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What Will Egypt Do With the IMF's $12 Billion?

Struggling to turn around a battered economy, Egypt just secured a $12 billion loan from the IMF. But what will this agreement bring along?

Egypt and the International Monetary Fund reached an initial agreement over a $12 billion loan, following talks held in Cairo. The funds, an effort to aid an economy battered by inflation, dollar shortage, and economic stagnation, will be a three-year package designed to restore the confidence of foreign investors.

The agreement aims to “improve the functioning of foreign exchange markets, bring down the budget deficit and government debt, and to raise growth and create jobs,” IMF Egypt delegation head Chris Jarvis said, as the talks unfolded in Cairo.

What does this mean for the Egyptian economy? Loans by the IMF are frequently tied to unpopular and controversial measures to 'discipline' local economies, and in fact, in the past years – post-revolution – Egypt had turned down two agreements with the financial entity.

Analysts say that a key expectation is the exchange rate; once the central bank sees more stable reserves, the Egyptian pound is expected to float around EGP 10 per USD 1. Other measures would include controversial power subsidy cuts and modifications to the investment law aimed towards attracting investors and increasing the influx of currency.

Economists also say that the central bank will be expected to raise interest rates, introduce VAT (value-added taxation), and cut government lending to reduce liquidity and fight economic inflation. The agreement, however, is still pending both parliamentary and IMF Executive Board approvals.