Egypt signed a $8bn deal with the International Monetary Fund on Wednesday after months of speculations, which includes a $5bn increase from an original deal, Prime Minister Mostafa Madbouly announced.
The deal comes a few hours after a decision by the central bank to float the Egyptian pound, one of the requirements of the international lender.
The agreement is an expansion of the $3bn, 46-month Extended Fund Facility deal between the IMF and the Egyptian government in December 2022.
Dispersal of the funds has been delayed as Cairo failed to meet conditions such as a shift to a flexible exchange rate and reduce the state’s footprint in the economy.
Madbouly added that his government will receive an additional loan of about $1.2bn from a separate facility aimed at enhancing environmental sustainability.
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The Central Bank of Egypt (CBE) announced earlier on Wednesday it was raising its key rate by an unprecedented six points to a record 27.25 percent, which caused the Egyptian pound to fall by more than a third of its value against the dollar, bringing the official rate closer to the black market rate.
Following this decision, the pound plummeted to approximately 50.5 EGP to the US dollar, at 14:00 local time, down from 31 in the year preceding the decision. This almost matches the black market rate of 50.78 recorded at the same time.
The IMF’s mission chief for Egypt, Ivanna Vladkova Hollar, welcomed the CBE’s measures as “decisive steps to move to a flexible exchange rate system, starting with unifying the exchange rate between the official and parallel market rates”.
IMF deals and currency devaluations are usually feared to have knock-on effects on the cost of living for the poor in Egypt, home to more than 110 million people.
The World Bank estimates that nearly 30 percent of Egypt’s population was poor in 2019 and many millions more at risk of falling below the poverty line.
The impact of the devaluation on inflation, however, remains uncertain, as the import-dependent economy already relied on black market rates.
Egypt’s headline inflation reached 33.7 percent in December, and is expected to reach a peak of 45 percent in the fourth quarter of 2024, according to Oxford Economics think tank.
Price hikes expected
Many food products are already priced according to black market pound prices, which dropped as low as 70 pounds against the US dollar in recent months.
“Since last year, we have gradually seen prices rise based on the pound price on the black market,” Mohamed Gad, an economics researcher at the Egyptian Center for Economic and Social Rights, told Middle East Eye.
“Importers’ dependence on the black market US dollar made them raise prices of consumer products,” he added.
As a result of the current flotation, Gad anticipates another hike in the price of basic commodities that are priced at the official pound price and have already been fixed by the government, such as fuel, wheat, and subsidised bread.
According to Gad, pricing chaos already exists. “Many traders are taking advantage of the crisis and raising prices, so it is difficult to predict what level inflation will reach at this time,” he added.
Mohamed Abdallah, an owner of a small market in Cairo’s Agouza, said he changes the prices of the products on his cashier machine each time he receives a new shipment, depending at what prices he buys the new goods.
He mentioned that a packet of green tea was worth 91 EGP (1.84 USD) two weeks ago, but now he sells it at 145 Egyptian pounds (2.93 USD) and “this will change again and again,” he told MEE.
Two weeks ago, Egypt agreed to a $35bn deal with the United Arab Emirates to develop the prime area of Ras el-Hekma on its northwestern coast.
Economists expected the immediate $15 bn cash inflow from the deal to facilitate currency devaluation and the subsequent agreement with the IMF.