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Thursday, 28 April 2022

Support talks with IMF reach technical stage as lender pinpoints key reforms + The Fund expects uneven recovery in the Middle East

Talks between Egypt and the IMF on a fresh support package have reached the “technical stage,” Jihad Azour, the multilateral lender’s head of Middle East and Central Asia, told reporters at a press briefing on the release of the IMF’s latest regional outlook yesterday, Ahram Online reports. Azour did not go as far as to say when the talks are expected to wrap up.

As ever, there will be strings attached: The IMF “has identified three fundamental sectors that need quick reform,” Bloomberg Asharq reports, citing Azour. They include:

  • Monetary policy reform to return inflation to 7-8% this year. Inflation recorded a three-year high last month to sit at 10.5%, above the central bank’s 7% (±2%) target range. It will likely spike higher before tapering off (see the next story, below).
  • Greater flexibility in the exchange rate.
  • Stepping up structural reforms aimed at job creation and boosting growth. That sounds to us like a nod of support for the state’s redoubled efforts to increase private sector participation in the economy, as well as the ongoing digital transformation push.

What would a support package look like? Something along the lines of a “precautionary and liquidity line” loan amounting to as much as USD 3.5 bn, according to an earlier note by BNP Paribas. We’ve been in talks with the IMF for over a month now on support to mitigate fallout from Russia’s war in Ukraine — including spiraling inflation and a tightening global monetary environment — on Egypt’s economy.

BACKGROUND- This marks the third time in recent memory we’ve turned to the lender for emergency assistance, having secured USD 12 bn over three years to stabilize our economy following the 2016 devaluation, and a further USD 8 b in covid-era financing in 2020.

A ROCKY ROAD AHEAD FOR THE MENA REGION

The Russia-Ukraine conflict and rising inflation will likely dampen the Middle East’s economic recovery in 2022, the IMF said in its latest Regional Economic Outlook, which forecasts uneven regional growth caused by volatile commodity prices, higher inflation, a lingering pandemic, and more hawkish monetary policy in advanced economies. You can download the full report here (pdf).

Key takeaways:

  • Inflation in the region is expected to stay red-hot at 13.9% in 2022, which is slightly lower than the 14.8% recorded in 2021, the IMF said, attributing the high rate to the rising cost of food and energy, exchange rate depreciations in some cases (as in Egypt), as well as lax monetary policies.
  • Real GDP will grow 5% in 2022 in MENA — slower than 5.8% in 2021, but an upward revision of 0.9 percentage points from the Fund’s estimate in October. The higher forecast reflects “the improved outlook for oil exporters and better-than-expected growth in the first half of 2022 for Egypt,” it said.
  • Output will be uneven across the region, with oil exporting countries projected to grow by 5.4%, emerging markets by 4.4%, and middle income countries by 1.1%.

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