IMF downplays inflationary risk as Egypt seeks to finalize loan

Reuters

Egypt is unlikely to see a jump in inflation from measures to ease a foreign-exchange shortage because import prices already reflect the black market rate, a senior International Monetary Fund official said.
Egyptian officials are widely expected to devalue the pound and cut energy subsidies to secure a $12 billion IMF loan, needed to fund an economic overhaul they hope will attract foreign investment to Egypt’s ailing economy. But with core inflation — a key gauge of price increases for non-volatile consumer goods — at the highest level since 2009, some analyst are warning of a public backlash if they force prices up further.
“If you look at what’s happening to prices today, already many prices are reflecting the parallel market rate,” Masood Ahmed, head of the IMF’s Middle East and Central Asia department, said in an interview in Dubai on Tuesday. “It’s not obvious to me there is going to be a big additional impact on prices.”
Ahmed said he hopes the IMF’s Executive Board would be able to consider the loan request later this month or in November.
“But the more important point is that delays on important areas they’re trying to address, such as the problem they have in the foreign-exchange market, would have a high cost on the economy,” he said. As part of the initial loan agreement, Egyptian officials also agreed to move to a flexible exchange-rate system. “If people are expecting that the exchange rate will only move in one direction, then they’re less likely to bring dollars into the economy,” Ahmed said. “It’s the bringing in of those dollars that will effectively get the economy moving forward.” Finance Minister Amr El-Garhy suggested on Monday that authorities will not use funds from the IMF and other creditors to finance imports and defend the currency, echoing similar comments made by Egypt’s central bank Governor Tarek Amer in July.
Egypt has burnt through billions of foreign currency reserves since the 2011 uprising against President Hosni Mubarak.
The pound has slumped more than 40 percent on the black market this year, hitting a
record low 15.58 per dollar last week, compared with the official rate of 8.88.