- Egypt commits to IMF-backed reforms after $8 billion financial support approval.
- Measures include addressing reliance on central bank overdrafts and off-budget activities.
- Shift to a flexible exchange rate regime undermined by a return to fixed rate, causing currency shortages and inflation.
- A delay in policy rate adjustment contributes to negative real rates and financial repression.
- Despite challenges, record investment deals with the UAE and the Gaza crisis are cited in the IMF’s decision to expand the loan program.
Egypt has committed to addressing several financial practices that have put pressure on its currency and exchange rate, according to a recent report by the International Monetary Fund (IMF).
The report, released four weeks after the IMF’s board approved an $8 billion financial support program, highlighted Egypt’s commitment to tackle issues such as its reliance on central bank overdraft facilities and off-budget public sector activities.
The IMF report noted that Egypt has also pledged to address vulnerabilities like central bank lending to public agencies.
In addition, Egypt has taken steps to tighten its monetary policy, shift to a flexible exchange rate regime, liberalize its exchange system, and increase gasoline and fuel prices to make up for missed adjustments since December 2022.
However, the report pointed out that an initial $3 billion support program was put on hold last year due to a series of policy slippages. It highlighted that the decision to return to a fixed exchange rate in February 2023 had adverse effects.
This move undermined the initial credibility boost from the announcement of a shift to a flexible regime. Moreover, it hampered the execution of other program pillars such as the divestment of state-owned assets.
The report emphasized that the return to a fixed exchange rate led to foreign exchange shortages, a large spread in the parallel market, and constrained imports. These factors, in turn, fueled inflation and weighed on economic growth.
The IMF’s report underscores the importance of Egypt’s commitment to implementing reforms to stabilize its economy and create a more favourable environment for growth. By addressing these financial practices and vulnerabilities, Egypt aims to strengthen its currency, reduce inflationary pressures, and encourage sustainable economic growth.
The delay in raising the policy interest rate in response to higher-than-expected inflation has resulted in continued negative real rates and financial repression, according to the report. This delay, coupled with continued investment in national projects at a pace inconsistent with macroeconomic stability, significantly contributed to foreign exchange and inflation pressures.
The report highlights that from mid-2022 to early 2024, the central bank rapidly expanded its net domestic assets. During this period, it lent to public agencies without going through the Ministry of Finance. Furthermore, the Ministry of Finance’s use of the overdraft facility has increased sharply. These actions have intensified inflation and exchange rate pressures over the past two years.
The Egyptian pound has depreciated significantly, sliding from 15.74 pounds to 47.85 Egyptian pounds to the dollar since March 2022. Inflation reached a record annual high of 38% in September before slightly easing to 33.3% in March.
According to the report, Egyptian authorities had committed to limiting the government’s overdraft account at the central bank and preventing further central bank lending to public agencies outside the finance ministry.
However, as of February 2023, the central bank had lent as much as 765 billion Egyptian pounds ($15.9 billion) to state agencies other than the finance ministry, in apparent breach of a 2020 central bank law.
The IMF board meeting on March 29, 2024, which approved the expansion of the loan program, cited damage to the economy from the crisis in Gaza as a contributing factor. Before this, Egypt had struck a record $35 billion investment deal with the United Arab Emirates, which helped ease a foreign currency shortage.
These developments have raised concerns about Egypt’s economic stability and the effectiveness of its monetary policy. The government faces the challenge of balancing its investment in national projects with the need for macroeconomic stability and controlling inflation.
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Last Updated on April 28, 2024 by Safiya K
