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Sunday, 13 November 2016

IMF approves bailout package

The IMF board approved a three-year, USD 12 bn extended fund facility for Egypt on Friday, according to an IMF statement, and the Central Bank of Egypt confirmed that it has received the first USD 2.75 bn tranche of the loan the same day. CBE Governor Tarek Amer told Ahram Online that the loan will help raise the country’s foreign reserves to more than USD 23 bn from the current USD 19.04 bn recorded in October. Deputy Finance Minister Mohamed Maait confirmed that the CBE received the payment and that it will be transferred to the Finance Ministry in EGP, Al Borsa reports. The balance of the facility will be disbursed in phases over the duration of the program, subject to five reviews, according to the IMF statement. Finance Minister Amr El Garhy told Al Mal that the first review will take place in March 2017, while the second will take place next September of that year.

Managing Director Christine Lagarde said the homegrown economic reform program will address longstanding challenges including “a balance of payments problem manifested in an overvalued exchange rate, and foreign exchange shortages; large budget deficits that led to rising public debt; and low growth with high unemployment. Resolute implementation of the policy package under the economic program is essential to restore investor confidence, reduce inflation to single digits, rebuild international reserves, strengthen public finances, and encourage private sector-led growth.”

The statement, which also includes a summary of the reform program’s pillars and a snapshot of current and projected macro indicators, quotes Lagarde at considerable length on foreign exchange policy, public finances and social protection, structural reforms and risks.

Lagarde’s release notes the Ismail government’s reform program is based on four pillars, namely:

  • A significant policy adjustment including (1) liberalization of the foreign exchange system to eliminate forex exchange shortages and encourage investment and exports; (2) monetary policy aimed at containing inflation; (3) strong fiscal consolidation to ensure public debt sustainability;
  • strengthening social safety nets by increasing spending on food subsidies and cash transfers;
  • far-reaching structural reforms to promote higher and inclusive growth, increasing employment opportunities for youth and women;
  • Fresh external financing to close the financing gaps.

With sound implementation of the program, growth could rebound to 6 percent by 2021—similar to the levels in 2005-2010, the IMF said in a separate ‘news article’ released on Saturday and picked up by local media. The fund is also anticipating that foreign direct investment will reach USD 9.4 bn this fiscal year, up from USD 6.7 bn last year, Al Borsa reports, picking up on an entry in the table accompanying Lagarde’s statement. The prediction is line with the Investment Ministry’s goals of attracting USD 8-10 bn this year. The IMF is projecting inflation will hit 16.6% this year from 14% last year, Al Mal reports.

S&P revised Egypt’s sovereign credit outlook to Stable on Friday on the support from IMF, with the current rating at B-, Reuters reported. Ratings on Egypt remain constrained by "wide fiscal deficits, high public debt, low income levels, and institutional and social fragility." S&P anticipates that Egypt’s economic growth will start recovering in 2018-2019, fueled by domestic consumption and investments, and expects the country’s real GDP growth will exceed 4% by 2019.

Does the House get a say? The loan agreement is expected to be with the House of Representatives in ten days’ time, said Hussein Eissa, chair of the House Budget Committee, Al Borsa reports. The move is part of the House’s duties to ratify foreign agreements, he added. Some political parties have come out strongly against the loan. Farid Zahran, head of the Egyptian Social Democratic Party, said the need for an international bailout proves the Ismail government hasn’t got a grip on the economy. The National Progressive Unionist Party issued a statement condemning the agreement, AMAY reports. Members of the House Economics Committee and the Country’s Future Party have come out publically in support and praise of the agreement.

The IMF bailout is the dominant story on Egypt in the international press this morning. Coverage includes:

  • With shock reform, Egypt throws out rules it long lived by (Associated Press) (widely picked up by US, Canadian, UK press)
  • IMF Approves USD 12 bn Loan to Egypt (Wall Street Journal)
  • Painful Steps Help Egypt Secure USD 12 bn IMF Loan (New York Times)
  • IMF board approves Egypt’s USD 12 bn loan agreement, USD 2.75 bn disbursed (Reuters)
  • IMF Approves Biggest-Ever Mideast Loan to Revive Egypt’s Economy (Bloomberg)
  • IMF approves $12 billion Egypt loan agreement (Germany’s DW, relying primarily on wires)
  • Egypt optimistic about economy after IMF loan approval: PM (China’s Xinhua)

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