IMF money incoming: The International Monetary Fund’s Executive Board has signed off on the USD 5 bn extension for Egypt’s extended fund facility (EFF) and completed its long-delayed first and second reviews of the facility, the multilateral lender said on Friday. Of the total USD 8 bn program, the Fund also approved a decision to let the state “immediately draw” around USD 820 mn, which should be arriving this week, according to comments made by Prime Minister Moustafa Madbouly yesterday.

Why the top-up? A challenging macroeconomic environment of high inflation, foreign exchange shortages, and mounting debt — triggered in part by the war in Ukraine and exacerbated by the war on Gaza and tension in the Red Sea — have “called for decisive domestic policy action supported by a more robust external financing package, including from the IMF,” the lender said.

Remember: Authorities announced the agreement on the extension of the program earlier this month after floating the EGP and enacting a jumbo 600-bps interest rate hike, months after recurrent hints from the IMF that we were in line for additional funding.

The IMF has taken note of recent progress: “Recent measures toward correcting macroeconomic imbalances, including unification of the exchange rate, clearance of the foreign exchange demand backlog, and significant tightening of monetary and fiscal policies, were difficult, but critical steps forward,” the Fund’s Managing Director Kristalina Georgieva said.

But one key target is yet to be fulfilled: A criterion on net international reserves was the one quantitative performance target for end-June 2023 that Egypt failed to meet. The Executive Board approved a request by the government for a waiver “on the basis of corrective actions,” the Fund said.

Sustained reforms are “subject to risks,”Georgieva added at the end of her statement. The Fund’s managing director warned that “externally, uncertainty remains high” and that “sustaining the shift to a liberalized foreign exchange system, maintaining tight monetary and fiscal policies, and integrating transparently off-budget investment into macroeconomic policy decision making will be critical.” She also cautioned that the country needs to manage the return of capital inflows well to reduce the risk of external pressures going forwards and to keep inflation under control.

This has been a long time coming: The IMF approved Egypt’s USD 3 bn EFF back in December 2022, but held off on disbursing most of it and delayed two reviews — initially scheduled for March and September of last year — after we failed to meet several key conditions of the loan, including a commitment to implement a fully flexible exchange rate.

More funds to follow? The expanded facility gives Egypt the right to apply for USD 1.2 bn in long-term, low-cost climate financing under the IMF’s Resilience and Sustainability Facility, Finance Minister Mohamed Maait confirmed yesterday.

A look into the IMF’s crystal ball:

  • The economy will grow at a 4.4% clip in the fiscal year 2024-2025, a 0.3 percentage point downward revision from its projection in January — and 0.2 percentage points higher than the government’s most recent forecast. The Fund’s growth forecast for the current fiscal year remains at 3.0%.
  • Inflation will decline to 32.1% at the end of this fiscal year, before halving to 15.3% by the end of FY 2024-25.
  • The budget deficit will widen to 6.3% of GDP this fiscal year and to 8.5% next year.
  • The primary surplus will jump to 7.1% of GDP this fiscal year before it recedes to 4.5% in the next.
  • FDI will exceptionally jump to 9.3% of GDP this fiscal year — thanks to Ras El Hekma — and return back to 2.5% next year.
  • External debt will rise to 43.0% of GDP this fiscal year and 45.4% next year.

The international press also took an interest in the story:Bloomberg | Reuters.

EU TO FAST-TRACK EUR 1 BN IN AID-

EUR 1 bn from the EU on its way? The European Union plans to expedite the delivery of some EUR 1 bn in macro-financial assistance to Egypt under its EUR 7.4 bn aid package by applying an emergency funding mechanism that side-steps the EU Parliament’s approval as well as an evaluation of the funding’s effects, the Associated Press reports, citing a letter penned by European Commission President Ursula von der Leyen to the parliament ahead of the package’s announcement. The plan is part of the bloc’s efforts to “make sure that a first significant contribution” reaches Egypt by the end of 2024, von der Leyen wrote.

The why: While it’s unusual for the bloc to bypass financing safeguards, European Parliament elections scheduled for 6-9 June mean that upholding these controls would slow the delivery of funds. Von der Leyen cautioned of a “rapidly deteriorating economic and fiscal situation” triggered by “a very large exposure to the economic effects of Russia ’s full-scale war of aggression on Ukraine, the wars in Gaza and Sudan, and the Houthi attacks in the Red Sea.”

Déjà vu?Egypt’s ambassador to the EU Badr Abdelatty told the press last week that the bloc would disburse some EUR 1 bn worth of concessional loans in the short term, confirming earlier reports from foreign media outlets.

The controversy: Fast tracking the package bypassess the oversight of the EU Parliament and does away with the need for impact assessments. Following the EU elections, the EU parliament will be “fully involved” with the remaining EUR 4 bn of macro-financial assistance that will be given out after Egypt commits to “more comprehensive” reforms, Von der Leyen added.

Remember: Egypt has over the past weeks lined up some USD 57 bn worth of foreign support — including the IMF’s expanded USD 8 bn loan, the EU’s EUR 7.4 bn package, USD 6 bn in financing from the World Bank, and ADQ’s USD 35 bn agreement for the development of Ras El Hekma.

SPEAKING OF RAS EL HEKMA- The second tranche of the funds from the Abu Dhabi wealth fund ADQ are expected to arrive in the nation’s coffers at the beginning of May, Prime Minister Moustafa Madbouly said (watch, runtime: 2:30). We received the first tranche of the payment late February.

How much are we talking? ADQ still has to pay the remaining USD 20 bn — USD 6 bn of which will be from UAE’s existing deposits at the Central Bank of Egypt.

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