In November 2016 the IMF approved a three-year, $12 billion loan to support the Egyptian Government’s comprehensive economic reform plan. This also required the international community to commit support to fill the Government of Egypt’s remaining financing gap, and in mid-2016 the G7 countries committed to provide $600m of support.
The World Bank’s share of this international support package has been provided through a series of three $1 billion Development Policy Loans from the International Bank for Reconstruction and Development (IBRD). The first two loans have already been disbursed, and the third is due for disbursement in the last quarter of 2017.
In order to obtain the IMF loan, the Government of Egypt has committed to undertake the boldest economic reforms in a generation. While necessary, these reforms will be difficult for the population in the short term, with a sharp currency devaluation leading to a short term increase in inflation. If the impact on citizens is not managed, discontent among the population may increase the political risk of the reforms, which could undermine Government commitment to them.
A loan guarantee from the UK will enable the World Bank to increase the size of its upcoming Development Policy Loan. This will support measures to protect the poor, which will mitigate the impact of the reform programme and therefore increase the likelihood that the necessary reforms will be implemented.
As a result I have today laid a Departmental Minute outlining details of a contingent liability estimated at $224 million (equivalent of £169 million) which DFID proposes to undertake, in respect of the World Bank Group. This guarantee does not involve DFID providing any resources up front. Resources will only be disbursed if Egypt defaults on its loan the risk of which is low.
The IBRD’s internal rules on loan exposure to any one country constrain the extent to which it can increase its lending to Egypt. This proposed UK guarantee will allow the IBRD to increase the size of its 2017 loan by $150 million (equivalent of £113 million). DFID’s contingent liability under this agreement is expected to be $224 million (equivalent of £169 million), covering the equivalent of £113 million of loan principal, plus the equivalent of around £56 million of interest payments, assuming current exchange rates and interest rate levels. The agreement would be in place for the expected 35 year life of the IBRD loan. The guarantee will be denominated in US Dollars to maximise the value of additional IBRD lending. As a result, the size of the contingent liability will vary depending on movements in the exchange rate between the US Dollar and Sterling. The IBRD loan will have a variable interest rate, hence the interest payment element of the liability will also vary along with movements in global interest rates.
For the guarantee to be triggered, the Government of Egypt would have to be in arrears with the IBRD for over 180 days. The risk of Egypt defaulting, and the UK guarantee being called upon, is the same as the risk of Egypt defaulting on other IBRD lending. This risk is deemed to be low. Defaults on IBRD lending are rare. There are strong incentives for Egypt to avoid a default, as this would prevent the IBRD from providing any further funding to Egypt, would halt disbursements on already agreed lending and would lead to penalty charges. In the event that the Government of Egypt does default on a loan repayment to the IBRD, and the liability is called, the UK will provide a payment to the World Bank, in proportion to the UK’s guaranteed share of the overall IBRD loan. The payment will prevent the loss on the loan from impacting on the World Bank’s other lending activities. If the liability is called, provision for any payment will be sought through the normal Supply procedure.If the Government of Egypt subsequently provides a payment to reduce its arrears, the World Bank will transfer the right to pursue and retain recoveries to the UK Government, should it wish to do so. This will avoid undermining the Bank’s preferred creditor status, which is so critical to its ability to borrow at very favourable rates from the market and pass these on to its borrowers.