Egypt’s currency slips further amid signs of possible IMF accord

The Egyptian pound slid another 1 per cent on Tuesday, after a 14 per cent devaluation on Monday, and the government announced a budget restructuring in a sign it may be preparing for a new finance package with the International Monetary Fund (IMF).

Egypt’s economy was buffeted after Russia’s invasion of Ukraine prompted foreign investors to flee emerging markets. Russia and Ukraine were also the main exporters of wheat to Egypt and a major source of tourism.

Egypt’s central bank on Monday hiked its main overnight interest rates by one percentage point and stressed the importance of exchange rate flexibility.

“This would be in line with what is needed … to potentially reach yet another IMF programme, especially as it would be under exceptional access to IMF resources,” JPMorgan said in a note.

The government also on Monday announced a 130 billion Egyptian pound ($7.05 billion) economic relief package, a move that analysts said seemed designed to win IMF support.

Egypt has turned to the IMF three times in the last few years. It borrowed $12 billion under an Extended Fund Facility in November 2016, $2.8 billion under a Rapid Financing Instrument in May 2020 and $5.2 billion under a Stand-by Arrangement in June 2020.

Egypt is eligible for a new version of any one of the three programmes, according to a person familiar with its discussions with the IMF.

But because it has exceeded its normal borrowing quota it would have to adhere to exceptional access criteria, meaning it would be subject to a greater level of scrutiny, the person said.

SLIDING POUND

The Egyptian pound slipped to 18.45 to the dollar on Tuesday from 18.27 in the morning, Refinitiv data showed. Until Monday it had remained mostly steady at 15.70 pounds to the dollar since November 2020.

The latest depreciation leaves the pound more than 15 per cent weaker since Monday morning – close to the amount that some analysts had estimated it was overvalued by.

“We agree with consensus that this is a move that the IMF will welcome and could pave the way for some additional support from the Fund within the next month or two,” Renaissance Capital said in a note, adding that it suspected Saudi and other Gulf states could contribute funds as well.

The cabinet said on Tuesday it was targeting a primary surplus equal to 1.5 per cent of gross domestic product in its budget for the fiscal year beginning in July and an overall deficit of 6.1 per cent.

The cabinet also forecast GDP growth of 5.5 per cent in 2022/23, down from a forecast of 5.7 per cent the finance ministry made in January.

State banks began selling one-year certificates of deposit to the public with a yield of 18 per cent, a move analysts said was designed in part to soak up liquidity and tamp down inflation, expected to jump to double digits following the devaluation.