Working Paper
Country Study 9

Since joining the International Monetary Fund in 1945 as an original founding member, Egypt has signed four stabilization agreements with the Fund. These agreements were: a credit facility in May, 1962, which collapsed fairly rapidly; a stand-by arrangement in April 1977; an extended fund facility in July 1978; and the new stabilization package agreed in May, 1987, which is supported by a stand-by credit of SDR 250 million. Some of the most important items in the new programme are the following:A gradual devaluation-cum-unification of the exchange-rate structure, with the establishment of an official free market in foreign exchange; an increase in energy prices; an increase in purchase prices of agricultural commodities; action to reduce the budget deficit to 13 per cent of GDP; an increase in interest rates; and (undisclosed) limits on monetary expansion.This package must be viewed against a dismal background of a stagnant economy, rapidly-rising inflation (estimated unofficially at 30 per cent in mid-1987) and a budget deficit which the author of the following paper, Dr Abdel-Khalek, reports to have been 27 per cent of GDP in 1985-86 - and possibly even higher in 1986-87.The real purpose of this programme, which the IMF was persuaded to moderate considerably from its original demands, was to clear the way for a Paris Club rescheduling. Subsequently, about one-quarter of Egypt's medium and long-term debt of about USD40 billion has been rescheduled over ten years, including a five-year grace period.In the author's judgment, the new package may turn out to be self-defeating, and could well founder through failure to control the budget deficit. This failure would leave behind a legacy of a greatly depreciated currency and excessive interest rates. The author concludes that Egypt 'may soon find itself facing a crisis situation even more difficult than the one which led to the present package'.