IMF says Egypt to address central bank overdrafts, off-budget activity

Egypt has committed to addressing its recourse to central bank overdraft facilities and off-budget public sector activity, practices that have contributed to pressure on the currency and the exchange rate, the IMF said in a staff report released on Friday.

The report, released four weeks after the International Monetary Fund’s board approved an $8bn financial support programme, said Egypt had also committed to addressing vulnerabilities such as central bank lending to public agencies.

Egypt had already taken steps to tighten monetary policy, to shift to a flexible exchange rate regime and a liberalised exchange system and to increase gasoline and fuel prices to catch up for missed adjustments since December 2022, the report said.

An initial $3bn support programme was put into abeyance last year following a series of policy slippages.

“The return to a fixed exchange rate in February 2023 undermined the initial credibility boost from the announcement of a shift to a flexible regime and hampered the execution of other program pillars such as divestment of state-owned assets,” the staff report said.

“It also led to foreign exchange shortages, a large spread in the parallel market, and constrained imports, all of which fuelled inflation and weighed on growth.”

Delays in raising the policy interest rate in response to higher-than-expected inflation resulted in continued negative real rates and financial repression, the report said.

“Continued investment in national projects at a pace inconsistent with macroeconomic stability contributed significantly to foreign exchange and inflation pressures,” it added.

The central bank rapidly expanded its net domestic assets from mid-2022 to early 2024 to lend to public agencies without going through the Ministry of Finance, the report said. More recently it had sharply increased the Ministry of Finance’s use of the overdraft facility.

These contributed to the inflation and exchange rate pressures of the past two years, it said.

The currency has slid to 47.85 Egyptian pounds to the dollar from 15.74 pounds in March 2022. Inflation climbed to a record annual 38% in September before slipping to 33.3% in March.

Reuters obtained portions of the report through an unofficial channel earlier this week.

Egyptian authorities had committed to limiting the government’s overdraft account at the central bank and to prevent further central bank lending to public agencies outside the finance ministry, the report said.

Egypt‘s central bank as of February 2023 had lent as much as 765 billion Egyptian pounds ($15.9bn) to state agencies other than the finance ministry, an apparent breach of a 2020 central bank law, it said.

The March 29 IMF board meeting that approved the expansion of the loan programme cited damage to the economy from the crisis in Gaza. Weeks earlier, Egypt struck a record $35bn investment deal with the United Arab Emirates that eased a foreign currency shortage.