IMF Boss Confirms Deal With Egypt ‘Close’ After Rate Hike Caps Talks

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Ms. Kristalina Georgieva - Managing Director, IMF, Washington DC

The International Monetary Fund is close to agreeing on a new financial package for Egypt, according to the Washington-based lender’s managing director.

“We are in this very last stretch, where we are working on the details of implementation,” Kristalina Georgieva said in a briefing in Washington. “We are very close; we’re not talking about a long protracted period at all.”

The talks are a “top priority” for the IMF because of Egypt’s importance to the wider region, she said. Global markets are watching the negotiations closely, given that Egypt — the Arab world’s most populous country — is suffering from its worst economic crisis in decades and dire shortages of foreign exchange.

Egypt’s dollar-bond yields have fallen since late last year, but still average around 13.5%, according to Bloomberg indexes. Its spreads over US Treasuries are close to 1,000 basis points, a level considered distressed by most traders.

Around the same time Georgieva spoke, Egypt unexpectedly hiked its main interest rate by 200 basis points to 21.25%. Most analysts had predicted a hold.

The fund and Egypt are working on a potential deal that may bring in partners such as the World Bank and exceed $10 billion, Bloomberg reported on Thursday. That’s a sum that would go a long way toward easing Egypt’s crisis.

An IMF team ended a roughly two-week visit to Egypt on Thursday. Vladkova Hollar, who headed the mission, said they had “made excellent progress.”

“The IMF team and the Egyptian authorities have agreed on the main policy elements of the program,” Hollar said. “The authorities expressed a strong commitment to act promptly on all critical aspects of Egypt’s economic reform program.”

The two sides will continue to work over the coming days to finalize a so-called Memorandum of Economic and Financial Policies and “identify the magnitude of additional support from the IMF and other bilateral and multilateral development partners,” she said.

Egypt has a $3 billion IMF program in place already. But hardly any of it has been disbursed, partly because the fund first wanted Egypt to allow a more flexible exchange rate and make good on other economic reforms.

The government is widely expected to devalue the pound in the coming months. While the currency’s official rate has held around 30.9 per dollar since last March, it’s trading between 65 and 70 on the black market, underscoring the sheer scarcity of hard currency in the nation.

Egypt Cenbank Raises Interest Rates By 200 bps

Egypt’s central bank raised its overnight interest rates on Thursday by 200 basis points (bps), a move some analysts said may indicate a currency devaluation is on the way.

The bank hiked the lending rate to 22.25% and the deposit rate to 21.25%, its Monetary Policy Committee said in a statement.

Most analysts did not expect a hike. The median forecast in a Reuters poll of 16 analysts was for the central bank to hold rates steady. Six analysts expected a hike of between 100 and 300 basis points.

“The hike is likely coming ahead of a EGP devaluation and the announcement of an expanded IMF deal,” said Monica Malek of Abu Dhabi Commercial Bank. Egypt has been in talks for the last two weeks with the International Monetary Fund to revive and expand a $3 billion loan agreement signed in December 2022.

IMF disbursements on the loan were put on hold last year after Egypt did not follow through on a pledge to let the Egyptian pound (EGP) respond to market forces and instead fixed it against the dollar in March.

Farouk Soussa of Goldman Sachs disagreed a devaluation was imminent. The rate hike “is the start of a process of policy tightening,” he said. But that “will take some time and must be supported by enhanced FX liquidity.”

The Egyptian pound, fixed at 30.85 to the dollar since March, has been trading on the black market as low as 71 pounds.

Egypt’s already weak economy was hit by the Gaza crisis, which dampened tourism and decreased shipping through the Suez Canal, a major source of foreign currency.

The MPC said growth fell to 2.7% in the third quarter of 2023 from 2.9% in the second and was expected to continue softening through June.

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