Cairo-The International Monetary Fund’s executive board has approved a three-year $12bn loan to Egypt to boost its economy, drop public debt, and control inflation.
The IMF said its board’s approval allows for a disbursement of an initial tranche of $2.75bn. The remaining amount will be phased in over the duration of the program, subject to five reviews.
According to the fund, the flexible exchange rate system which determines exchange rate according to the market’s powers will work on promoting Egypt’s competitiveness, support exports and tourism, and attract foreign investments.
It added that the adopted measures will allow the Egyptian Central Bank to rebuild its international reserves and that the financial policy will focus on containing the inflation and reducing it.
The IMF has expected fiscal revenues to increase to 2.5% of the GDP during the program due to the application of the Value Added Tax (VAT) system approved by the parliament in August.
An IMF statement reported that primary expenditures will be dropped by 3.5% because of reducing support and containing the wages’ bill. It also asserted that the increase of fuel prices announced on the third of November has been an important step in this direction.
This new loan along with other bilateral loans have been expected to raise the central bank’s reserve of foreign currencies to USD25-30 billion compared to around USD19 billion by the end of October.
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.”
Challenges 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.
She added that Egyptian authorities recognize that resolute implementation of the policy package is essential to restore investor confidence.
Import-dependent Egypt has struggled to attract US dollars and revive its economy since tourists and investors flow regressed. Facing a gaping budget deficit, plummeting foreign reserves and a burgeoning currency black market, it agreed to the IMF loan in August but had to secure about $6bn in bilateral financing for the deal to be completed.
Egypt made the final push for the loan after the central bank liberated the local currency, which was welcomed by the Fund and World Bank.
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 IMF program also will be accompanied by bilateral financing contributed by China, the United Arab Emirates, G7 countries, bank loans and bond issues.
The positive evaluation of the Egyptian economy has already started. Last week, Standard & Poor’s revised Egypt’s outlook to stable from negative and affirmed “B-/B” long and short-term sovereign credit ratings.
However, the first phase of the loan is not the government’s last step. The three coming years are expected to carry on many reforms to recapture the trust from the IMF and the international community, which will contribute to increasing the flow of foreign investments.