CAIRO (AP) -- The International Monetary Fund reached a preliminary agreement with the Egyptian government Thursday that paves the way for the economically troubled Arab nation to access a $3 billion loan, officials said Thursday.
IMF officials said a staff agreement between the Egyptian government and IMF leaders had been reached following months of talks, as Egypt struggles to combat surging inflation caused, in part, by the war in Ukraine.
In a statement issued Thursday, Egypt's IMF mission chief Ivanna Vladkova Hollar said the 46-month deal -- known as an Extended Fund Facility Arrangement -- allows Egypt access to the $3 billion loan on the condition it implements a series of economic reforms.
In the hours before the announcement, Egypt's central bank announced a series of economic measures, including a hike in key interest rates by roughly 2 percentage points and a switch to a more "durably flexible exchange rate." The bank said the exchange rate switch would now allow international markets to "determine the value of the Egyptian pound against other foreign currencies."
Following the announcement, the Egyptian pound dropped to a record low against the U.S. dollar from 19.75 to around 22.99, according to data provided by Egypt's central bank. Before Wednesday's flotation of the Egyptian currency, the U.S. dollar was traded at an average of 23 pounds in the black market.
Since the beginning of the year, the Egyptian pound has lost around 46% of its value against the U.S. dollar. Jason Tuvey, a senior emerging markets economist for Capital Economics, expects it to lose further value before the end of next year.
The flexible exchange rate "will result in some short-term economic pain" but got the IMF deal approved and will "go a long way to restoring macroeconomic stability," said Tuvey.
"The commitment to durable exchange rate flexibility going forward will be a cornerstone policy for rebuilding and safeguarding Egypt's external resilience over the long term," said Hollar.
The Egyptian economy has been hard-hit by the coronavirus pandemic and the war in Ukraine, events that have disrupted global markets and hiked oil and food prices worldwide. Egypt is the world's largest wheat importer, most of which came from Russia and Ukraine. The country's supply is subject to price changes on the international market.
In a statement issued Thursday morning, Egypt's central bank said it had raised the new lending rate to 14.25% and the deposit rate to 13.25%. The discount rate was also raised to 13.75%, it said.
Egypt's monetary reforms and the IMF loan are designed to help offset rising inflation, which passed 15% in September, and lighten the financial pressure on lower- and middle-income households. Some of the agreement's main goals are to reduce Egypt's overall debt and bring about broad reforms to its fiscal policy, Hollar said.
As part of its monetary reforms, the central bank said it would begin removing a system for importers, a red tape process introduced in February to control the demand on the currency for imports.
Late on Wednesday, Egyptian Prime Minister Mustafa Madbouly announced an 11.1 % increase in the minimum monthly wage, from 2,700 pounds ($137) to 3,000 pounds ($152). Madbouly's announcement marks the fourth hike in the minimum wage since President Abdel Fattah el-Sissi took office in 2014.
In its statement, Egypt's central bank said it was "intent on intensifying its reform agenda to secure macroeconomic stability and achieve strong, sustainable and inclusive growth."
About a third of Egypt's 104 million people live in poverty, according to government figures.