Egypt, IMF reach preliminary deal for $3 billion loan to fight soaring inflation

Hours before announcement of agreement, central bank hikes key interest rates by 2%, implements more flexible exchange rate system, as Cairo commits to initiate reforms

An Egyptian man walks past a poster showing a US dollar outside an exchange office in Cairo, Egypt, November 3, 2016. (AP Photo/Amr Nabil)
An Egyptian man walks past a poster showing a US dollar outside an exchange office in Cairo, Egypt, November 3, 2016. (AP Photo/Amr Nabil)

CAIRO — The International Monetary Fund reached a preliminary agreement with the Egyptian government on Thursday, paving the way for the economically troubled Arab nation to access a $3 billion loan, officials said Thursday.

IMF officials said a “staff agreement” between the Egyptian government and IMF leaders had been reached following months of talks, as Egypt struggles to combat surging inflation caused, in part, by the war in Ukraine.

In a statement issued Thursday, Egypt’s IMF Mission chief, Ivanna Vladkova Hollar, said the 46-month deal — known as an Extended Fund Facility Arrangement — allows Egypt access to the $3 billion loan on the condition it implements a series of economic reforms.

In the hours before the announcement, Egypt’s central bank announced a series of economic measures including the hike of key interest rates by 2% and a switch to a more flexible exchange rate system.

“The Central Bank of Egypt’s move to a flexible exchange rate regime is a significant and welcome step to unwind external imbalances, boost Egypt’s competitiveness, and attract foreign direct investment,” said Hollar.

The Egyptian economy has been hard-hit by the coronavirus pandemic and the war in Ukraine, events that have disrupted global markets and hiked oil and food prices worldwide. Egypt is the world’s largest wheat importer, most of which came from Russia and Ukraine. The country’s supply is subject to price changes in the international market.

A man pays his bill as his friend smokes a waterpipe, or shisha, at a cafe in Cairo, Egypt, October 22, 2016. (AP Photo/Nariman El-Mofty)

According to Holler, some of the agreement’s main goals are to reduce Egypt’s overall debt and bring about broad reforms to its fiscal policy.

In a statement issued Thursday morning, Egypt’s central bank said it had raised the new lending rate to 14.25% and the deposit rate to 13.25%. The discount rate was also raised to 13.75%, it said.

By changing to a more “durably flexible exchange rate,” the bank said it would allow the international markets to “determine the value of the Egyptian pound against other foreign currencies.”

Egypt’s monetary reforms and the IMF loan are designed to help offset rising inflation, which passed 15% in September, and lightens the financial pressure on lower- and middle-income households.

Following the bank’s announcement, the Egyptian pound dropped in value against the US dollar from around 19.75 pounds to a dollar to at least 22.50 pounds to a dollar, according to data provided by the National Bank of Egypt.

In its statement, Egypt’s central bank said it was “intent on intensifying its reform agenda to secure macroeconomic stability and achieve strong, sustainable, and inclusive growth.”

As part of its reforms, the bank also said it would begin removing a system for importers, a red tape process introduced in February to control the demand on the currency for imports.

Late Wednesday, Egyptian Prime Minister Mustafa Madbouly also announced a 15% increase in the minimum monthly wage, from 2,700 pounds ($137) to 3,000 pounds ($152). Prime Minister Mustafa Madbouly’s announcement marks the fourth hike in the minimum wage since President Abdel Fattah el-Sissi took office in 2014.

About a third of Egypt’s 104 million people live in poverty, according to government figures.

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