CAIRO — The International Monetary Fund on Thursday reached a preliminary deal with the Egyptian government that paves the way for the economically struggling Arab nation to access a $3 billion loan, officials said Thursday.
IMF officials said a staff agreement between the Egyptian government and IMF leaders had been reached after months of talks, as Egypt struggles to tackle soaring inflation caused, in part, by the war in Ukraine.
In a statement on Thursday, the head of the IMF’s Egypt mission, Ivanna Vladkova Hollar, said the 46-month deal – known as the Extended Financing Facility Agreement – gives Egypt access to the loan of 3 billion dollars on the condition that it implement a series of economic reforms.
In the hours leading up to the announcement, the Egyptian central bank announced a series of economic measures, including an increase in key rates of almost 2% and the transition to a “sustainably flexible exchange rate”. The bank said the exchange rate change would now allow international markets to “determine the value of the Egyptian pound against other foreign currencies”.
Following the announcement, the Egyptian pound fell to a record low against the US dollar, falling from around 19.75 to at least 22.80, according to data provided by the National Bank of Egypt.
The Egyptian currency has already lost 20% of its value against the US dollar this year. Jason Tuvey, senior emerging markets economist for Capital Economics, expects it to shed another 18% before the end of next year.
The flexible exchange rate “will cause economic hardship in the short term” but got the deal approved by the IMF and “will go a long way towards restoring macroeconomic stability”, Tuvey said.
“The commitment to sustainable exchange rate flexibility going forward will be a fundamental policy to rebuild and safeguard Egypt’s external resilience in the long term,” Hollar said.
Egypt’s economy has been hit hard by the coronavirus pandemic and the war in Ukraine, events that have disrupted global markets and pushed up oil and food prices around the world. Egypt is the world’s largest importer of wheat, most of which came from Russia and Ukraine. The country’s supply is subject to price variations on the international market.
In a statement released Thursday morning, Egypt’s central bank said it had raised the new lending rate to 14.25% and the deposit rate to 13.25%. The discount rate was also raised to 13.75%, he said.
Egypt’s monetary reforms and IMF loan are designed to help offset rising inflation, which topped 15% in September, and ease the financial strain on low- and middle-income households. Some of the main goals of the deal are to reduce Egypt’s overall debt and bring about sweeping reforms to its fiscal policy, Hollar said.
As part of its currency reforms, the central bank said it would start scrapping a system for importers, a bureaucratic process introduced in February to control demand on the currency for imports.
Late Wednesday, Egyptian Prime Minister Mustafa Madbouly announced an 11.1% increase in the minimum monthly wage, from 2,700 pounds ($137) to 3,000 pounds ($152). Madbouly’s announcement marks the fourth minimum wage hike since President Abdel Fattah el-Sissi took office in 2014.
In its statement, the Egyptian central bank said it was “determined to intensify its reform program to ensure macroeconomic stability and achieve strong, sustainable and inclusive growth”.
About a third of Egypt’s 104 million live in poverty, according to government figures.