The International Monetary Fund’s executive board approved on Friday a three-year, $12 billion bailout to Egypt aimed at salvaging a struggling economy, restoring investor confidence, bringing down public debt and controlling inflation while seeking to protect the poor.
Yet, even with the loan, economic challenges remain ahead.
The IMF said its executive board’s approval immediately disbursed an initial loan tranche of $2.75 billion to Egypt’s central bank. The remainder will be phased in over the next three years subject to five reviews on required reforms.
Tarek Amer, the head of Egypt’s Central Bank, was quoted by the state-run MENA news agency as saying that the first installment has arrived at the bank and increased foreign reserves to $23.5 billion. Egypt had $36 billion in reserves before the 2011 uprising. The government announced earlier that it’s targeting an additional $7 billion loan annually from other lenders in order to secure over 30 billion of funds needed in the coming three years.
IMF Managing Director Christine Lagarde described the Egypt bailout as a “homegrown economic program” that the IMF will support “to address longstanding challenges to the economy.”
“These include a balance-of-payments problem manifested in an overvalued exchange rate and foreign exchange shortages, large budget deficits that led to rising public debt and low growth with high unemployment,” Lagarde said. “The authorities recognize that resolute implementation of the policy package is essential to restore investor confidence.”
Import-dependent Egypt has struggled to attract U.S. dollars and revive its economy since tourists and investors fled after the 2011 uprising that ended Hosni Mubarak’s 30-year rule. Its tourism sector has dried up over fears of terrorism, overseas remittances dropped because of low oil prices, and Suez Canal revenues diminished because of a decline in global trade. Investment and business activity also stalled, with inflation hitting 14 percent and unemployment 13 percent while the percentage of the unemployed youth is around 30 percent.
Facing all these issues, Egypt agreed the IMF loan in August but had to secure around $6 billion in bilateral financing for the deal to be completed.
Egypt made the final push for the loan after the central bank abandoned its currency peg of 8.8 pounds to the U.S. dollar last week in a dramatic devaluation move welcomed by the Fund and World Bank. The pound traded at just over 16 to the dollar on Friday.
The government of Egyptian President Abdel Fattah al-Sisi also took other key steps required by the IMF, including passage of a value-added tax to raise revenues and reductions in fuel subsidies. The program also requires legislation to reduce Egypt’s public sector wage bill.
The IMF said the program is expected to reduce Egypt’s debt-to-GDP ratio, now hovering near 100 percent, by about 10 percentage points over three years.
But some of the fiscal savings from austerity measures will be used to strengthen social safety nets, including by increasing food subsidies and direct transfers to the poor.
The IMF said it “supports the authorities in looking to reprioritize within the budget to protect vulnerable and poor households from the impact of food inflation.
“Social protection is a cornerstone in the government’s reform program.”
The latest measures, the IMF said, will cause short-term inflation.
“The move to a flexible exchange rate could increase inflation as imports will become more expensive,” it said, but added that the impact will be limited and that the Central Bank is working to keep inflation “under control.”
Lagarde also emphasized that Egypt needs to make structural reforms to its economy such as streamlining regulations for business start-ups, passing insolvency reforms and labor reforms aimed at increasing labor participation.
The $12 billion IMF program also will be accompanied by about $6 billion in bilateral financing contributed by China, the United Arab Emirates, G7 countries, bank loans and bond issues. Those transactions are expected to be announced separately.