior actions” that have to be taken before future IMF disbursements, she added.