In the past year, the Egyptian government has been striving to curb soaring inflation caused by rising food and energy prices as a result of the Russia-Ukraine conflict and lingering COVID-19 pandemic.
As the most populous Arab country and one of the world’s largest importers of wheat, Egypt’s economy has been particularly overshadowed by soaring global commodity prices since the conflict’s breakout in February 2022.
Under pressure, Egypt decided in October to sharply devalue its currency, the Egyptian pound, sending the annual urban consumer inflation rate surging to 18.7 percent in November from 16.2 percent in October, marking a near-five-year high.
“The situation is difficult for Egypt, but it’s also difficult worldwide,” said Rashad Abdo, an Egyptian economist, citing recent protests in some European countries due to high inflation and increasing cost of living.
Moreover, the Egyptian financial market suffered from a shortage of hard currency that led to the decline in the local currency’s exchange rate against the US dollar.
Rampant inflation in Egypt came after two sharp devaluations of the Egyptian pound against the US dollar this year, the latest of which was on Oct. 27 when the Central Bank of Egypt (CBE) lowered the value of the pound by about 14.5 percent.
To contain soaring inflation, the CBE announced on Dec. 22 to raise the interest rate by 300 basis points.
“There are problems, but the government is working hard to address them,” Abdo told Xinhua, noting that the Egyptian government is taking measures to intervene in commodity prices on the market and expand the social safety network.
IMF loan support
Egypt’s devaluation move was endorsed by the International Monetary Fund (IMF), which last week approved a 3-billion-dollar loan to Egypt over the next 46 months as a support package.
Egypt relies on the IMF loan and offers international bonds “to narrow the finance gap related to foreign currency,” said Abdo, also head of the Egyptian Forum for Economic Studies.
“The government has raised the interest rate to absorb the liquidity available on the market, and liberated the exchange rate against the US dollar to fluctuate with the market needs and under the guidance of the IMF for approving the 3-billion-dollar loan,” he said.
The IMF loan approval, which enabled an immediate disbursement of about $347m to Egypt, is expected to catalyze additional financing of about $14bn from Egypt’s international and regional partners, the IMF revealed.
Fakhri al-Fiqi, an Egyptian professor of economics and head of the parliamentary Planning and Budget Committee, said the IMF loan is “a certificate of confidence” in the Egyptian economy.
“The international business community has been waiting for this certificate of confidence, as the IMF will be evaluating and reviewing Egypt’s economic and structural reform program biannually for the coming four years,” the economist told Xinhua.
Al-Fiqi explained that the IMF support package, along with the anticipated $14bn from other partners, will make up for the hot money outflows that led to the foreign currency shortage and eventually contain the inflation.
Economic reform programme
The IMF’s financial support was granted in exchange for an economic reform program to be implemented by the Egyptian government, under which Egypt agreed to reduce the state’s footprint, facilitate private-sector-led growth, and more.
In a similar experience, Egypt carried out a three-year economic reform program that started in late 2016 in order to secure a $12bn loan from the IMF.
With the fresh funding from the IMF, Egypt will be able to clear a backlog of requests from importers and businesses to access hard currency.
“With the expected foreign currency inflow, the Egyptian government will gradually clear the backlogs of importers’ requests and will provide facilitations to foreign exporters, which would help businessmen in Egypt import the materials needed for their factories,” Al-Fiqi said.
The IMF loan and the CBE’s decision to increase the interest rate will help gradually slow down the inflation rate over the coming four years to 4-5 percent as it used to be, which will be acceptable to average Egyptian citizens, the Egyptian economist said.
“When foreign currency is available at Egyptian banks to businessmen, the latter won’t resort to the black market, which will in turn stabilize the exchange rate and restrain the black market,” he added.