Centrum Stosunków Międzynarodowych - 11 August 2016: Egypt reaches initial IMF agreement

Two weeks after the start of loan deal negotiations, the International Monetary Fund and Egypt have announced an interim deal on Thursday, August 11. The staff-level agreement, if implemented, will start a three year Extended Funds Facility worth $12 billion. It is the result of a two-week visit of an IMF mission under Chris Jarvis that arrived in Egypt on July 30. According to Jarvis, the agreement ‘aims to improve the functioning of the foreign exchange markets, bring down budget deficit and debt, and raise growth.’ The mission chief has also declared that ‘Egypt is a strong country with great potential but it has some problems that need to be fixed urgently.’

The staff-level agreement is expected to be approved by IMF’s Executive Board in the coming weeks and will enable Egypt to borrow around $12 billion under the EFF mechanism. EFF is designed to aid countries facing structural balance of payment problems. Having the deal confirmed will also allow Egypt to tap into other sources of financing, such as the World Bank of the African Development Bank.

After the first tranche of funding, further payments will be dependent on Egypt implementation of reforms envisioned in the agreement. Egypt has committed itself to significant structural changes – including the introduction of Value Added Tax and cuts in energy subsidies – which are designed to reduce the debt-to-GDP ratio from 98% to 88% in three years. A significant fraction of funds thus saved is earmarked for social protection schemes in order to minimise the negative social effects. The reform plan also envisions moves towards a floating currency rate and structural reforms to ‘improve business environment’.

The IMF talks have taken place within the context of a currency crisis that has forced the Egyptian Central Bank to devalue the Egyptian pound (EGP) by 10%. However, this has not stopped the growth of a black market on which the rate for USD is almost 50% higher than the official one. A floating currency rate, as envisioned by the IMF deal, will thus lead to EGP depreciation and an increase in costs of living. The previous attempt at an IMF deal, made in 2011-12, foundered after the staff-level agreement due to lack of political will and fears over the effects of subsidy cuts and other reforms.