IMF approves $12 billion Egypt loan agreement

The International Monetary Fund has approved a three-year $12 billion (11.5 billion euros) loan package for Egypt to revive its struggling economy hit by soaring public debt and inflation.

On Friday, the IMF said it had immediately released $2.75 billion to Egypt's central bank. Further payments would be made over the next three years, pending five reviews of reforms.

The program will help "restore macroeconomic stability and promote inclusive growth," the IMF board said in a statement.

IMF Managing Director Christine Lagarde called the bailout part of a "homegrown economic program" that will help to "address longstanding challenges to the economy" while protecting the poor and vulnerable.

"These include a balance-of-payments problem manifested in an overvalued exchange rate and foreign exchange shortages, large budget deficits that led to rising public debt and low growth with high unemployment," Lagarde said. "The authorities recognize that resolute implementation of the policy package is essential to restore investor confidence."

Fears of social instability

The bailout package comes after import-dependent  Egypt in recent weeks implemented a series of reformsdemanded by the international lender, including floating of the exchange rate, cutting fuel subsidies and passage of a value-added tax to raise revenue. The program also requires Egypt to cut its bloated public sector wage costs.

Since floating the currency earlier this month, the Egyptian pound has dropped by nearly 50 percent against the US dollar. The previous fixed exchange rate had led to a parallel black market in currency and a shortage of imports.

The IMF said short-term inflation may rise as imports become more expensive, but that this would be offset by central bank policy.

Fearing social instability, Egypt has long sought to avoid implementing IMF reforms, but Egyptian President Abdel-Fattah al-Sissi said that they were now unavoidable if the country wanted to revive the economy. On Friday, security forces were out in full force to prevent anti-austerity protests.

Egypt's economy has been badly hit by instability since the 2011 ouster of longtime strongman Hosni Mubarak and the subsequent military overthrow of Islamist President Mohammed Morsi.  The foreign currency earning tourism sector has shrunk, overseas remittances have dropped with lower oil prices and slowing global trade has reduced revenue from the Suez Canal. Investment and business activity have also been impacted by the instability.

Social protections 'a cornerstone of the program'

Aware of the potential for unrest, the IMF said social protections "are a cornerstone of the program, not an add-on or afterthought." The program allows for increases in food subsidies and direct transfers to the poor.

Inflation is currently at 14 percent, the budget deficit at 12 percent and the current-account deficit at almost 7 percent. Unemployment stands at 13 percent, but youth unemployment is as high as 30 percent.

The IMF bailout will be complemented by about $6 billion in separate financing from China, the United Arab Emirates, Saudi Arabia, G7 countries, bank loans and bond issues.

The initial IMF loan tranche brings central bank foreign reserves to $23.5 billion, still far short of the $36 billion in reserves before the 2011 uprising.

cw/cmk (AFP, AP, Reuters)