Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Egypt secured a deal to more than double its IMF bailout to $8bn after the country allowed its currency to drop to a record low against the US dollar, unlocking support to avert its worst economic crisis in decades.
The fund said on Wednesday that Cairo had taken “decisive steps to move towards a credible flexible exchange rate regime” after Egypt’s central bank devalued the pound by 40 per cent and massively raised interest rates to relieve a foreign currency shortage.
Floating the currency and allowing market forces to set the value of the pound was a key condition for the heavily indebted country to access more IMF funds as a condition of a $3bn bailout in 2022.
The pound fell beyond 50 against the dollar on Wednesday, after being officially held at about 31 to the dollar for almost a year while it reached more than twice that figure on the black market.
With an inflation rate of close to 30 per cent in January, Egyptian authorities have been wary of allowing the pound to fall further and piling additional hardship on families.
But the recent move by ADQ, an Abu Dhabi investment vehicle, to inject $35bn into Egypt, the biggest single investment in the country’s history, provided the central bank with the buffer it needed to prevent the currency from going into freefall once controls had been lifted.
The increased IMF support for Cairo comes as Egypt faces mounting social and economic pressures that have been exacerbated by Israel’s war against Hamas in Gaza. Egypt borders the besieged strip and plays a critical role in supporting the delivery of aid into Gaza and facilitating negotiations with Hamas. Meanwhile, Cairo’s foreign currency revenue from shipping transiting the Suez Canal has been hit by attacks on vessels in the Red Sea by Houthi rebels in Yemen.
Charlie Robertson, head of macro strategy at fund manager FIM Partners, said the investment from ADQ had been vital to the IMF deal. “The currency is going to be at a defensible level and reserves will be booming as a result of the UAE inflows, and IMF money. Default risk has collapsed over the last two weeks,” he said. “I think the crisis is over.”
The magnitude of the Abu Dhabi investment to develop 170mn square metres on Egypt’s Mediterranean coast, and the quick disbursement schedule, was in effect a bailout from the Gulf state intended to help ease Egypt’s foreign currency crisis and bring its IMF deal over the line.
The deal included an investment of $24bn of fresh money in addition to the conversion of $11bn of UAE deposits in the central bank to local currency to be used in projects in Egypt. The first tranche of $10bn had already reached Cairo. The rest should arrive in six weeks, according to a schedule announced by the Egyptian authorities.
Egypt has been forced to go to the IMF for multiple loans since 2016 and is the fund’s second-biggest debtor after Argentina.
Under the $3bn support package with the fund in October 2022, Egypt agreed to move to a flexible exchange rate and privatise state assets, including entities owned by the military. But it has held back from allowing further devaluations of the pound.
The Central Bank of Egypt said the move to float the currency would lead to a unified exchange rate and close the gap between the official and black market rates, as it also increased interest rates by 600 basis points, bringing the overnight lending rate to 28.25 per cent and the overnight deposit rate to 27.25 per cent.
The central bank said it was committed to “continue to target inflation . . . [and] allowing the exchange rate to be determined by market forces”.
Source: Economy - ft.com
