International efforts to rescue Egypt's economy intensify

A bigger IMF loan agreement and more support from the EU is expected to help dig Cairo out of its amassing debt

EPA

Director General of the International Monetary Fund, Kristalina Georgieva, while attending the World Government Summit session in Dubai on February 12, 2024.

International efforts to rescue Egypt's economy intensify

Marcelle Nasr

last update on 15 Feb 2024

Egypt and the International Monetary Fund are in the final stages of reaching an agreement over a loan that would be one of the primary means of easing the dollar shortage gripping the country.

It comes as the West takes steps to help keep Egypt stable as the impact of the war in Gaza ripples through the economy of one of the Middle East’s most strategically important nations, which is playing a key diplomatic role in the crisis.

An announcement is expected soon.

A deal would be one of the main means of bringing relief to people caught in the fallout from the collapse of the Egyptian pound. The US dollar price in the black market is around 63 pounds and can reach as high as 73 pounds, with the official rate at 30.90 pounds.

The gap puts enormous pressure on the nation’s finances.

The government and the IMF are in the final stages of agreeing on terms, which are expected to be settled “within a few weeks”, according to the IMF’s Managing Director Kristalina Georgieva on the sidelines of the World Government Summit.

Pleased to meet with Mostafa Madbouly, ’s Prime Minister. Working with Egypt is a high priority for the IMF and we have made significant progress in our discussions of a comprehensive policy package needed to complete the 1st & 2nd reviews of Egypt’s economic reform program. pic.twitter.com/suJ0g7dL4L
— Kristalina Georgieva (@KGeorgieva) February 12, 2024

The rebound in international financial assistance to Egypt also includes promises from the European Union. The bloc informed Egypt’s Foreign Minister Sameh Shoukry of a decision to allocate additional support as part of the mid-term review of the EU budget for the period between 2021 and 2027 without specifying an amount.

But Egyptians typically view such agreements – especially with the IMF – with suspicion. They say: “Nothing pleasing comes from the West.”

The terms of the loan deal with the IMF are likely to include liberalisation of the managed official exchange rate of the Egyptian pound, taking it toward the weaker levels in the parallel market, which has borne the brunt of the currency’s collapse.

AFP — A woman walks in the middle of a popular market near the Greek temple of the Serapeum in Alexandria, which dates back to 246 BC, with the Victory Column visible in the background, November 24, 2023.

Bracing for impact

Ahead of such a devaluation, Egypt’s government recently announced measures to protect against the impact of the decline in the pound’s dollar purchasing power.

President Abdel Fattah el-Sisi increased salaries for public sector employees and state-owned enterprises and raised the minimum wage to 6,000 pounds a month. The government also announced a 15% increase in pensions starting next month.

However, Egyptians say this is not nearly enough — given the unprecedented spike in prices — and provides little relief from a cost-of-living crisis.

Despite the government’s efforts, including beefed-up controls on pricing, the Central Bank of Egypt is considering raising interest rates by two percentage points on deposits and lending, to 21.25% and 22.25%, respectively.

National income has been hit by a drop in traffic through the Suez Canal due to the outbreak of attacks on shipping in the Bab-el-Mandeb Strait in the Red Sea, which Houthi groups have carried out in solidarity with the plight of Palestinians during Israel’s war on Gaza.

The crucial source of revenue fell 46% year-on-year in January, with the number of ships passing through down 36%. There are hopes among experts and analysts that recovery will be swift when the geopolitical turmoil lifts and global markets stabilise.

In the meantime, Georgieva has pointed to the impact of the war, saying: “Egypt’s financing needs have become larger, and we’re working with other parties to provide support."

"The impact of Houthi attacks on Red Sea traffic and the Suez Canal’s income reduction has affected Egypt’s financial situation. The canal could provide a monthly income of $700mn, but this income has now diminished.”

That has led the IMF to boost the size of the loan on offer to the country, changing the headline terms of an agreement in principle reached in 2022.

But there are conditions attached to the IMF, particularly concerning that Egypt controls inflation, adding to the outlook for big rate rises from the country's central bank.

The Egyptian pound is expected to devalue further following the expected IMF deal.

Boosting national income

Georgieva also praised Egypt's commitment to major projects to secure more sources of income in foreign currency.

A major initiative is underway to open up direct international investment in a major development at Ras El-Hekma. The United Arab Emirates plans to invest between $22bn and $40bn there, in the area along the Mediterranean coast, between the cities of Alamein and Marsa Matruh.

But while these plans will take time, the impact on income from the war on income has already hit, and the potential consequences for Egypt have galvanised its allies to offer support.

Much of the financing from Gulf countries already exists as deposits in the Egyptian Central Bank and is expected to be invested in Egyptian assets.

European Commission President Ursula von der Leyen also offered additional loans of $10bn to Egypt.

Migration

Part of the motivation for such action comes from European nations keen to avoid the rise in irregular migration from Egypt across the Mediterranean that a deeper and longer-term economic crisis would be likely to cause.

Economic expert Walid Gaballah told Al Majalla that the EU commits to Egypt, which is already hosting millions of refugees and spending significantly on projects to curb migration across the Mediterranean.

He said it amounted to an ethical obligation for the bloc, with the refugees already imposing a significant burden on Egypt's economy.

AFP — Sudanese drivers wait by their buses upon arrival at the Egyptian village of Wadi Karkar near Aswan on May 14, 2023, after fleeing war-torn Sudan.

Gaballah noted that this is also one of the factors putting Egypt in a strong negotiating position with the IMF, opening the way for a bigger loan.

"The Egyptian government has taken measures to support negotiations, such as cancelling taxes on government activities to enhance the competitiveness of the private sector and reducing investment spending by 15% in the current fiscal year," he said.

As for the future, Gaballah stated that the Egyptian economy is large, capable, and diverse, adding that the foreign currency liquidity crisis is short-term.

He noted that the government had injected trillions of pounds to enhance the country's competitiveness and create an infrastructure capable of shaping Egypt's future.

"International economic blocs recognise this reality," he said.

Other analysts also point to the overlap between geopolitics and a rising sense of urgency over the need for support, with some predicting that conditions over currency regimes may also be left out.

The economic and financial expert, Dr Khaled El-Shafie, told Al Majalla: "The European Union is aware of the scale of problems and negative impacts caused by the brutal Israeli war on Gaza on the Egyptian economy."

"The IMF's inclination to urge Gulf countries and lending institutions to stand by Egypt due to its suffering in light of the Gaza crisis is considered positive."

He hoped for an agreement between Egypt and the IMF without floating the exchange rate, "thus enabling Egypt to achieve significant gains alongside the fund's ability to support it in this direction, especially standing by its struggling economy in this crucial and sensitive stage."

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