Wednesday, September 12, 2012

Newly Elected Egyptian Government Requests IMF Help to Boost Economy

BBC: Egypt Requests $4.8bn Loan from Visiting IMF Chief
Bloomberg: Egypt: Currency Account Deficit Widens As Tourism, FDI Fall
Brookings: Egypt and the IMF: Turning a new Page?
Business Week: Egypt Offers 3-Year T-Bonds as Brotherhood Backs IMF Loan Talks
Central Bank of Egypt: Egyptian Treasury Bonds Auction
Chicago Tribune: Egypt’s President Rules out Currency Devaluation 
IMF: IMF to Discuss New Loan Program With Egypt, Says Lagarde
IMF: Egypt International Reserves and Foreign Currency Liquidity
New York Federal Reserve: Currency Devaluation and Revaluation 
Reuters: Yields on Egyptian 266-day T-bills Climb
Swiss Info: Egypt Seeks $4.8 billion IMF Loan for Stricken Economy

On August 22, 2012, Egypt's new President Mohamed Mursi requested a $4.8 billion dollar loan from the International Monetary Fund's (IMF) Managing Director Christine Lagarde. Egyptian Prime Minister Hisham Qandil said that he expects the $4.8 billion loan to be for a term of five years, have an interest rate of 1.1 percent, and a grace period of 39 months. The Egyptian economy has suffered in recent years due to the political unrest following the Arab Spring, and the newly elected Mursi is exploring ways to kick-start the Egyptian economy and avoid a devaluation of the Egyptian Pound.

President Mursi believes the IMF loan will contribute to Egypt’s economic stability in the short term and be a signal to the world that Egypt is once again a politically and economically stable place to invest and travel. After the ouster of long time President Hosni Mubarak, foreign investors and travelers avoided Egypt because of the unpredictable financial and social climate. Foreign direct investment in Egypt (money invested by foreign businesses) fell by 90%, and travel to Egypt fell by 18% in 2011-12. Thus, the IMF loan will signal to investors that Egypt is ready to start dealing with its serious economic and political problems.

The $4.8 billion loan will be a welcome infusion of cash to the faltering Egyptian economy. Egypt has spent more than half of its foreign currency reserves (funds held in international currencies by the Central Bank) to maintain the value of its currency by purchasing its own bonds, which effectively raises the value of the Egyptian Pound. So far, the currency has lost only five percent of its value on the international market despite a much larger drop in foreign investment and travel. However, if Egypt were to run out of foreign reserves and not be able to defend the value of its currency, the likely depreciation of the Pound would make key imported food staples, such as wheat, tea, and sugar, more expensive to purchase. This would likely contribute to social and political unrest.

Despite Mursi’s actions to stabilize the economy, foreign investors do not yet consider Egypt to be a stable investment. Egyptian treasury bills’ interest rates are a good measure of investor sentiment because they reflect the risk of Egyptian default that investors expect. As of August 26, 2012, the interest rate on 266-day Egyptian treasury bills climbed by two tenths of a percent to 15.863 percent. By contrast, the interest rate on a one-year U.S. treasury bill is only .19 percent. The Mursi administration is hoping that the IMF loan will help address investors’ concerns by helping to quell political and social unrest and promote financial reforms.

The new Egyptian President has made efforts to improve the Egyptian economy, and continues to take steps to make Egypt financially stable. However, the world market does not yet see the stability Mursi seeks. After meeting with President Mursi, the IMF’s Managing Director said that getting Egypt’s economy back on track will not be an easy task, but that that the IMF stands ready to help. An IMF mission will visit Cairo in September to hold discussions and the parties plan to reach an agreement in November.



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