Egypt charts international financing course
Thursday, Oct 26, 2017
Cairo’s international funding plans over the remainder of the fiscal year became clearer in late September and early October.

Fresh instalments of IMF and World Bank funding were provisionally promised by year-end, following broadly approbatory assessments of the government’s progress thus far on its radical programme of economic and fiscal reform on which multi-billion dollar support packages were contingent.

Meanwhile, the state’s bilateral lenders furnished improved terms. A slew of positive economic and fiscal data released by the authorities in recent weeks continued with the news that foreign reserves had hit a new post-2011 record last month. With the immediate foreign exchange crisis averted, Finance Minister Amr el-Garhy indicated a likely postponement until the new year of a fresh international bond issue.

The IMF published the full conclusions on September 26 of the second review of Cairo’s performance under the US$12 billion, three-year Extended Fund Facility (EFF) programme agreed in November. A satisfactory assessment had already been indicated by the release of a second instalment, of US$1.25 billion, in the immediate aftermath of the report’s completion in July.

The fund adjudged the economy to be “gathering strength” under its tutelage and lauded the government for implementing several of the major reforms prescribed.

Politically sensitive cuts to energy subsidies and the imposition of value-added tax (VAT) were expected to contribute to a forecast narrowing of the budget deficit to 8.6% in the fiscal year to next June from 10.5% in the previous year.

Waivers were granted on 2016/17 targets for reductions in the primary fiscal balance and in the fuel subsidy bill. This was on the basis of the authorities’ plans to make up ground over the remainder of the reform programme, including a purported promise to move to “full cost recovery” on the pricing of most fuels.

Economic growth of 4.2% in 2016/17 was said to have exceeded the IMF’s original expectations – having accelerated during the second half of the period. The main blot on the economic horizon is soaring inflation since the Egyptian pound’s flotation late last year – a prerequisite for the EFF deal: the headline rate was running at around 31.6% in September.

Answering questions the day after the report’s release, IMF Mission Chief for Egypt Subir Lall predicted that inflation would fall to “slightly above 10%” by next June and to single digits during the following year as a result of “the appropriate and very credible policy stance of the Central Bank of Egypt [CBE]”.

A second performance review is due to be conducted by year-end, which he projected would trigger a third disbursal, this time of around US$2 billion.

The World Bank is also anticipated to deliver by the end of December the third and final US$1 billion tranche of a financing agreed with Cairo shortly after that with the IMF.

Among the conditions of the EFF package was that Egypt secure bilateral commitments covering the remainder of the funding required for the first year of the fiscal programme – with Saudi Arabia and the UAE acquiescing with deposits worth a total of US$2 billion apiece lodged with the CBE.

Bank governor Tareq Amer was quoted in the local press in mid-October as claiming that the two GCC allies – which Cairo has joined in the current economic blockade of Qatar – had agreed to extend the maturity beyond the original 2018 date, without revealing the new terms.

The delay will be welcome for the authorities, which face repayments of nearly US$13 billion in debt and interest next year.

IMF and World Bank funds, bilateral loans and two international bond issues have helped eliminate the foreign exchange shortage that had originally prompted Cairo’s reluctant request for IMF assistance.

Data for September released promptly by the CBE in early October showed reserves building again last month by US$392 million to US$36.535 billion – a new record for the period since the 2011 revolution and more than double their level before the IMF intervention.

The cushion diminishes the urgency of a planned return to international bond markets – which el-Garhy had predicted last month would take place by the end of November.

Speaking in early October, he disclosed that the auction was now more likely to take place in January or February, after the traditional December slowdown. The reasons for the delay were unstated but a quiet market for emerging market issuance was suddenly interrupted in the space of two weeks at the turn of the month by sales of dollar-denominated bonds worth a combined US$22.5 billion by Saudi Arabia and Abu Dhabi.

Cairo issued dollar bonds worth US$4 billion and US$3 billion in November and May. The government had been aiming to launch next year’s new programme of issuance with additional bonds in the US currency but intended to follow with a sale of euro-denominated paper, el-Garhy said.

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