The International Monetary Fund (IMF) announced in a statement early Friday that it has reached an agreement with Egypt on the key policy elements of the economic reform program, signaling another step towards finalizing the deal to increase the country’s loan by $3 billion.
Ivana Vladkova Hollar, head of the IMF mission to Egypt, stated that both sides have made “excellent progress” in discussions on a comprehensive policy package that could initiate long-awaited reviews of the country’s economic reform program.
Hollar added in the statement that the IMF team and the Egyptian authorities have agreed on the key policy elements of the program.
Earlier on Thursday evening, Kristalina Georgieva, the Managing Director of the IMF, mentioned that the Fund and Egypt are in the “final stages” of negotiations to increase the loan program. Following the announcement, Egypt’s international sovereign bonds rose by more than a cent in the early hours of Friday.
Egypt has been in talks with the IMF over the past two weeks to revive and expand the loan agreement signed in December 2022.
The IMF suspended loan disbursements last year after Egypt pegged the exchange rate of the Egyptian pound to the dollar at 30.85 since March, while the dollar is currently trading at around 71 pounds in the parallel (black) market.
Hollar, who concluded a two-week visit to Cairo on Thursday evening, stated that discussions would continue virtually in the coming days “to determine the magnitude of additional support needed to help bridge Egypt’s growing financing gaps from the IMF and other bilateral and multilateral development partners in the context of the latest shocks.”
The Monetary Policy Committee of the Central Bank of Egypt decided in its meeting on Thursday evening to raise the main interest rates by 200 basis points.
The bank, in a statement published on its website, decided to increase the overnight deposit and lending rates and the central bank’s main operation rate by 200 basis points, reaching 21.25%, 22.25%, and 21.75% respectively.
The credit and discount rate was also raised by 200 basis points to 21.758%.
The bank pointed to a slowdown in economic activity due to restrictive monetary policies adopted by major central banks affecting demand.
Global inflationary pressures have recently decreased due to restrictive monetary policies followed in many advanced and emerging economies, leading to reduced inflation expectations for those economies compared to what was presented at the previous meeting.
Despite this, there is uncertainty around inflation expectations, especially concerning global commodity prices, due to current geopolitical tensions and disruptions in Red Sea navigation.
Domestically, the bank expects GDP growth to slow during the fiscal year 2023-2024 compared to the previous year, with a gradual recovery thereafter.
This aligns with actual data developments and the negative repercussions of regional instability and Red Sea navigation disruptions on the services sector. The unemployment rate stabilized at 7.1% during the third quarter of 2023.
The bank noted that both the general and core inflation rates continued to decline to 33.7% and 34.2% annually in December, while current developments indicate ongoing and rising inflationary pressures above the usual pattern, affecting both food and non-food commodities.
Most analysts did not anticipate the interest rate hike, with the average expectation in a Reuters survey of 16 analysts being that the central bank would maintain interest rates.
Six analysts predicted an increase ranging from 100 to 300 basis points.
Egypt’s economy has been impacted by the Gaza war, affecting tourism, reducing shipping through the Suez Canal, a major source of foreign currency.
The Monetary Policy Committee stated that growth dropped to 2.7% in the third quarter of 2023, down from 2.9% in the second quarter, and is expected to continue declining until June.
The committee noted that despite the current decline in inflation rates, there is uncertainty around inflation expectations, particularly due to global commodity prices amid current geopolitical tensions and Red Sea navigation disruptions.
