Egypt has recently clinched a substantial financial lifeline, securing a deal with the International Monetary Fund (IMF) to bolster its economic resilience. This agreement, doubling Egypt’s IMF bailout to a significant $8 billion, follows a series of pivotal economic reforms initiated by Cairo.
One of the critical measures taken by Egypt was allowing its currency, the pound, to undergo a substantial devaluation against the US dollar, plummeting to record lows. This decision, aimed at fostering a more flexible exchange rate regime, was pivotal in unlocking much-needed support from the IMF to stave off what could have been Egypt’s most severe economic crisis in decades.
The devaluation of the pound, by a staggering 40 per cent, coupled with significant hikes in interest rates, was undertaken to alleviate the strain caused by a shortage of foreign currency. It’s worth noting that permitting market forces to dictate the value of the pound was a precondition for Egypt to access additional IMF funds, following a previous $3 billion bailout secured in 2022.
The impact of these economic manoeuvres was palpable as the pound plummeted beyond 50 against the dollar, a stark contrast to its artificial stability around 31 to the dollar for nearly a year. This sharp decline in the official exchange rate brought it more in line with the prevailing black market rates, which had soared to more than twice the official rate.
Despite the inevitable challenges posed by such drastic measures, with an inflation rate hovering around 30 per cent as of January, Egyptian authorities were cognizant of the potential hardships facing their populace. However, the injection of $35 billion into Egypt by ADQ, a prominent Abu Dhabi-based investment vehicle, provided a much-needed cushion for the central bank to navigate the aftermath of currency controls being lifted.
The significance of ADQ’s investment cannot be overstated, as it played a pivotal role in facilitating the IMF deal. With the influx of funds, the currency found a more stable footing, and Egypt’s foreign reserves experienced a notable boost. This, in turn, significantly mitigated the risk of a currency freefall, providing much-needed reassurance to investors and stakeholders alike.
Egypt’s economic woes were further compounded by external factors, including the recent conflict between Israel and Hamas in Gaza. Given Egypt’s strategic proximity to the besieged strip, it plays a crucial role in facilitating aid delivery and negotiation efforts with Hamas. Moreover, disruptions to foreign currency revenue, stemming from attacks on vessels in the Red Sea by Houthi rebels in Yemen, added to Egypt’s economic challenges.
The magnitude of ADQ’s investment, earmarked for the development of vast coastal expanses along Egypt’s Mediterranean coast, effectively served as a bailout from the Gulf state. This infusion of fresh capital, coupled with a rapid disbursement schedule, provided much-needed relief to Egypt’s foreign currency crisis and helped cement the IMF deal.
In concrete terms, the agreement entailed a staggering $24 billion in fresh investments, complemented by the conversion of $11 billion of UAE deposits into local currency for use in various projects across Egypt. Notably, the initial tranche of $10 billion had already been disbursed, with the remaining funds scheduled to arrive within six weeks, as per Egypt’s announcement.
Egypt’s reliance on IMF support dates back to 2016, making it the fund’s second-largest debtor after Argentina. Previous agreements, such as the $3 billion support package in October 2022, mandated pivotal reforms, including a shift towards a more flexible exchange rate and the privatization of state-owned assets, including those under military ownership.
The Central Bank of Egypt has underscored its commitment to maintaining stability amidst these economic upheavals. In addition to floating the currency, the central bank implemented a significant hike in interest rates, increasing the overnight lending rate to 28.25 per cent and the overnight deposit rate to 27.25 per cent. These measures are aimed at bridging the gap between official and black market exchange rates, while also addressing inflationary pressures.
In conclusion, Egypt’s recent economic reforms, including the devaluation of its currency and securing substantial investments from abroad, have positioned the country on a more stable economic trajectory. While challenges persist, particularly in the face of external geopolitical tensions, the increased IMF support and strategic investments offer a glimmer of hope for Egypt’s economic recovery and resilience.
