Egypt’s economic outlook darkens as IMF postpones review

Reuters/Johanna Geron

• IMF review postponed to Q1 2024
• Further devaluation urged
• Election could take place this year

Egypt’s efforts to revive its economy were dealt a major setback this week after the IMF postponed its eagerly awaited September review of Egypt’s $3 billion bailout programme until the first quarter of 2024. 

Originally scheduled to take place in March, it would have been the IMF’s first review of the $3 billion loan it provided to Egypt under a 46-month agreement signed in December 2022 but has now been delayed a second time.

The IMF’s approval of the $3 billion loan was conditioned primarily on Cairo implementing “a permanent shift to a flexible exchange rate regime”.

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Cairo received a first instalment of $347 million of the loan in December, with the remaining disbursements contingent on reviews conducted by IMF experts. 

The IMF’s decision further exacerbates Cairo’s severe foreign currency shortage. 

Latest official figures showed that the Central Bank of Egypt’s reserves stood at $34.9 billion in August, representing just a $1.5 billion increase since last June and $7 billion less than before Russia’s invasion of Ukraine. 

This is in spite of the fact that Saudi Arabia, the UAE and Qatar deposited $13.9 billion into Egypt’s central bank last year.

Egypt’s National Election Authority held a press conference on Wednesday stating that it will announce the timetable next week for the country’s upcoming presidential election.

Originally scheduled for 2024, there are now growing media reports that a presidential election will be held before the end of the year. 

Economists believe the election news may help to explain the recent policy paralysis around committing to a flexible exchange rate and that a fourth devaluation of the Egyptian pound will take place once the election is over. 

Since March 2022, the Egyptian pound has already lost over half of its value through three devaluations.  

Amid soaring commodities prices – in August, headline inflation reached 39.7 percent year on year for the first time in the country’s history – the Egyptian government has shown reluctance to allow the pound to fall any further.

“President Abdel Fattah Al-Sisi’s government is aware of the way in which the next devaluation of the pound will push up political risk, so it would prefer to hold the election before doing so,” François Conradie, lead political economist at Oxford Economics Africa, told AGBI. 

“We expect the election will be moved forward to allow the government to postpone the devaluation until Mr Sisi has been re-elected.” 

James Swanston, Middle East and North Africa economist at Capital Economics in London said another devaluation is almost certain.

“Delaying any currency moves until definitively securing another term for [incumbent Egyptian president] Al-Sisi would play into his favour.”

Swanston noted that the delay will likely exert downward pressure on the pound and therefore result in a more pronounced devaluation than otherwise would be the case.

“What’s more, it will mean that the delays to the IMF reviews persist for longer and add to any investor worries,” he added. 

Since the start of August, Egypt’s sovereign dollar bond spreads have risen back to around the 1,100-1,200 basis points mark – the level at which investors typically classify debt as being distressed. 

The Egyptian pound is now trading at over $40 on the local parallel market, a discount of over 20 percent versus the official rate. 

Improving investor confidence is critical to ensuring the success of the government’s privatisation drive – aimed at attracting $40 billion.

Swanston said a devaluation now would help to reassure investors and the resultant inflow of new investment could strengthen the currency against the dollar and help improve the country’s balance sheet.