Egypt requests ‘support’ from IMF that ‘could include additional financing’ as economy reels under impact of Russia’s war on Ukraine

Egypt has requested more support from the IMF, the institution said in a Wednesday statement, which was followed by an Egyptian Cabinet statement saying the program “could include additional financing.”

The step comes after high rates of global inflation propelled a major foreign capital exit from Egypt’s bond market, a trend that was only exacerbated by Russia’s invasion of Ukraine. 

The IMF said it is working closely with Egyptian authorities to prepare for discussion of the program, noting that “a set of macroeconomic and structural policy measures” would be appropriate to mitigate the “shock” that Russia’s invasion of Ukraine entailed on the Egyptian economy, as well as to “protect the vulnerable, and preserve Egypt’s resilience and medium-term growth prospects.”

It did not specify whether the program would include a loan or not, though analysts have told Mada Masr that the country will need substantial foreign currency inflows given the distressed state of its foreign reserves.

Mada Masr reported in late January, when global inflation was already high, that the Egyptian government had been in exploratory talks with the IMF for months. The government has until today denied putting in a request for a loan, though it has not denied the presence of talks.

The request for IMF support comes as Egypt faces a major foreign capital flight. Billions of dollars left Egypt’s bond market in the immediate aftermath of the invasion, as investors pulled out of emerging markets in favor of investments perceived as more secure. Foreign investors withdrew an estimated $3 billion in the first week of Russia’s attack, Reuters reported at the time.

A March report from Fitch ratings agency also noted that investments had begun to seep out of Egypt months before the war, with a total of $5 billion in outflows between December and September 2021.

In a bid to staunch the flow by rendering Egypt’s markets more attractive to investors, the central bank took a decision in an extraordinary meeting on Monday to float the Egyptian pound, which has been de-facto pegged at LE15.7 to US$1 since the exchange rate was originally liberalized in 2016.

The peg has been costly, as the central bank enlisted the help of local commercial banks to supply any extra hard currency that the market might need. 

In March and April of 2020, at the outset of the COVID-19 pandemic, $8 billion left Egypt’s foreign reserves as a result of efforts to prop up the value of the pound.

The central bank also raised interest rates by 1 percent across the board on Monday.

While analysts told Mada Masr that the central bank's measures increase Egypt’s attractiveness as a destination for foreign investors shopping for the choicest available interest rates, they also said the government would nevertheless have little choice but to seek further loans from the IMF and financing from the Gulf.

Analysts also said the decision is likely to compound levels of inflation that were already at their highest level in nearly three years.

The new program, if it includes a loan, would be Egypt’s third since 2016, when it undertook a three-year structural adjustment program along with a $12 billion loan that entailed a major austerity program, over which poverty rates rose by nearly five percentage points between 2015 and 2018.

During the first year of the pandemic, Egypt also took out two further loans, one a follow-up facility to the 2016 program worth $5.4 billion over 12 months, and a second emergency facility worth about $2.8 billion to help cover costs during the pandemic-induced global crisis.