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Egypt secured a deal to double its International Monetary Fund bailout to $8 billion after the country allowed its currency to fall to a record low against the US dollar, unleashing support to avert the worst economic crisis in decades.
The Fund said on Wednesday that Cairo had taken “decisive steps to move towards a flexible and reliable exchange rate system” after the Central Bank of Egypt devalued the pound by 40 percent and raised interest rates significantly to ease foreign currency shortages.
Floating the currency and allowing market forces to determine the value of the pound was a key condition for the heavily indebted country to access more International Monetary Fund money, after an initial $3 billion bailout in 2022.
The price of the pound fell beyond 50 pounds to the dollar on Wednesday, after officially remaining at around 31 pounds to the dollar for almost a year while reaching more than double that figure on the black market.
With the inflation rate approaching 30 percent in January, Egyptian authorities fear allowing the pound to fall further, exacerbating additional hardships for families.
But the recent move by ADQ, an investment vehicle affiliated with Abu Dhabi, to pump $35 billion into Egypt, the largest single investment in the country's history, has provided the central bank with the buffer it needs to prevent the currency from free-falling once controls are imposed. Up.
The IMF's increased support for Cairo comes as Egypt faces increasing social and economic pressures exacerbated by the Israeli war against Hamas in Gaza. Egypt is located on the border of the besieged Strip and plays a crucial role in supporting the delivery of aid to Gaza and facilitating negotiations with Hamas. Meanwhile, Cairo's foreign exchange earnings from shipping through the Suez Canal have been hit by attacks by Yemen's Houthi rebels on ships in the Red Sea.
Charlie Robertson, head of macro strategy at fund manager FIM Partners, said the investment from ADQ was vital to the IMF deal. “The currency will be at a defensible level and reserves will flourish as a result of inflows from the UAE and IMF funds. Default risks have collapsed over the past two weeks,” he said. “I think the crisis is over.”
The scale of Abu Dhabi's investment to develop 170 million square meters on Egypt's Mediterranean coast, and the timeline for rapid disbursement, were in effect a bailout from the Gulf state intended to help ease Egypt's foreign currency crisis and end the IMF deal.
The deal included investing $24 billion in fresh funds, in addition to transferring $11 billion from the UAE’s deposits in the Central Bank into the local currency for use in projects in Egypt. The first batch of $10 billion has already arrived in Cairo. The rest is scheduled to arrive within six weeks, according to a timetable announced by the Egyptian authorities.
Egypt has had to resort to the International Monetary Fund to obtain multiple loans since 2016, and it is the Fund's second largest debtor after Argentina.
Under a $3 billion support package with the IMF in October 2022, Egypt agreed to move to a flexible exchange rate and privatize state assets, including military-owned entities. But it refrained from allowing further reductions in the value of the pound.
The Central Bank of Egypt said that the move to float the currency would lead to unifying the exchange rate and closing the gap between the official and black market rates. It also raised interest rates by 600 basis points, bringing the overnight lending rate to 28.25 per month. cent and the overnight deposit rate to 27.25 percent.
The central bank said it was committed to “continuing inflation targeting.” . .[and]Allowing the exchange rate to be determined by market forces.”
