Egypt reveals $16 billion funding gap that IMF deal can help fix

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Egypt has an external funding gap of $16 billion over roughly four years and believes it will secure enough money to cover its needs in full because a loan from the International Monetary Fund can unlock financing from abroad.

Finance Minister Mohamed Maait said in an interview that the $3 billion IMF deal is “fully funded,” meaning Egypt’s financing requirements will be met during the duration of the 46-month program. Some investors already approached the ministry for a private placement of an Islamic bond, an option it’s now considering, he said.

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“We are dealing with the difficult circumstances of the international market by diversifying our financing sources,” Maait said in the Egyptian resort of Sharm El-Sheikh, venue of this year’s United Nations climate change conference. “We see potential in the Chinese, Japanese and Sukuk bond markets and we are working on issuing sustainable bonds.”

The shortfall facing the $400 billion economy reflects the depth of the crisis inflicted on Egypt by spillovers from Russia’s invasion of Ukraine. Soaring oil and commodity prices have hit one of the world’s largest wheat importers hard, and foreign portfolio investors have pulled some $22 billion from what was once a favorite debt market.

Gulf allies have rushed to Egypt’s aid with deposits and investment pledges, while Egypt in late October announced a long-awaited IMF agreement and new flexibility in managing its currency.

Even so, Fitch Ratings this week downgraded its outlook for Egypt to negative from stable, citing weaknesses in its external liquidity and reduced prospects of access to bond markets.

Funding Breakthrough

The agreement with the IMF has helped the country secure $5 billion from multilateral organizations including the World Bank and the African Development Bank, which Maait expects to arrive in the fiscal year ending next June.

Egypt is also stepping up efforts to broaden its bond issuance and hopes for improved access to capital markets in the second half of next year.

Maait reiterated his view that Egypt, which had one of the highest inflation-adjusted interest rates in recent years until consumer prices quickened in 2022, should be less dependent on the carry trade for funding. It’s already seeing the return of portfolio inflows, he said, declining to give a figure.

“We have seen some inflows in the local debt market in the recent days after the devaluation and the IMF deal,” Maait said. But “we have to learn the lesson, which is that this kind of inflows is not secure and Egypt should focus on boosting foreign direct investment and exports,” he said.

The government expects net portfolio inflows of $2 billion for each of four fiscal years, including the current one that ends in June.

Financing in 2022-2023 is set to include a $750 million first tranche from the IMF, World Bank lending both for food security and in a budget assistance loan to which the Asian Infrastructure Investment Bank and UK Treasury are also contributing, according to Maait.

Foreign direct investment is seen at $10 billion in the current fiscal year, with a target of $13 billion in 2025-26. Much of the 2022-2023 figure may come from the selling of state-held stakes in Egyptian companies to its Gulf allies.

Asked if the ministry is planning to increase yields on Treasury bills and bonds to attract investors, Maait said it would be left to supply and demand as well as the debt-servicing costs Egypt is allowed according to its budget law.

Egypt, one of the Middle East’s most indebted nations, targets slashing the ratio of government debt to gross domestic product to 70.4 percent in the fiscal year that ends in June 2027. That compares with 85.3 percent in the last one, and would be the lowest since at least 2010.

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