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Egypt: Will the citizen pay the price of the agreement with the International Monetary Fund?

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The rise in the exchange rate of the dollar leads to a rise in the price of imported goods, most notably wheat

After months of tortuous talks, the International Monetary Fund and the Egyptian government announced, on Thursday, October 27, that they had reached a preliminary agreement, according to which Cairo would obtain a financial loan of $3 billion from the fund, in addition to another package that includes $1 billion from the Fund’s Sustainability and Resilience Fund and $5 billion from the Fund’s Sustainability and Resilience Fund. dollars from partner countries for development. Which means a total of nine billion dollars in aid.

Egypt will use these amounts to face the financial distress that the country’s economy is experiencing as a result of the repercussions of the Corona pandemic and the Russian war on Ukraine. Among the most prominent features of the economic crisis is the presence of a large deficit in the Egyptian state’s general budget, the need to pay debt installments and interests, in addition to the high bill of commodity imports, as Egypt suffers from a large deficit in the trade balance and high inflation.

The head of the International Monetary Fund’s mission in Egypt, Ivana Vladkova-Holler, said that the Fund approved the financing program, which extends over a period of 46 months, provided that the Egyptian financial authorities adhere to a set of economic reforms.

The agreement will be presented to the IMF Board of Directors during the month of December 2022 for approval.

proactive action

Hours before the agreement was revealed, the Egyptian government announced a number of proactive measures. The central bank announced, surprisingly, to raise the lending rate by two percentage points to 14.25% and the deposit rate to 13.25%. The discount rate has also been raised to 13.75%. He also announced a flexible exchange rate for the pound against foreign currencies based on the mechanism of supply and demand in the market.

In contrast, Egyptian Prime Minister Mostafa Madbouly announced, on Wednesday evening, an increase in the minimum monthly wage by 11.1%, from 2,700 pounds ($137) to 3,000 pounds ($152). This is the fourth increase in the minimum wage since President Abdel Fattah al-Sisi took power in Egypt.

Exceptional social protection

In a press conference, Egyptian Finance Minister Mohamed Maait announced a new social protection package worth 67.3 billion Egyptian pounds, starting next month, and it includes an exceptional bonus of 300 pounds per month for people in irregular employment, pensioners and all employees of the state’s administrative apparatus and its subsidiaries.

The IMF immediately welcomed the Egyptian authorities’ expansion of social protection and the implementation of a permanent flexible exchange rate regime. The Fund expects these policies to catalyze a larger multi-year financing package.

The Fund acknowledged that the existence of a flexible exchange rate for the Egyptian pound, which leads to a decline in the exchange rate of the pound against the dollar, will lead to economic difficulties, most notably the rise in the general level of prices, which increases the burdens borne by the poor and middle classes.

However, the IMF believes that the low exchange rate of the pound will contribute to limiting imports as a result of its high prices, and encouraging Egyptian exports, which will contribute to treating the large deficit in the Egyptian trade balance and achieving macroeconomic stability in the long term.

The pound is floating and the dollar is rising

Following the decision of the Central Bank of Egypt to follow a flexible exchange rate for the pound, the exchange rate of the dollar against the Egyptian pound jumped in an unprecedented manner from 19.75 to 22.80 pounds per dollar, according to figures revealed by the Central Bank of Egypt. The Egyptian currency had earlier lost 20% of its value against the US dollar. Economists expect the value of the Egyptian pound to decline against the dollar by 18% over the next twelve months.

Gulf aid declining

At the opening of the economic conference he called last week, Egyptian President Abdel-Fattah El-Sisi referred to the difficulties the Egyptian economy is facing. “Even Arab friends and brothers have become convinced that this country will not stand on its feet again, and that there is a culture of relying on them to solve the crises and problems facing Egypt,” he said. He pointed out that this will not continue because they have given so much. The scarcity of international aid was considered one of the reasons for resorting to IMF loans despite its difficult conditions.

The Egyptian economy, like many other economies around the world, is suffering from the repercussions of the Corona virus pandemic and the Russian war on Ukraine, which disrupted trade exchanges and the movement of global markets and led to a rise in oil and food prices. Egypt is the largest importer of Russian and Ukrainian wheat.

Hopes behind the agreement

The Egyptian government hopes that these economic measures, monetary reforms and the IMF loan will reduce the inflation rate that exceeded 15% last September, ease the financial pressure on low- and middle-income families and reduce the total Egyptian debt. Government figures indicate that about 30% of Egypt’s population of 104 million suffer from poverty.

Similar to other countries such as Tunisia, Lebanon and Jordan, the International Monetary Fund is asking Egypt to reduce subsidies on basic commodities such as fuel, electricity, wheat and rice, in order to reduce the public budget deficit. This means that the simple citizen will have to bear financial burdens that he may not be able to pay, and may even push large social groups towards the chasm of poverty.

Do IMF loans provide solutions to the problems of the Egyptian economy in the medium term?

Is the increase in wages approved by the Egyptian government sufficient to meet the increase in prices due to the rise in the exchange rate against the dollar?

Does the citizen pay the price of the agreement with the International Monetary Fund?

Why did the Gulf financial support for Egypt declined?

Who is responsible for the deteriorating economic conditions in Egypt? Internal politics or external factors?

We will discuss these and other topics with you on Friday, October 28th

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