IMF emergency financing for Egypt mitigates coronavirus crunch

The International Monetary Fund has approved a nearly $2.8 billion loan for Egypt to address its economy, which has been hit hard by the coronavirus crisis.

al-monitor A man walks in front of a currency exchange bureau showing an image of the US dollar in Cairo, April 20, 2020. To contain the spread of the coronavirus, the streets were almost empty on what would other have been a busy public holiday, Sham al-Nessim, which marks the beginning of spring. The IMF has given Egypt emergency financing to help the country combat the economic effects of COVID-19.  Photo by REUTERS/Amr Abdallah Dalsh.

May 20, 2020

The International Monetary Fund (IMF) has approved emergency financing for Egypt to help the North African country overcome the financial crunch caused by the coronavirus pandemic.

The IMF agreed May 11 to Egypt’s request for a nearly $2.8 billion loan to address the COVID-19 pandemic. The fund’s emergency assistance under its rapid financing instrument will be earmarked for urgent balance of payments needs stemming from the outbreak of COVID-19, said Rashad Abdo, head of the Egyptian Forum for Economic and Strategic Studies.

Economists say the IMF emergency funding will help mitigate the repercussions of the coronavirus on Egypt’s finances.

“The IMF’s financing facility is a good opportunity for Egypt, especially as its foreign reserves fell by $8 billion over the past two months,” Abdo told Al-Monitor.

 The IMF approved Egypt’s economic reform program in 2016 and wants it to stay on track and be able to weather COVID-19 economic repercussions, Abdo said. He said the emergency financing, in addition to a $4 billion loan Egypt hopes to get from the IMF later, "will ensure smooth recovery of the local economy.” 

Egypt and the IMF signed off on a $12 billion loan in November 2016, following Egypt’s currency float.

Abdo said of the emergency funding, “The IMF has imposed no stipulations for its assistance. However, it may be used to enhance Egypt’s medical sector in the face of the coronavirus pandemic. The objective is to safeguard the country’s successful reform program, which has maintained positive growth of GDP above 2%, while many world countries are in a negative growth area.” He said the country's reforms have helped it deal with the impact of COVID-19.

Egypt’s foreign reserves stood at a little above $37 billion at the end of April, down from $40 billion the previous month, according to data from the Central Bank of Egypt.

Net international reserves stood at $45.5 billion at the end of February, according to Central Bank data. Egypt’s foreign debt rose by $16.1 billion in 2019, or 16.6%, to $112.7 billion at the end of December 2019, Central Bank data showed.

Geoffrey Okamoto, the IMF's first deputy managing director and acting chair, said in a May 11 statement that the emergency support will help limit the decline in Egypt's international reserves and provide financing to the budget for targeted and temporary spending and is aimed at containing and mitigating the economic impact of the pandemic.

“The [Egyptian] authorities are committed to full transparency and accountability on crisis-related spending including through publishing information on procurement plans and awarded contracts, as well as ex-post audits of such spending,” Okamoto said.

Minister of Finance Mohamed Maait was quoted by the Youm7 news portal on May 4 that Egypt lost around 100 billion Egyptian pounds, or $6.37 billion, in April because of COVID-19. Maait said the coronavirus pandemic has battered the tourism sector, saying that Egypt would otherwise have netted $15 billion from tourist arrivals in 2020.

Moody’s said May 11 that the coronavirus shock has placed pressure on Egypt’s external financing requirements and brought about diminished tourism receipts and remittances and slower growth.

“Egypt is exposed to the potential liquidity and external financing shocks facing many emerging and frontier market sovereigns as a result of the coronavirus outbreak. Its debt affordability is weak and susceptible to a sharp rise in financing costs; its external position sensitive to potential capital outflows,” Moody’s added.

However, Moody's also pointed out that Egypt’s economic, fiscal and monetary reforms in recent years have shored up the country's credit profile.

Lower trade with the world on the back of COVID-19 pandemic has improved the country’s trade balance. The deficit in Egypt’s trade balance fell by 51.4% to $1.95 billion in February, compared with a little over $4 billion in February 2019, according to data from the state-run Central Agency for Public Mobilization and Statistics.

Egypt’s imports fell to $4.64 billion in February, down from $6.62 billion in the same month a year earlier, according to the agency.

The country’s exports rose to $2.69 billion in February, up from $2.61 billion in the same month the previous year, the agency said.

“Remittances from Egyptian expatriates and tourist arrivals have been hit hard. The global economy has fallen into recession. Declining oil prices have badly impacted the Arab Gulf countries, where Egyptian remittances mainly come from,” Mostafa al-Fiky, the senior treasurer and head of planning and financial analysis at the oil and energy company Saipem, told Al-Monitor. 

“Egypt needs to maintain stable levels of net international reserves as the whole world, including Egypt, is facing the unknown. We should be well prepared for that,” Fiky said, pointing out that crisis may persist into 2021.

“Foreign reserves have declined while one of the country’s major hard currency earners, tourism, has been tragically hit since the coronavirus pandemic halted international flights,” Fiky said.

“Absent the COVID-19 crisis, Egypt could have netted some $100 billion in 2020 from tourism, the Suez Canal, Egyptian expats’ remittances and exports. Unfortunately, the pandemic has made that impossible,” he said. 

“It is imperative to maintain a safe level of reserves to keep the US dollar around 15.7 pounds on the local foreign exchange market and combat any attempts for dollarization,” he added.

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