Egypt is facing a crisis in terms of foreign currency exchange rates which must be addressed, as the official rates and those of the informal market show a 100% disparity in prices, International Monetary Fund (IMF) managing director Christine Lagarde said in an interview with Bloomberg on Thursday.
As a result of declining tourism and foreign investments following the 25 January Revolution in 2011, the Central Bank of Egypt (CBE) was forced to sell US dollars at auctions. Egypt’s foreign currency reserves went from $36bn pre-revolution to $17.5bn as of June 2016.
Lagarde explained that the means and speed of dealing with this issue are dictated by the circumstances. On whether a gradual devaluation or a complete flotation would be the most effective, she said: “When the reserves are very low, and the difference between official and unofficial rates is very wide, historically we have seen rapid transition being most efficient.”
She added that if the IMF and the Egyptian authorities had already agreed on the specifics of the matter, no one would be talking about it, as such decisions must be made rapidly and kept confidential.
Lagarde said that Egypt is very close to securing the $6bn in bilateral finance, and hopefully the IMF board will approve the $12bn loan in the next few weeks.
Egypt has made very good progress in securing the required finances from bilateral creditors, with contributions from China, Saudi Arabia, and the G7 countries, director of the IMF’s communications department Gerry Rice announced in a press briefing on Thursday.
Rice put an emphasis on social protection as a cornerstone of the IMF programme, saying that the IMF programme did not call for any cuts in food subsidies, but rather advised for increases in the food subsidy budget to help people cope with the adjustments.
In the budget for fiscal year (FY) 2016/17 approved by the parliament, the total subsidies register EGP 130.1bn, of which EGP 46.3bn are allocated for food and farmers subsidies.
He added that Egypt has already made great progress in implementing the key elements of the IMF programme: the parliament has already activated the value-added tax (VAT), the government has a plan to cut energy subsidies, and the CBE is committed to move to a more flexible exchange rate.
Rice said: “The reforms are difficult, and there are going to be disagreements and differences and maybe even protests, but we believe that the reforms the government is undertaking are headed in the right direction. We support them in that and will continue to do so.”