Egyptians cautiously hopeful following IMF deal

Nonetheless, exchange rate liberalisation could usher in an upcoming wave of inflation, affecting the prices of goods and services. The Central Bank has proactively taken measures to curb inflation rates, notably by increasing interest rates by 6% to 27.25%.

Additionally, introducing investment certificates with an unprecedented historical return of 30% positions Egypt as the sixth country globally with the highest interest rates.

This strategic move aligns with the key requirements outlined by the IMF in the recently signed economic reform programme, aiming to steer the inflation rate towards a single-digit figure after approaching 40% in certain months last year.

However, concerns loom that this significant spike in interest rates may exert pressure on investments and potentially lead to a stagnation in lending and internal financing for investors. Such repercussions could introduce fluctuations and slowdowns in banks' lending activities unless new developments unfold looking forward.

Fifth exchange rate liberalisation

Egypt embarked on its first exchange rate liberalisation in November 2016. The second float occurred in March 2022, witnessing a pound reduction from EGP 15.77 to the dollar to EGP 19.7, marking a 25% decline.

Subsequently, the third float took place in October 2022, with the pound decreasing from EGP 19.7 to the dollar to EGP 24.7, reflecting a 25.4% decrease. The fourth and most recent float transpired in January 2023, reducing the pound from EGP 24.7 to the dollar to EGP 31, constituting a 30% decline.

The signing of the IMF agreement, totalling $8bn with an additional $1.2bn as per the IMF Resilience and Sustainability Trust's programme, is a crucial component of the Programme.

Egypt anticipates further financial infusions from trade partners, totalling around $12bn soon. This substantial influx of funds is expected to address a significant portion of the state's foreign exchange needs and resolve longstanding issues related to supply shortages.

These financial injections are poised to alleviate various challenges Egypt faces, including the backlog of goods in ports and shortages of essential items such as production requirements, medicine, and food.

Notably, commodities like sugar, which recently vanished from the markets, experienced a surge in price from EGP 12 to EGP 75 per kilogram in the parallel market. To tackle this issue, the government has committed to importing 1 million tonnes of sugar in the future.

There's a hopeful expectation to eradicate the parallel market for the dollar, a significant challenge the government has faced recently.

Foreign direct investment

An improvement of dollar sources in the Egyptian economy is anticipated, with the prospect of reducing remittances from Egyptians abroad, which decreased 30.8% to $22.1bn in 2022-2023.

Additionally, efforts are aimed at boosting foreign direct investment, which declined by about 30.3% in Egypt during the first quarter of 2023-2024.

In contrast, there's been an encouraging surge in merchandise exports, which achieved notable growth rates throughout 2023 and totalled about $35.631bn.

These figures surpass the indicators of 2022, demonstrating resilience despite economic crises at regional and global levels, according to official data. Moreover, there's an optimistic outlook for an increase in foreign currency reserves in the future.

Recent statements from IMF officials highlight the importance of increased funding for Egypt's programme to ensure its success, particularly in the face of external shocks.

Emphasising that Egypt's stability holds significance for the entire region, the IMF acknowledges that the primary direct impact of the Gaza conflict on Egypt is a substantial reduction of 55-60% in traffic through the Suez Canal.

The IMF is actively collaborating with Egyptian authorities to finalise the key elements of programme adjustments during the first and second reviews.

This collaborative effort has resulted in a significant increase in financial support, with the lending amount jumping from $3bn to $8bn and an additional loan of $1.2bn.

The agreement on the stalled programme between Egypt and the IMF dates back to December 2022, when the IMF committed to providing $3bn to Egypt, responding to the country's significant financial pressures.

Eight reviews of Egypt's reform programmes were planned, with the initial review scheduled for March 2023, though it remained incomplete.

Revised forecast

During this period, the IMF revised its growth forecast for the Egyptian economy in the current fiscal year 2023-2024, lowering it by 0.6 percentage points to 3% compared to previous projections.

The IMF anticipated a subsequent rise in the growth rate to 4.7% in the following fiscal year of 2024-2025, marking a decrease of 0.3 percentage points from earlier estimates released in October.

According to IMF assessments presented in the World Economic Outlook, Egypt recorded a growth rate of 3.8% in the fiscal year 2022-2023.

Approximately a year ago, the Central Bank refrained from adjusting the pound-to-dollar exchange rate, maintaining it at EGP 30.85, contrary to a prior agreement with the IMF to adopt a flexible exchange rate.

However, on the black market, the rate demonstrated more flexibility, reaching EGP 50 after previously touching EGP 75. This shift occurred before Egypt's announcement of a significant $35bn deal with the United Arab Emirates for the Ras al-Hekma project on the north coast.

The Central Bank's Monetary Policy Committee (MPC) recently implemented substantial decisions, marking the most significant rate increase witnessed in the Egyptian economy.

Interest rates were raised by about 6%, elevating the overnight deposit and lending rates and the Central Bank's main operation rate by 600 basis points to 27.25% for credit and 28.25% for lending.

According to a statement, the MPC emphasised that the decision aims to constrain monetary conditions in line with the targeted path for lowering inflation.

The move toward exchange rate unification is crucial as it eliminates the accumulation of foreign exchange demand, bridging the gap between official and parallel market exchange rates.

Persisting scepticism

The Central Bank introduced a 30% discount certificate to offset inflation, compensate depositors, and attract customers. Despite this, the Egyptian public remains sceptical as they anticipate further price hikes in goods, services, and fuels, heightening concerns about economic challenges.

Several officials have characterised the IMF agreement and the Central Bank's decisions in collaboration with the Egyptian government as "highly constructive."

This positive development is anticipated to pave the way for another financing package from additional development partners, including the World Bank, the European Union, and various other collaborators.

These partners are expected to offer soft loans to the Egyptian state, contributing to a comprehensive programme with substantial financial support.

This integrated approach aims to foster monetary stability, sustain the economic reform programme, and facilitate the resurgence of the private sector as the leading contributor to the economy.

While some have applauded the government's decision to cap total public investment at approximately $1.272bn, a significant portion of the Egyptian population foresees increased hardship and frustration in the coming period.

Despite differing perspectives, the collective hope is that these measures will lead Egypt to a more stable and resilient economic future.

Fitch applauds Central Bank measures

Fitch Ratings has characterised the measures implemented by the Central Bank of Egypt as a positive step toward overcoming the country's economic challenges, emphasising the Bank's commitment to curbing inflation and establishing positive real interest rates.

The agency foresees a shift toward positive yields on government bonds, reduced foreign exchange risks, and a stabilised exchange rate at EGP 50 by the end of the year.

Fitch noted that these measures are instrumental in attracting foreign funding, and the security efforts against money traders and speculators are viewed as positive, collectively contributing to the strengthening of the local currency.

While some applaud the decisions to liberalise the exchange rate and raise interest rates, acknowledging their potential benefits, there remains a potential tax on large segments of citizens and owners of small and medium enterprises.

The interest rate hike may have negative repercussions, particularly in the industrial sector, where elevated financing costs impact production expenses.

Consequently, these increased costs are expected to be passed on to consumers, adding to the prices of goods and commodities, whether consumers willingly accept them or not.