LONDON - The financing provided by the International Monetary Fund (IMF) will not be sufficient on its own to stabilise the US dollar and Egyptian pound exchange rate throughout the duration of the IMF programme; however, reforms will provide an anchor and maintain competitiveness, according to the Global Economic Weekly report by Bank of America Merrill Lynch (BOFAML).

The report analyses the current condition of the Egyptian economy and predicts possible changes in the near future.

The details of the IMF’s Extended Fund Facility (EFF) suggest an ambitious economic reform programme is in the works that could attract inflows to support the Egyptian pound and anchor the rate of the US dollar in the Egyptian market, said the report.

 “President Abdel Fatah Al-Sisi’s pronouncements suggest continued commitment to the reforms despite the sharp weakening of the Egyptian pound,” the report said.

The report added that the Central Bank of Egypt (CBE) may consider further rate hikes if the dollar moves closer to or above EGP 20. It also predicted the Egyptian authorities and the IMF will agree on the reforms carried out in the IMF programme in the first review due in March.

The report pointed out that November trade data suggests a 30% decline in imports year-on-year (y-o-y), narrowing the current deficit. On the other hand, the report also predicts a slowdown of growth as a result of the fiscal consolidation and rising inflation, which can increase the challenges faced by corporations and their need for adjustment. Inflation is expected to increase by 27% in April 2017 y-o-y, according to the report.

The BOFAML ruled out the possibility of any cabinet reshuffle aimed at changing the direction of policy-making and concluded the report by noting that continued implementation of reforms, as well as control of inflation and debt dynamics, is highly needed.

The market euphoria which greeted the Trump election has faded as investors decide he is less likely to reflate the US economy than they originally thought, but the International Monetary Fund remains a believer.

It has raised its forecast for US growth over the next two years by 0.5 per cent on the strength of an expected fiscal stimulus, bringing growth to 2.3 per cent this year and 2.5 per cent next, and says there is potential for growth to move much higher.

On the other side, the IMF’s confidence contrasts with its sister institution, the World Bank, which is sticking to a forecast that US growth will slow from 2.2 per cent this year to 2.1 per cent next.

World Bank economists say they have not incorporated any impact from the Trump administration’s policies in their January economic update because “their overall scope and ultimate form are still uncertain”.`

Challenged on the IMF’s optimism, the fund’s chief economist Maurice Obstfeld said last week the big change was that both the presidency and Congress were in the same hands. “It seemed very clear to us on the basis of past experience that at least some of these promise can and will be delivered on, and therefore we would be ignoring reality to say, well, everything is uncertain.

 “Everything is not uncertain. I think we know the direction of policies. What we don’t know are the specifics of those policies, and so we opted for a moderate increase in line with that uncertainty.”

The possibility of trade wars and global protectionism risked slower growth. Obstfeld said some of the Trump administration’s proposed trade policies would bring lower US growth, even without retaliation.

But Obstfeld said there was not the same “unity of view” between Congress and the presidency over trade policy as there as on fiscal policy, so the worse outcomes were not nearly as likely as some degree of fiscal expansion.