Egypt devalues currency as IMF agrees to $8bn bailout request

The Egyptian government, on Wednesday, reached a deal with the International Monetary Fund (IMF) to increase the country’s bailout loan from $3 billion to $8 billion.

Prime Minister Moustafa Madbouly announced the news on Wednesday.

The development came hours after the Central Bank of Egypt allowed the currency to float freely and raised interest rates in a surprise bid to win back foreign investors –  a result of the country’s economy coming under pressure from the war in Gaza.

Following the currency announcement, the pound began floating and within hours lost more than 60 percent of its value against the dollar.

By early afternoon, commercial banks in the African country were trading the U.S. currency at more than 50 Egyptian pounds for $1, up from about 31 Egyptian pounds for the dollar.

Egypt’s central bank monetary policy committee (MPC) also raised the benchmark interest rate by 600 basis points, to 27.25 percent.

It also increased the overnight lending rate by 600 basis points to 28.25 percent.

The MPC made the move to accelerate the monetary tightening process to fast-track the disinflation path and ensure a decline in underlying inflation.

Meanwhile, Egypt has for months negotiated with the IMF to increase a $3 billion bailout loan that both parties reached in 2022. The programme stopped when Egypt reverted to keeping its pound at a tightly managed rate over the past year and amid delays to an ambitious programme to divest state assets and boost the role of the private sector.

However, Madbouly said the new deal will enable the government to receive loans from other financial institutions including the World Bank.

The prime minister said as part of the new agreement, the country will also receive a loan of about $1.2 billion from a separate facility that promotes environmental sustainability.

In a statement, IMF said the agreement was reached with Egypt on the policies needed to complete the first and second reviews under the programme, which can unlock disbursements of funding, subject to approval by the fund’s executive board.

“We are pleased to announce that the Egyptian authorities and the IMF team have reached staff-level agreement on the economic policies needed to complete the first and second reviews of the EFF arrangement,” IMF said.

“Amid significant macroeconomic challenges that have become more complex to manage with the impact of the recent conflict in Gaza on tourism and Suez Canal receipts, staff also considered the authorities’ request for an augmentation of IMF support to Egypt from SDR 2.35 billion (equivalent to about US$ 3 billion) to SDR 6.11 (equivalent to about US$ 8 billion). 

“This agreement is subject to approval by the IMF Executive Board. The comprehensive policy package seeks to preserve debt sustainability, restore price stability, and reinstate a well-functioning exchange rate system, while continuing to push forward deep structural reforms to promote private sector-led growth and job creation.”

The agreement also included a new framework to slow down infrastructure spending including projects that have so far operated outside regular budget oversight.