The International Monetary Fund (IMF) has approved an $8 billion loan package for Egypt, which is expected to boost the country's flagging economy that has also been affected by the Israel-Gaza war.
The programme adds $5 billion to the $3 billion 46-month Extended Fund Facility signed in December 2022 and enables the Arab world's most populous economy to immediately draw $820 million, the Washington-based IMF said on Friday.
The IMF noted that Egypt's economic woes have worsened at the onset of the Russia-Ukraine and Israel-Gaza wars, and lately the tensions in the Red Sea.
“These developments increased the complexity of macroeconomic challenges and called for decisive domestic policy action supported by a more robust external financing package, including from the IMF,” it said.
The expanded loan agreement was announced on March 6, and was made hours after the Central Bank of Egypt increased interest rates and allowed the local currency to freely float with no interventions from the state. Cairo received a first tranche of $347 million after signing the December 2022 deal.
The flotation caused the pound to drop to its lowest level in history on official markets, reaching about 52 pounds to the US dollar on March 6. The pound has recovered, trading at 47.35 to the greenback on Saturday.
The IMF has also acknowledged the Egyptian government's measures to improve the economy and, along with the IMF's support, expects positive results, Kristalina Georgieva, the IMF's managing director, said.
“Recent measures towards correcting macroeconomic imbalances, including unification of the exchange rate, clearance of the foreign exchange demand backlog and significant tightening of monetary and fiscal policies, were difficult, but critical steps forward, and efforts should be sustained going forward,” she said.
“With policies to restore macroeconomic stability in place, the stage is set for accelerating implementation of the structural reform agenda intended to deliver inclusive and sustainable growth.”
Egypt's economy has faced lots of challenges over the past few years, grappling with rising inflation, foreign exchange shortages and elevated debt levels.
Business activity in the country's non-oil private sector contracted at the sharpest rate in more than a year in February, driven by a worsening foreign exchange crisis and a steep drop in customer sales, S&P Global said on March 5.
The country has felt the effects of the Red Sea shipping disruption as a result of Yemen's Houthi rebels attacking vessels, which has roughly halved key Suez Canal revenue so far in 2024, the ratings agency said.
However, two weeks later on March 18, S&P upgraded Egypt's credit outlook to positive from stable, citing government moves to improve its currency, attract more foreign direct investment and a growing list of donors pledging to support the economy.
The upgrade coincided with the World Bank's commitment to provide $6 billion in financing over the next three years, at the time the latest of funding deals signed by Cairo in recent weeks.
The World Bank deal came after the EU finalised an agreement with Egypt under which it gave Cairo the task to mitigate illegal migration through the Mediterranean in exchange for €8 billion ($8.7 billion) in funding over the next four years.
In February, Egypt granted a consortium led by Abu Dhabi's holding company ADQ rights to develop its Mediterranean city of Ras El Hekma in exchange for $35 billion in cash.
Egypt devalues currency to record low
The Abu Dhabi deal “has alleviated near-term balance of payment pressures and, if used judiciously, will help Egypt rebuild buffers to deal with future shocks”, Ms Georgieva said.
The IMF, however, cautioned that Egypt's goal of achieving its economic goals remain subject to risks and external uncertainty.
“Domestically, sustaining the shift to a liberalised foreign exchange system, maintaining tight monetary and fiscal policies, and integrating transparently off-budget investment into macroeconomic policy decision making will be critical,” Ms Georgieva said.
“Managing the resumption of capital inflows prudently will be important to contain inflationary pressures and limit the risk of future external pressures.”
