The International Monetary Fund confirmed on Tuesday that Egypt has asked it for financial support program and said an IMF staff mission will visit Cairo for about two weeks starting July 30.
"We welcome this request, and look forward to discussing policies which can help Egypt meet its economic challenges. Our goals are to help Egypt return to economic stability and to support strong, sustainable and job-rich growth," Masood Ahmed, the IMF's Middle East director, said in a statement.
He did not provide any details of the requested program or possible funding amounts, adding that any result would be announced following the IMF mission's conclusion. Egypt's finance minister said on Tuesday that the government was seeking US$12 billion from the IMF over three years, at an annual interest rate of 1 percent to 1.5 percent.
Prime Minister Sherif Ismail ordered the central bank governor and minister of finance to complete negotiations for the programme with the IMF team that will visit Egypt, the cabinet said in a statement.
The cabinet statement, after a five-hour meeting, was the first official confirmation that talks with the IMF were under way. The statement said talks had been ongoing for three months.
"The prime minister stressed the need to cooperate with the IMF through the support program to enhance international confidence in the economy and attract foreign investment, and therefore achieve monetary and financial stability," the cabinet statement said.
Economists welcomed the news, which came after a turbulent few weeks for Egypt's currency, which has plummeted to new lows on the black market as confusion mounted over the direction of monetary policy.
"It's great. Finally," said Hany Genena, head of research at Beltone. "Confidence will be restored in the government and central bank. Secondly, we will see flotation of the pound, if not tomorrow, next week, the week after."
Genena said he expected the Cairo stock market to surge after the news and for the currency to strengthen on the black market. The black market had already strengthened slightly from lows near 13 to the dollar on Monday.
Two black market traders contacted by Reuters said they were selling dollars at about 12.80 to 12.85 pounds after the IMF deal was announced.
"I think the stock index will hit 8,000 in the next couple of days," Genena added. The benchmark EGX30 closed up 0.3 percent at 7,540 points on Tuesday.
Egypt's economy has been struggling since a mass uprising in 2011 ushered in political instability that drove away tourists and foreign investors, both major earners of foreign currency. Reserves have halved to about $17.5 billion since then.
The dollar shortage has forced Egypt to introduce capital controls that have hit trade and growth, while the value of the Egyptian pound has plummeted on the black market in recent weeks as expectations of a second devaluation this year mount.
The government has pushed ahead with its existing reform programme, including plans for value added tax (VAT) and subsidy cuts that were put on hold when global oil prices dropped.
A VAT bill is in its final stages of preparation but has faced resistance in parliament due to concerns over inflation, which has touched seven-year highs since the currency was devalued by 13 percent in March.
Egypt's ambitious home-grown fiscal reform programme formed the basis of a $3 billion three-year loan deal with the World Bank that was signed in December. But the cash has yet to be disbursed since the World Bank is waiting for parliament to ratify economic reforms including VAT.
A cabinet minister told Reuters last month that Egypt had started negotiations with the IMF and that the central bank was leading the talks.
A statement released by Capital Economics, an independent economic research company, also welcomed the news.
"If approved, this would help to plug Egypt's external financing requirement and improve the economy's growth prospects," it said. "This would make a sizeable dent in Egypt's gross external financing requirement, which we estimate to be around $25bn over the coming year."