Egypt Clinches $3 Billion IMF Deal and Devalues Pound Again

Mirette Magdy, Tarek El-Tablawy and Abdel Latif Wahba
·4 min read
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(Bloomberg) -- Egypt agreed on a $3 billion loan with the International Monetary Fund after sharply devaluing its currency as it seeks to shore up an economy battered by the fallout from Russia’s invasion of Ukraine.

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The North African nation, which has faced soaring import bills and an exodus of foreign money due in part to the conflict, will also receive $5 billion from international partners to help finance the country’s external funding gap, Egyptian officials told a news conference on Thursday. A further $1 billion from a newly created sustainability fund is also on the table, according to the IMF.

In what could signal a longer-term shift in its currency policy, the central bank said earlier it was adopting a more flexible exchange-rate regime. It also raised official borrowing costs by 200 basis points at an unscheduled meeting.

The flexible exchange-rate policy leaves the forces of supply and demand to determine the value of the Egyptian pound against other currencies, the central bank said in a statement. The pound fell at least 15%, surpassing the magnitude of its devaluation on March 21.

The “move to a flexible exchange rate regime is a significant and welcome step to unwind external imbalances, boost Egypt’s competitiveness, and attract foreign direct investment,” the IMF said in a statement announcing the 46-month Extended Fund Facility.

Gulf Arab allies have pumped billions of dollars of support into Egypt’s economy, over concern about the stability of the Arab world’s most populous nation.

‘Cornerstone Policy’

“The commitment to durable exchange rate flexibility going forward will be a cornerstone policy for rebuilding and safeguarding Egypt’s external resilience over the long term,” the Washington-based lender added.

Egyptian Pound Has Bears Betting on 14% Drop as IMF Deal Nears

The bank’s statement reiterated greater currency flexibility as a key theme in ongoing economic reforms, shifting from a practice of keeping the pound stable by using foreign reserves.

Egyptian stocks soared as local investors rushed to protect their savings against the devaluing currency. The benchmark EGX 30 Index gained as much as 4.7% to the highest level since May.

What Bloomberg Economics Says...

“The chain reaction has unfolded: Egypt declared a move to a flexible exchange-rate regime, leading to a plunge in the pound, followed by an announcement of an agreement with the IMF. The key question is whether authorities will allow greater flexibility in the exchange rate or, like 2016, merely re-peg the currency to a weaker level against the dollar.”

--Ziad Daoud, chief emerging markets economist.

The central bank, which increased its key interest rate to 13.25%, said it will work toward building the currency derivatives market to “further deepen the foreign exchange market and enhance its liquidity.” The Monetary Policy Committee had been expected to hold its next meeting on Nov. 3

“Higher interest rates are needed given the acceleration in inflation and more strengthening expected in the coming months,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank.

In a separate statement, Egypt’s regulator amended regulations to allow for the use of foreign-exchange forwards, currency swaps and non-deliverable forward contracts.

Inflation Threat

The dramatic weakening of the pound risks further stoking Egyptian annual inflation that was already at 15% in September, its highest in almost four years, after hikes in food and fuel prices.

The upsurge will probably be “transient,” with the consumer-price index likely to peak at close to 19% in January, according to Goldman Sachs Group Inc. economists including Farouk Soussa in London.

The MPC meeting followed a three-day conference in which Egyptian officials discussed introducing new measures to boost the economy, such as reducing a reliance on debt and foreign support by boosting exports and the private sector’s role.

The central bank also said it would remove a requirement for importers to acquire letters of credit by December, which would “serve as a catalyst for the rejuvenation of economic activity in the medium term.” The regulations had contributed to shortages of some consumer goods in Egypt.

--With assistance from Netty Ismail and Farah Elbahrawy.

(Updates with economist comment in third-last paragraph.)

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