Egypt and the IMF Reach a Deal

Egypt secured on Wednesday an $8 billion deal with the International Monetary Fund, hours after the central bank weakened its currency and delivered a 600 basis point rate hike. 

Earlier on Wednesday, Egypt delivered its biggest-ever interest rate hike and allowed its currency to weaken by more than 38%. The EGP lost more than a third of its value within minutes after Egypt's central bank announced it would allow the market to determine the exchange rate.

Following the Central Bank of Egypt's (CBE) announcement, the currency weakened beyond EGP 50 to the dollar from about EGP 30.85, a level Egypt has for months tried to defend. It closed at EGP 49.4 to the dollar.

The move follows closely on the heels of the announcement of a $35 billion investment initiative by Abu Dhabi-based ADQ to develop Egypt's Ras El-Hekma region. The deal will give ADQ development rights for the coastal region for a staggering $24 billion, with an additional $11 billion to be allocated toward deposits in prime projects across Egypt. The Egyptian government will retain a 35% stake in the Ras El Hekma project. Immediately after the announcement, trading on the parallel market dropped from $62 to $50 to the EGP. 

A more flexible exchange rate had been a key demand of the IMF. Egypt has previously said it would shift to a more flexible exchange rate, only to return to closely managing the currency whenever the EGP weakened. It is not clear if the same pattern will be repeated this time.

The IMF hailed the Egyptian authorities for "comprehensive policies and reforms." The statement mentions a set of economic reform policies Egypt started to curb the economic crisis, especially the new framework to slow down infrastructure spending, including projects that have been criticized for operating outside regular budget oversight. The Egyptian Prime Minister has issued a decree that sets up a monitoring mechanism under his supervision, with participation from relevant authorities and headed by the Central Audit Agency.

The IMF statement praised recent decisions eliminating preferential tax treatment and exemptions for state-owned enterprises and called them "a step in the right direction." 

The loan and reforms are aimed at stabilizing the Egyptian economy, solving the dire hard currency crisis, and bridging the gap between the official rate and the black market. In the weeks leading up to the agreement, the parallel market rate surged to EGP 70 to the dollar, while the official exchange rate was around 30.9.

Egypt has been struggling with an economic crisis since 2022, with soaring inflation, which reached a record high of nearly 40% last August. In addition to dire foreign currency shortages, which have caused some businesses to completely halt or slow their operations in Egypt as the cost of imported goods soared and foreign currency availability dwindled. Israel's war on Gaza and the Red Sea unrest as a result of the Houthi attacks have also added to economic pressures on Egypt.