Is an IMF package imminent? Cairo has been abuzz since midday yesterday with chatter that the Madbouly government is nearing a staff-level agreement with the International Monetary Fund.

The press is reporting that an agreement in principle is in sight, but there’s no consensus on the size of the assistance program.

  • Talk show queen Lamees El Hadidy said last night the government is nearing an agreement that would take the package to USD 7-8 bn over three years, with USD 700 mn disbursed up front after two in-process reviews are wrapped up (watch, runtime: 11:14).
  • Al Hadath, the breaking news arm of Al Arabia, reported yesterday that there is agreement on a USD 7 bn program (watch, runtime: 6:02). Cairo24 picked up the blurb.
  • Al Shorouk, meanwhile, puts the value of the program at USD 6 bn, adding that Cabinet spokesman Mohamed El Homosany said the government is preparing to make a statement on the results of the talks with the IMF delegation.
  • Reuters quotes Daniel Leigh, a senior IMF official, as saying the first and second reviews of the fund’s initial USD 3 bn loan program could wrap up “in the coming weeks.”

Four sources with knowledge of the state of play with whom we spoke yesterday have told us that an agreement worth c. USD 9 bn is nearly over the finish line, though they cautioned that circumstances can change before a final agreement is reached, potentially revising the value of the program or extending the process by days or weeks. Separately, three well-placed sources put the value of the agreement at USD 6 bn.

What’s with the difference between the two figures? A larger program may only be possible if we go for a full float, not a managed devaluation. In the latter scenario, we would be looking at wrapping reviews of the USD 3 bn program already in place and then unlocking up to USD 3 bn more over an extended period of time. It remains unclear which scenario policymakers in Cairo will pursue.

In all cases, the value of the program would include the USD 3 bn the IMF had originally committed under a 46-month agreement back in late 2022. We have yet to draw any of that cash since an initial release of USD 347 mn. Under the terms of the agreement, the balance could only be unlocked tranche-by-tranche after reviews by the IMF of our progress on a range of reforms and other conditions.

What we know: An IMF delegation has been in Cairo for two weeks to work out an agreement. Their mission was due to wrap up yesterday, but the delegation is reportedly willing to extend its stay to put it over the finish line. The meetings have absorbed a massive percentage of the cabinet economic team’s bandwidth: There was no cabinet meeting last week, and International Cooperation Minister Rania Al Mashat was the only minister to make the trek to Davos for the World Economic Forum — a gathering typically attended by multiple cabinet members.

THE STATE OF PLAY ON THE EGP

The EGP hit record lows in the parallel and derivative markets yesterday as speculation about a possible float reached a fever pitch.

#1- The EGP was changing hands at 70.00 and beyond to the USD in the parallel market, while the official rate remains 30.95.

#2- Twelve-month non-deliverable forwards now put the EGP at 63.00 to the greenback, while GDR transactions yesterday that we’ve heard of imply a rate just north of 70.00.

Gold bug Naguib Sawiris poured fuel on the fire, saying on X that it’s time to devalue — and to use the parallel market rate as the starting point for discussion. “The right thing to do is to [set the official rate] at the black market price” and let it equilibrate from there, he said. “People will only sell [FX] in official channels if the two rates are equal.” Bloomberg used Sawiris’ posts as the hook on which to hang its story on the state of our FX crunch.

How to think about the gap between forwards and the parallel market. In a nutshell: Black market = our current mental state. Forwards = future direction of travel. Forwards often miss the mark, but the market for them is a lot more liquid — and vastly more transparent — than the parallel market. The parallel market is disproportionately influenced by the sentiment of individual sellers rather than by corporates making (comparatively) large purchases to cover L/Cs and transfers.

WHAT TO LOOK FOR-

Issues and questions you’ll want to keep an eye on when and if an agreement is announced:

#1- Is it a float or a managed devaluation? Dueling options on the table right now include (a) a move straight to a full float (see: Sawiris, Naguib, above) and (b) a more gradual process where the current is brought to a market-clearing rate in a series of more controlled auctions, possibly over an extended period of time. There’s no consensus in the press or among the people we’ve spoken with, though it seems we may be edging toward a managed or gradual process, Al Borsa writes. The language used by the central bank and the IMF to describe our FX exchange rate policy will be key.

#2- When does the shift to a flexible currency regime happen? Whether it’s a float or a managed devaluation, will the IMF require it happen first as a condition of getting to a staff-level agreement? Or will the central bank want to have cash in hand ahead of time to fight a possible overshoot?

In past devaluations, the central bank’s playbook has been to announce an early-morning interest rate decision (if it makes a move on rates at all) and then hold a series of auctions in the interbank market to allow a period of price discovery, posting new exchange rates at bank counters (online and IRL) nationwide in the process. The CBE’s Monetary Policy Committee (MPC) can meet outside its regular schedule if it wishes to do so.

#3- What’s the EGP really worth? Yesterday’s parallel market rate in the EGP 68-70 range is one that we (and just about any economist you speak with) think is out of whack with the market’s fundamentals.

#4- The total value of the package matters, sure — but almost as important is how fast we get it. Officials have been talking about a package in the USD 9-12 bn range. Cabinet and Central Bank Governor Hassan Abdalla will want the maximum up-front commitment possible to get the gears of the economy unstuck fast. The IMF will want to retain substantial cash as a lever to ensure we push ahead with reforms. We’re told the government is hoping to get USD 3 bn in hand quickly.

#5- The length of the approval cycle. The signing of a staff-level agreement on its own doesn’t automatically unlock funds. The IMF’s executive board would have to sign off on the text. The board’s schedule is here — it has meetings booked through 7 February to discuss Kazakhstan, the Kyrgyz Republic, and Chile. Egypt doesn’t yet appear on the agenda, but the board can add a meeting or change an agenda effectively at will.

#6- What does the conditionality look like? The IMF will demand we move to a flexible exchange rate policy, fast-track the sale of state assets, curb the state’s involvement in the economy, and slow down government spending, particularly on infrastructure projects. You can also expect social support spending to be a feature. Pundits will be watching closely to see what other conditions may be tacked on.

#7- What happens when the Central Bank of Egypt meets on Thursday? Only four of nine analysts we spoke with for our customary poll ahead of the MPC meeting expect the bank to leave interest rates on hold. Two see 150-200 basis point hikes, and three weren’t willing to make a call. All were speaking with no expectation that an IMF agreement would be announced ahead of time. If a pact with the IMF is imminent, a hold at Thursday’s meeting could mean only that the CBE is keeping its powder dry ahead of a major decision post-agreement.

#8- What language do government officials — from the cabinet table to Ayman Soliman’s Sovereign Fund of Egypt — use in discussing asset sales? Will they entertain the idea of selling specific assets below book value just to stimulate the market? One way to spur fresh FDI is to offer an attractive asset at a great price. Snap IPOs are also worth considering — the EGX climbed 70.5% in 2023 and is up 21.9% so far this year as investors look for assets into which to park liquidity amid soaring inflation.

#9- Will the IMF agree to reschedule some of the upward of USD 6 bn we owe it this year in repayments? Could the IMF serve as a catalyst for a swap of some of that debt for equity in companies or assets moving through the national asset sale program?

#10- What other channels will the central bank and the government use to add to their war chest? For example: Al Arabiya reports the CBE will sell USD 1 bn of one-year treasury bills next week. The broadcaster cited unnamed sources as backing the report.

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