Capital Economics expects 7.5% depreciation of Egyptian Pound after turning to IMF

CAIRO – 28 April 2020: Capital Economics reiterated its expectation of a 7.5 percent depreciation of the Egyptian pound to reach $17 by end of 2020 after the state announced returning to the International Monetary Fund (IMF).

The economic research consultancy said in a report that Egypt has become the latest emerging market to turn to the IMF for assistance and one of the priorities for the Fund is likely to be for the central bank to loosen its grip on the pound.

The report affirmed that the immediate concern for the IMF is likely to be the exchange rate.

“Egypt’s turning to the International Monetary Fund (IMF) means that the authorities are likely to loosen their grip on the pound sooner rather than later,” it added.

According to Capital Economics, a depreciation on that scale is unlikely to lead to significantly higher inflation. “Monetary policymaking has improved in recent years and, by keeping real interest rates elevated, the central bank has brought inflation under control. The headline rate stood at 5.1 percent y/y in March and the CBE’s preferred measure of core inflation, which includes some food products, came in at just 1.3 percent y/y.”

It expected inflation to stay below the mid-point of the CBE’s target range of 9±3 percent throughout our forecast horizon.

“Allowing the currency to depreciate will negate the need to keep interest rates high in order to attract capital inflows and, with inflation well-anchored, the central bank is likely to follow up last month’s emergency 300bp interest rate cut with further easing to support the economy,” it stated, expecting the benchmark overnight deposit rate to be lowered by an additional 225bp, to 7 percent, over the coming months.

In addition, it thought that the IMF will probably keep one eye on the public finances, clarifying that solid progress was made under the previous IMF programme to address Egypt’s poor budget and debt positions.

“Revenue-raising measures, spending restraint and subsidy reform resulted in the primary budget balance swinging from a deficit of around 3.5 percent of GDP to a surplus of close to 2 percent of GDP in the 2018/19 fiscal year. Meanwhile, debt has declined from a peak of more than 100 percent of GDP to 84 percent of GDP,” it noted.

According to the report, the budget position will no doubt take a hit from the current crisis, but there are signs that the authorities are well aware of the fiscal constraints they are under – direct fiscal stimulus for the economy has, so far, amounted to a relatively modest 1.8 percent of GDP.

“Even so, the IMF will want to ensure that support is scaled back once the crisis is over and that the debt ratio quickly resumes its decline,” it added.

Comparing Egypt’s conditions between 2016 and 2020, It said that Egypt’s external position was in much better shape compared with 2016, when the government last turned to the IMF. A combination of stronger exports and weaker imports, attributable to the effects of the 2016 devaluation as well as a marked improvement in the energy trade balance, had supported a narrowing of the current account deficit. The shortfall came in from 6.6 percent of GDP in 2016 to 3.1 percent of GDP last year. Meanwhile, the central bank had rebuilt its foreign exchange reserves.

In November 2016, the Executive Board of the IMF approved a $12 billion loan as a financial assistance to Egypt to support the Egyptian economic reform program.

Upon the board's approval in November, Egypt embarked on a bold economic reform program that included floating its currency, losing around 50% of its value, as part of the economic reform program which imposed taxes, including the value-added tax (VAT), and cut energy subsidies, all with the aim of trimming the budget deficit.

“The current crisis [coronavirus] has undoubtedly led to strains in Egypt’s balance of payments. Travel restrictions have brought the country’s tourism industry, which was close to returning to its pre-Arab Spring peak, to a grinding halt,” it said, explaining that tourism receipts are a vital source of foreign currency, equal to 4.2 percent of GDP, and the industry directly accounts for just over 6 percent of GDP and around 4.5 percent of total employment. PM Madbouly said that the government would use financing from the IMF to prioritise support for the tourism industry.

Earlier in April, Capital Economics expected the Egyptian currency to fall by around 7.5 percent by the end 2020 to 17/$. It clarified the decline will take place as the Egyptian authorities would loosen their grip on the pound over the coming weeks.

Prime Minister Mostafa Madbouli announced Sunday that the Egyptian government and the Central Bank have requested a financial package from the International Monetary Fund (IMF), according to the Rapid Funding Tool program (RFI) and the SBA program.

This package is to enhance the state’s capabilities to face the new COVID-19 virus crisis, in a proactive step based on the successful implementation of the economic reform program; to maintain the continuing gains and positive results achieved by the Egyptian economy, in light of the exceptional circumstances experienced by all countries of the world and developments in global conditions.

Egypt requests new financial package from IMF for 1 year

CAIRO - 26 April 2020: The Egyptian government and the Central Bank have requested a financial package from the International Monetary Fund (IMF), according to the Rapid Funding Tool program (RFI) and the SBA program, Prime Minister Mostafa Madbouli announced Sunday.