An IMF loan agreement might have been approved in principle but is contingent on both the IMF’s view of Egypt’s progress and possibly on parliament’s ratification Pharos, the local leading investment bank said in a recently released research note.
The note based the assumption on press reports quoting anonymous government officials as saying that a potential loan agreement will be contingent on the feedback received from the IMF mission that visited Cairo last week on Egypt’s reform process.
The likelihood of signing an IMF loan agreement has become exceptionally high amid the steep deterioration in Egypt’s net foreign assets (NFA) position and the relatively higher cost of raising foreign currency debt via market-based alternatives, such as the issuance of Eurobonds Pharos, said senior economist Hany Genena.
As of the end of August 2015, the stock of NFA held by the CBE plunged further to $1.3bn.
The mediocrity of the figure is revealed by comparing it to the $2bn held by the CBE one month before the popular depreciation of January 2003.
Not only is the 2003 figure higher in absolute terms, it is even higher when compared to the relative sizes of the population and merchandise imports in 2003 versus 2015.
The net foreign assets reflect the government’s ability to cover its long and short term liabilities with different assets
“The bulk of the CBE’s foreign liabilities are long-term in nature, which means that it can use the short term foreign assets it holds to stabilize the exchange rate without having to keep an eye on impending debt repayments. However, we believe selected creditors impose limits on the use of these funds and logically they would prefer to see the funds used in financing priority imports rather than used in defending a specific exchange rate, ” said Genena.
Pharos’ note concludes that the decline in net foreign assets limits the Central Bank’s ability to keep defending the pound by using reserves and this would eventually push Egypt to acquire the IMF loan.
