Egypt secured an expanded $8 billion deal on Wednesday with the International Monetary Fund, hours after the central bank unshackled its currency and delivered a 600 basis points rate hike in a push to stabilise the economy.
Additionally, Egypt would obtain a $1.2 billion loan for environmental sustainability, bringing its total from the IMF to more than $9 billion, the government said. This was towards the lower end of what some analysts expected.
The currency weakened to beyond 50 Egyptian pounds to the dollar – far beyond previous records – from about 30.85 pounds, a level Egypt has for months tried to defend. It closed at 49.4 to the dollar.
A more flexible exchange rate is seen as crucial for restoring investor confidence and is a key demand of the IMF, which had been in talks to expand the Fund’s current, $3 billion support programme for the Arab world’s most populous nation.
Egypt has in the past said it would shift to a more flexible exchange rate, only to return to closely managing the currency whenever the pound weakened.
This time, after struggling with a prolonged economic crisis linked to chronic foreign currency shortages, it may be betting that hard currency inflows including a $35 billion investment deal signed in late February with the United Arab Emirates, will prevent a freefall.
Analysts say doubts remain over commitment to structural reforms that have been repeatedly dodged, including reducing the sprawling economic interests of the state and the military.
The central bank said it had raised the overnight lending rate to 28.25% and its overnight deposit rate to 27.25% in a bid to tame inflation, which rose to record levels last year and has caused years of hardships to tens of millions of Egyptians.
“To ensure a smooth transition, the CBE will continue to target inflation as its nominal anchor, allowing the exchange rate to be determined by market forces,” it said in a statement.
“Sufficient funding has been secured to avail foreign exchange liquidity,” it said.
Central bank governor Hassan Abdalla told reporters that as in other countries, the bank would still have the ability to intervene if there were “illogical movements” in the currency.
While the central bank already had an inflation target, it also sought to manage the pound.
