Egypt has reached a preliminary agreement with the International Monetary Fund (IMF) to revise its existing loan terms. The deal encompasses an immediate devaluation of the Egyptian pound and a substantial increase in the financing program from $3 billion to $7 billion or more, along with an extension of its duration.
Devaluation drive
The key focus of the agreement is the rapid devaluation of the Egyptian pound. This aims to narrow the gap between the official and parallel market rates against the dollar. Moreover, government sources suggested that Egypt will implement a managed exchange rate system rather than a fully liberalized exchange rate. Adjustments to the exchange rate could materialize within hours or days, with an announcement of the expanded agreement expected next week.
IMF program challenges
Egypt currently holds an extended credit facility agreement with the IMF worth $3 billion. However, only the first tranche totaling $350 million has been disbursed due to the delay in completing the first and second reviews. This led to a freeze of the program. The IMF’s disbursement of funds has been contingent on various reforms, including exchange rate flexibility and progress in the tender program. However, the program faced setbacks amid disagreements over valuations in the parallel market.
Growth forecast adjustments
The IMF recently lowered its growth forecast for Egypt’s economy for the fiscal year 2023-2024 by 0.6 percent, down to 3 percent. Moreover, the report anticipates a growth increase to 4.7 percent in the next fiscal year, marking a 0.3 percent decrease from October estimates. Hence, the widening gap between official and parallel market rates has further complicated economic conditions. The pound is trading at 30.9 to the dollar in banks while reaching over 71 pounds on the black market.
Read: Central Bank of Egypt to convene amidst ongoing pound decline
Potential loan increase
Discussions between the IMF and the Egyptian government are ongoing, with a possibility of the $3 billion financing package increasing to $7 billion. Fitch Solutions’ BMI suggests that Egypt’s new IMF program could reach $8 billion. That is due to its geopolitical importance and concerns about the impact of global and regional conflicts on the Egyptian economy. The details of these discussions are expected to be announced later this month.
As Egypt navigates economic challenges due to global and regional tensions, the preliminary agreement with the IMF signals a potential turning point. The proposed reforms and increased financial support could pave the way for sustained economic growth. However, this depends on successfully addressing the disparities in exchange rates and implementing key reforms outlined in the IMF program. The coming weeks are crucial as Egypt moves closer to unveiling the specifics of its revised agreement with the IMF, providing a clearer picture of the nation’s economic trajectory.
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