Economy

IMF ‘likely to drop currency demands for loans to Egypt’

January 17, 2024, 10:19 AM

Gold vendors in Cairo. The Egyptian government will devalue the pound further in March

Support plan agreed in 2022
Gaza conflict hurting economy
Loans may top $5bn

The International Monetary Fund is likely to waive its demand that the Egyptian government make the pound free floating in order to receive additional loans, experts said on Tuesday.

Cairo agreed a $3 billion IMF support package in December 2022, but received only an initial payment of $347 million.

The original deal said Egypt should allow the pound “to be determined freely against other currencies”. The government has subsequently sought to increase the package to $5 billion.

The currency requirements are now likely to be relaxed, said analysts from BMI, in response to the damage done to Egypt’s economy since the start of the conflict in Gaza.

Yemeni attacks on vessels travelling through the Bab Al Mandab strait will lower Egypt’s vital Suez Canal revenue, said Ramona Moubarak, head of Mena country risk and global banking at BMI

Around 23 percent of global shipping passes through the strait connecting the Red Sea to the Gulf of Aden, according to Statista.

The Suez Canal provides around 10 percent of Egypt’s current account income, BMI estimates, and the rerouting of shipping to avoid the Red Sea will intensify pressure on the country’s balance of payment pressures, Moubarak added.

“The negative economic implications of the [Israel-Hamas] war on Egypt, Egypt’s role as mediator and geopolitical importance will catalyse increased foreign financial support,” she said.

BMI is predicting that the support will top $5 billion and some of this money could be provided immediately upon a renegotiated deal being concluded.

Rather than switch to a free-floating currency, Egypt will devalue the pound to EGP40-45 to the dollar in March, from around EGP31 currently, according to BMI. A greater devaluation to below EGP50 is also possible, said Moubarak.

A new IMF deal will also it easier for Egypt to obtain other bilateral and multilateral funding. That will be important; a weaker currency and increased debt repayment costs will widen Egypt’s deficit, said Mariette Kas-Hanna, a BMI Mena country risk analyst.

The country’s debt-to-GDP ratio is forecast to hit about 100 percent.

“Regional allies” could make additional deposits at Egypt’s central bank, according to Moubarak. Such countries would usually include Saudi Arabia and the UAE.

Increasing foreign investment into Egypt this year will offset a slowdown in domestic demand and exports, she added.

BMI forecasts Egypt’s economy will expand by about 4 percent in 2024.

Egypt’s headline annual inflation, which hit an all-time peak of 38 percent last September, will remain elevated but will not return to such levels, Moubarak said.

Egypt will raise its benchmark interest rate, currently 19.25 percent, by 300 basis points in 2024, said Samer Talhouk, a Mena country risk analyst at BMI, as part of its monetary tightening policy aimed at constraining inflation and supporting the ailing pound.