Courtesy: Daily News Egypt

 

A delegation from the International Monetary Fund touched down in Cairo on Monday to begin its final review of the US$8 billion loan program Egypt took out in 2022.

While Egypt’s macroeconomic indicators have improved in recent months as the country descends from the peak of economic crisis, the two sides are expected to discuss the slow pace of the government’s privatization plan — an issue that prompted the postponement of the fifth program review and its merger with the sixth, according to several informed sources who spoke to Mada Masr.

Egypt’s growing reliance on hot money for current account liquidity is also on the agenda for the meetings over the coming two weeks, the same sources said.

The IMF, meanwhile, has shown flexibility regarding its other major economic adjustment metric, cuts to energy subsidies, in order to keep inflationary pressure at bay.

Privatization 

The fifth program review was delayed earlier this year, with International Monetary Fund spokeswoman Julie Kozak attributing the decision to slow progress in the government’s privatization plan in press statements at the time.

Egypt had requested that the two reviews be merged to give it time to ink deals that would secure dollar inflows and expand the space available to the private sector, according to head of the Planning and Budgeting Committee of the outgoing House of Representatives, Fakhry al-Fekky.

But though the government’s New Urban Communities Authority finalized a US$29.7 billion deal with the Qatari sovereign wealth fund for the development of state-held lands in Alam al-Roum on the North Coast, the government’s delay on withdrawing from state-owned assets remains a bone of contention between the government and the IMF.

According to two sources who spoke to Mada Masr, one from the Cabinet and the other from the World Bank, the IMF is less interested in the asset sales than in progress on the State Ownership Policy, the blueprint assembled by the government to structure a staged exit from several sectors in which it holds a substantial market share.

The sources cited the government’s failure to advance the sale of stakes in the 32 companies it listed for privatization in 2023 — including companies it has claimed for nearly a decade it intends to open to the private sector, in plans that have repeatedly stalled.

For the IMF, the stake sales are less about securing new dollar inflows — a target the government has sought to achieve through major land development deals like Ras al-Hikma and Alam al-Roum — and more about opening Egypt’s industrial and commercial sectors up to the private sector, according to the World Bank source. “Investors don’t want to see lots of state-owned companies, especially in the commercial goods and services sectors,” they said.

But for the government, a series of lowball investment offers as well as unfavorable conditions on the Egyptian Exchange for new listings have deterred it from launching into the planned sales, said the Cabinet source, the World Bank source, Fekky, and another parliamentarian.

Fekky said the government is no longer under the degree of extreme economic pressure that could force it to accept selling assets below their actual value.

The World Bank source echoed the opinion, saying “we no longer need fire sales.”

After Russia’s invasion of Ukraine sent global markets into a tailspin, Egypt faced a crushing dollar shortage. To remedy the situation, the government undertook a set of rapid sales, surrendering stakes in strategically important companies to state buyers from Saudi Arabia and the United Arab Emirates.

These included the UAE’s acquisition of around 40 percent of the Alexandria Container and Cargo Handling Company for around $186 million. Saudi Arabia, meanwhile, purchased around 20 percent of the same company for $157 million in 2022 before reselling the same stake in November to the Emirati DP World for around $280 million.

The government has also sold or floated shares in MOPCO and Abu Qir Fertilizers, Fawry for e-payments, the Commercial International Bank, the tobacco firm Eastern Company and Telecom Egypt, generating a combined total of $5.6 billion.

It has hesitated, however, to enact plans for share sales in the military-owned Safi mineral water and Wataniya Petroleum, despite criticism from the IMF.

In its latest review, the IMF said it had expected the privatization program to generate around $3 billion by the end of the 2024/25 fiscal year, but the government has so far secured only $600 million.

Dollar inflows have improved markedly overall, however.

Rallying inflows were driven primarily by remittances from Egyptians abroad, which reached $36.5 billion by the end of FY 2024/25. Exports also grew by 23 percent year-on-year by the end of Q3 2024/5, according to the Central Agency for Public Mobilization and Statistics (CAPMAS). The tourism minister said that revenues are expected to reach $17.6 billion by year-end.

Hot money liquidity

All these inflows helped Egypt’s foreign reserves top the $50 billion mark at the end of October.

However, alongside the other sources of hard currency inflows, hot money — foreign investor capital locked into short-term government debt — also hit new highs, reaching LE875 billion ($42 billion at current exchange rates) in 2024. Sources speaking to Mada Masr in recent months said they estimate this figure stands at around $50 billion, as Egyptian government debt currently offers one of the highest real rates of return on investment globally, at around 10 percent.

This resurgent dependence on hot money is one of the points the IMF is expected to raise in its meeting with the government, according to the Cabinet source.

While hot money can generate rapid liquidity, it is nevertheless fragile and highly volatile given its exposure to global and domestic variables, the World Bank source said.

At the start of Russia’s war on Ukraine, foreign investors withdrew at least $20 billion from Egypt, according to then-Finance Minister Mohamed Maiet, who had pledged to reduce the contribution of hot money to current account liquidity in the wake of the shock.

Comparatively calm weather

The parliamentary and government sources said the atmosphere surrounding the fifth and sixth review discussions is calm, given that the program, due to end in October 2026, is now reaching its final stages.

Program recommendations to cut government spending on energy subsidies, including the liberalization of electricity and fuel prices, are expected to be more relaxed in this round to avoid stoking inflation.

Inflation across Egypt has eased since the beginning of the year, stabilizing at an annual rate of 10.1 percent, according to CAPMAS. Inflation peaked at over 30 percent at the worst of the economic crisis.

The government has aimed to rein in inflation so that the Central Bank of Egypt can press ahead with the monetary-easing cycle it began in April. It has rolled out three interest rate cuts — in May, August and October — bringing the total reduction to 5.25 percentage points since the start of the year.

The policy direction is part of a bid to reduce borrowing costs in the country, according to the Cabinet source, a second parliamentary source in the House Planning and Budgeting Committee and two financial analysts.

While the atmosphere is less tense than prior reviews, the World Bank source nevertheless stressed the importance of passing the review and securing the IMF’s approval, as it would send an encouraging message to foreign investors — whether those considering direct investments or investors in government debt, which the state will continue to rely on at least partially to service a persistent current-account deficit.

Egypt began negotiating with the IMF at the end of 2022 for a $3 billion loan. The program faltered for months before talks resumed, with the two sides ultimately agreeing to augment the loan to $8 billion and approving four reviews. As the program unfolded, the exchange rate fluctuated, with the dollar reaching LE50 before the pound appreciated to 47.46 to the dollar more recently, according to the CBE.

Egypt has received three tranches of the program so far — $820 million after completing the first and second review in the first quarter of 2024, another $820 million following the third review, and $1.2 billion after the fourth one.

With each review worth around $1.3 billion, Egypt would receive around $2.6 billion if the merged fifth and sixth reviews are approved.