by Ahmed Feteha  . Bloomberg .

Egypt has created a “well-functioning" currency market that is reflected in the pound’s current rate, the International Monetary Fund said, adding that the currency may strengthen after a period of “overshooting” since last year’s float.

The pound is trading at a “genuine equilibrium exchange rate, in the sense that as many people want to sell foreign exchange as buy foreign exchange," said Chris Jarvis, the IMF’s mission chief to Egypt, after the fund released details of the $12 billion loan approved last year -- its largest in the region. While the pound is weaker than the fund predicted, it may recover after the initial period of post-float trading, Jarvis said. “That’s our current expectation,” he said.

Egypt floated its currency in November to qualify for the IMF loan, which officials say will help raise funds and restore investor confidence. The pound lost about half its value, with prices soaring at the fastest pace in almost 12 years in December -- pushed higher by a rise in fuel prices and a new value-added tax. With many Egyptians struggling, President Abdel-Fattah El-Sisi told state media on Monday that the pound should strengthen and reach fair value in six months.

The pound strengthened 0.9 percent to 18.65 per dollar at 12:13 p.m. on Thursday in Cairo, according to data compiled by Bloomberg. Egypt’s benchmark stock index fell 3.5 percent.

The IMF expects inflation to drop in the second half of the year. When that starts to happen, interest rates will “come down to permit credit recovery,” the IMF staff said in the report presented to the lender’s board before it approved the loan.

The documents released on Wednesday, which include the Egyptian government’s letter of intent, reveal the main features of the country’s fiscal and monetary policy for the three-year term of the loan.

Time Needed

The program of economic reforms will take time to “bear fruit,” the IMF said, with growth expected to reach about 4 percent in the current fiscal year, “well below” its potential. Egypt cut its growth forecast for this fiscal year to 4 percent from 5 percent this month.

“Fiscal consolidation coupled with monetary tightening would inevitably constrain growth,” the IMF said, though output is expected to rise 5 percent to 6 percent over the medium term.

The documents “suggest that a significant fiscal squeeze is in the pipeline this year, while monetary policy will remain tight,” Jason Tuvey, Middle East economist at London-based Capital Economics, said in a report. “The economy will slow sharply and by much more than the consensus expects. But if reforms are pushed through, Egypt’s medium-term prospects should brighten.”

Egyptian officials are this week marketing as much as $2.5 billion in international bonds, hoping to secure favorable rates on the back of the IMF deal. Egypt is planning to raise as much as of $6 billion from overseas markets this year.

Reserve Boost

Gross foreign reserves are expected to reach almost $33 billion in the final year of the program, and Egypt will pay all of its arrears due to international oil companies by the end of June 2019, according to the statements.

The government is also planning to keep wage growth for millions of government workers below projected inflation, a measure that will help reduce the budget deficit to 4.7 percent of gross domestic product in the final year of the year of the program. It was 12.1 percent last fiscal year.

Egypt turned to the IMF to help raise funds and restore investor confidence after the country’s economy was hammered by years of political and social instability following the 2011 uprising against President Hosni Mubarak. Reserves slumped as foreign investors withdrew, leaving a hard currency shortage that stymied economic growth.

The crunch has eased recently as Egypt borrowed from the IMF, the World Bank, Saudi Arabia and others. The central bank is set to remove the remaining capital controls, which barred individuals from transferring more than $100,000 abroad, by the end of June, the IMF report said. A $50,000 cap on cash deposits for importing non-priority goods will also be lifted.

The second tranche of the loan is expected to be disbursed in the spring, Jarvis said.