Egypt back to Reform Track

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Mon, 31 Oct 2022 - 01:50 GMT

BY

Mon, 31 Oct 2022 - 01:50 GMT

A general view of clustered buildings in Cairo, Egypt, January 28, 2018. REUTERS/Mohamed Abd El Ghany

A general view of clustered buildings in Cairo, Egypt, January 28, 2018. REUTERS/Mohamed Abd El Ghany

CAIRO - 31 OCtober 2022: With a total fund of $9 billion, the International Monetary Fund (IMF) and the Egyptian government announced on Oct. 27, reaching a preliminary agreement, according to which the latter would obtain a financial loan of $3 billion from the Fund, in addition to another package that includes $1 billion from the IMF's Resilience and Sustainability Facility (RSF), and $5 billion from development partner countries and various financing institutions.
 
 
Egypt will use these amounts to face the financial distress that the country's economy is experiencing as a result of the repercussions of the Coronavirus pandemic and the Russian-Ukrainian crisis. The state is suffering a large deficit in the general budget, with the need to pay debt installments and interests, in addition to the high bill of commodity imports, as it suffers from a large deficit in the trade balance and high inflation.
 
According to the IMF, the new financing aims to protect macroeconomic stability and debt sustainability, improve Egypt's resilience to external shocks, strengthen its social safety net, and intensify reforms that support private sector-led growth and job creation.
 
IMF’s Mission Chief for Egypt, Ivanna Vladkova Hollar, said that the Egyptian authorities and the IMF team have reached a staff-level agreement on the economic policies to be supported by a 46-month arrangement under the Extended Fund Facility (EFF). 
 
The agreement is subject to approval by the IMF’s Executive Board, which is expected to discuss the authorities’ request in December, according to Hollar.
 
““The EFF also aims to unlock Egypt’s enormous growth potential through broadening and deepening structural and governance reforms. The program will include policies to unleash private sector growth including by reducing the state footprint, adopting a more robust competition framework, enhancing transparency, and ensuring improved trade facilitation. The authorities also plan to expand targeted social transfers and enhance spending on social assistance, health, and education. These reform measures will be critical to address long-standing constraints to Egypt’s higher, more sustainable, and more inclusive growth,” she stated.
 
Proactive procedures
 
Couple of hours before the announcement of the deal with the IMF, the Central Bank of Egypt (CBE) announced the issuance of several decisions related to the exchange rate, interest rates and letters of credit for importing.
 
The decisions which were taken in an exceptional meeting included raising the Central Bank of Egypt’s (CBE) interest rates by 200 basis points or 2 percent, in an exceptional meeting.
 
The overnight deposit rate, overnight lending rate, and the rate of the main operation were raised to 13.25 percent, 14.25 percent, and 13.75 percent, respectively.  The discount rate was also kept raised to 13.75 percent.
 
The CBE’s committee also announced moving to a durably flexible exchange rate regime, leaving the forces of supply and demand to determine the value of the Egyptian pound against other foreign currencies. “This will take place while prioritizing the primary goal of achieving price stability, and building up sustainable, adequate levels of Foreign Exchange Reserves,” according to the statement.
 
Moreover, the CBE will begin the process of gradually repealing the use of Letters of Credit for import finance, to be fully canceled in December 2022. 
 
The decisions also included working towards building the foundation for a derivatives market to further deepen the foreign exchange market and enhance its liquidity.
 
Hollar praised the authorities’ recent actions to expand targeted social protection, implement a durable flexible exchange rate regime, and phase out the mandatory use of letters of credits for import finance, as well as their steadfast commitment to tackle needed macroeconomic adjustments and carry out an ambitious structural reform agenda amidst a challenging global backdrop.
 
Social Protection Package
 
Earlier, the Egyptian government announced a social protection package to be applied starting from November and costs the state LE 67 billion.
 
The package included raising minimum wages for public employees by LE 300 to reach LE 3,000 instead of LE 2,700.
 
The government also decided to allocate an exceptional allowance worth LE 300 for all state workers to cope with the rising cost of living, Prime Minister Mostafa Madbouli announced in a press briefing.
 
This comes in light of President Abdel Fattah El-Sisi’s directives to set social solidarity packages for citizens amid the current circumstances, Madbouli noted, adding that the state will also continue to halt the decision of raising electricity prices until 30 June next year.
 
In August, the government said its newly introduced social protection package will come into effect in September to support Egyptians amid global repercussions of the Ukraine crisis.
 
This comes a month after the government unveiled an exceptional package of programs to support low-income citizens in cooperation with civil society groups.
 
According to Madbouli earlier this year, an increase of LE 100 per month will be added to ration cards possessed by around 9.1 million needy families as per the new package for six months.
 
Liberalization of the Egyptian Pound
 
In response to the Central Bank’s decision to move to a durably flexible exchange rate regime, leaving the forces of supply and demand to determine the value of the Egyptian pound against other foreign currencies, the exchange rate of the dollar against the Egyptian pound jumped in an unprecedented way from LE 19.75 to LE 22.80 per dollar during the same day of the decision, according to figures revealed by the CBE.
 
Capital Economics expected the Egyptian pound to fall 18 percent to 24/$ by end-2023 if not sooner.
 
It added that the move will add to inflation pressures which are expected to rise further and stay high over 2023, after recording its highest rate in four years during September 2022 at 15 percent on an annual basis.
 
Capital Economics referred to the CBE’s decision to raise interest rates by 2% percent which in its point of view comes to encounter the inflation pressure.
 
Despite the concerns related to the fragile public finances resulting from the weaker currency and the interest rate raise, the economics company expects “the government will be able to muddle through, not least because fiscal policy is already tight and is expected to remain so.”
 
For his part, the Chairman of the United Bank of Egypt Ashraf Qadi told MENA that the decisions are the fruits of the Egyptian Economic Conference 2022 meant to have a free economy backing the development process.
 
The decisions will increase confidence in the Egyptian economy and encourage foreign investments, Qadi added.
 
Moreover, Ayman Warda, banking expert and head of the treasury sector in one of foreign banks, said the decision of liberalizing exchange rate is meant to put an end of black market where the dollar price reached 24 to 25 pounds and this is unacceptable, according to MENA.
 
The Egyptian government hopes that these economic measures, monetary reforms and the IMF loan will reduce the inflation rate that exceeded 15 percent during September 2022, ease the financial pressure on low- and middle-income families and reduce the total Egyptian debt.
 
On Oct. 15, the Central Agency for Public Mobilization and Statistics (CAPMAS) revealed that the annual urban consumer inflation in Egypt recorded its highest of 15 percent in 4 years, exceeding the target of the Central Bank. 
 
The annual urban inflation rate rose to 15 percent in September compared to 14.6 percent in August, while it recorded 15.7 percent in November 2018. It was only at 6.4 percent in August 2021.
 
The CBE aimed to achieve an inflation rate of 7 percent (±2) percentage points on average during the fourth quarter of 2022. However, the CBE announced that the new target rate will be announced soon.
 
 

 

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