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Egypt secures $8bn IMF deal as economy is in freefall

March 7, 2024 at 12:37 pm

Egyptian people retrieving money at the bank on April 3, 2023 in Cairo, Egypt [Mahmoud Elkhwas/NurPhoto via Getty Images]

Egypt has secured a deal to more than double its International Monetary Fund (IMF) bailout to $8 billion, the Financial Times has reported. The deal was struck to avert the country’s worst economic crisis in decades after the country allowed its currency to drop to a record low against the US dollar.

According to the FT, the IMF agreed to inject cash after Cairo took “decisive steps to move towards a credible flexible exchange rate regime” by devaluing the Egyptian pound by 40 per cent and raising interest rates significantly to relieve a foreign currency shortage. The measures are unlikely to bring relief to average Egyptians who have been struggling with reduced purchasing power and the high cost of borrowing for many years.

The FT noted that floating the currency and allowing market forces to set the value of the pound was a key condition for the heavily indebted country to access more IMF funds as part of a $3bn bailout in 2022.

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The report also highlighted that the increased IMF support for Cairo comes as Egypt faces mounting social and economic pressures, exacerbated by Israel’s aggression against the Palestinians in Gaza and attacks on vessels in the Red Sea by Houthi rebels in Yemen. Both issues have had an impact on Egypt’s foreign currency revenue from merchant shipping using the Suez Canal.

The recent $35bn investment by ADQ, an Abu Dhabi investment vehicle, provided the Egyptian Central Bank with the necessary buffer to prevent the currency from going into freefall once controls had been lifted. This investment, the largest single investment in Egypt’s history, was vital to securing the IMF deal, according to the report.

Egypt’s economy has been struggling for years, with the country facing a range of challenges, including high inflation, rising debt and a lack of foreign currency reserves. According to Reuters, Egypt’s inflation rate reached 25.8 per cent in January 2023, the highest level in five years, driven by rising food and energy prices.

The BBC reported that Egypt’s foreign debt has also been a major concern, with the country’s external debt reaching $155.7 billion in September 2022, up from $134.8bn twelve months earlier. The high debt levels have made it difficult for Egypt to access international financial markets and have put pressure on the country’s foreign currency reserves.

Bloomberg noted that Egypt’s tourism sector, a key source of foreign currency, has also been hit hard, by the Covid-19 pandemic as well as the ongoing conflict in neighbouring Libya. The sector, which accounts for around 12 per cent of Egypt’s GDP, saw revenue drop by 70 per cent in 2020 compared with the previous year.

These economic challenges have put pressure on the Egyptian government to implement reforms and secure financial support from international institutions like the IMF.

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