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Sun 7 Jun 2020 10:50 AM

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IMF emergency funds give Egypt space to reduce local borrowing

Egypt also secured $12 billion in 2016 as part of an IMF programme that required a steep currency devaluation and subsidy cuts

IMF emergency funds give Egypt space to reduce local borrowing

Egypt also secured $12 billion in 2016 as part of an IMF program that required a steep currency devaluation and subsidy cuts.

Egypt may reduce financing in local markets over coming weeks as it tries to cut debt-service costs for one of the Middle East’s most indebted countries.

The country may lower the amounts it accepts in auctions of Treasury bills and bonds for the remainder of the fiscal year that ends in June, the Finance Ministry said in a statement on Wednesday. The government is “eager to diversify financing sources to cut borrowing costs,” it said.

Egypt secured $2.8 billion from the International Monetary Fund under its emergency Rapid Financing Instrument this month, giving the government some breathing space. The country was planning to raise 610 billion Egyptian pounds ($38.6 billion) from T-bills and bonds from April to June, according to data on the Finance Ministry’s website.

“It makes sense to make use of cheap financing from the IMF to free up resources to counter-balance the negative impact of the Covid-19 shock,” said Mohamed Abu Basha, head of macroeconomic research at Cairo-based investment bank EFG Hermes.

Market revival

Egypt also secured $12 billion in 2016 as part of an IMF programme that required a steep currency devaluation and subsidy cuts. That helped rekindle investor interest battered in the aftermath of the 2011 uprising - a revival most notable in the debt market, where record-high interest rates and a stable currency made the country a developing-nation darling.

But the country saw it biggest-ever capital outflows of about $17 billion in the past two months. Net international reserves, which were at a record high at the start of 2020, have declined by almost a fifth to $37 billion. The central bank partially covered the pullback of overseas portfolio capital through its repatriation mechanism, which guarantees investors can withdraw profits in hard currency.

The North African nation made its largest-ever interest rate cut of 300 basis points in an emergency meeting in March, but maintained the key deposit rate unchanged at 9.25% in April and May. Adjusted for inflation, policy rates are now at 3.35%, near the lowest in a year but still well above many of Egypt’s peers among developing nations.

The Arab world’s most populous nation is now looking for ways to cover a financing gap estimated at about $10 billion in 2020 by EFG Hermes and Goldman Sachs Group Inc., as some of its main foreign-currency sources - tourism, remittances and Suez Canal receipts - take a hit from Covid-19. It seeks to secure more than $5 billion from the Washington-based IMF under a stand-by arrangement and $4 billion from other sources, an official told Bloomberg last week.

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