The International Monetary Fund (IMF) recently approved a deal that will provide a $3bn support package to Egypt over a period of almost four years, with the agreement expected to draw in an additional $14bn in financing for the North African nation.
To find out more about the details of the IMF programme with Egypt, and the country’s expected economic performance, Daily News Egypt spoke to IMF Senior Resident Representative in Egypt Said Bakhache.
Could you give us an overview of the IMF’s programme for Egypt? What are the steps that the Egyptian government now has to take?
On 16 December, the Executive Board of the IMF approved Egypt’s request for a 46-month arrangement under the Extended Fund Facility for an amount of about $3bn. The first disbursement under the programme of about $347m will be made within the next few days. The remaining amount is expected to be disbursed over the duration of the programme in equal tranches. The IMF-supported programme is expected to catalyse additional financing from international and regional partners.
The approved arrangement supports the authorities’ home-grown reform programme, which aims to sustainably address macroeconomic vulnerabilities and promote private-sector-led growth and job creation. It is anchored on three main pillars.
First, exchange rate and monetary policies will be focused on a durable shift to a flexible exchange rate regime that would help absorb external shocks and rebuild reserves while gradually reducing inflation.
Second, continued fiscal discipline and fiscal structural policies will help maintain market confidence and ensure the downward trajectory of the debt-to-GDP ratio while strengthening the budgetary process and improving the budget composition to allow for an expansion in social spending.
Third, a broad structural reform agenda will help promote private sector investment and secure strong and inclusive medium-term growth, including by reducing the state’s footprint in the economy, levelling the playing field between state-owned enterprises and private companies, removing barriers to trade, and enhancing transparency and governance in the public sector.
Egypt has made a good start in implementing reforms in these three areas, including through the Central Bank of Egypt’s (CBE) commitment to stop intervening in the foreign exchange market, implement the agreed budget — which allows for extra social spending — and advance the state ownership policy and sale of public assets.
In the period ahead — in addition to staying the course of disciplined macro policies — it is essential that the authorities make further progress in creating the right conditions for private sector-led growth, including by moving quickly to start the implementation of the state ownership policy. It is worth noting that, over the course of the four-year programme, we will work with the authorities to define further measures that would be needed to secure this critical objective.
What are your expectations for Egypt’s debt-to-GDP ratio? What public expenditure priorities should Egypt have now?
The programme is focused on strengthening debt sustainability by putting the general government debt-to-GDP ratio on a downward path, which is projected to reach 81% by the end of FY2025/26 and below 75% by FY2027/28. This is expected to be achieved through continued fiscal discipline towards primary surpluses of 1.7%, 2.1%, and 2.3% of GDP for this fiscal year, FY2023/24, and FY2024/25 respectively, while ensuring adequate social protection spending.
Additionally, the government will strive to lengthen the maturity of domestic public debt to reduce its gross financing needs. Proceeds from the ongoing divestment programme will help strengthen the fiscal position and reduce public debt further. Domestic revenue mobilisation will be key to help support this effort by creating space for priority spending and targeted support for the vulnerable.
What do you think of Egypt’s monetary and exchange rate policies? What policies would you advise the CBE to adopt in the near future?
The objective of the exchange rate policy under the fund-supported programme is for the value of the EGP to be determined freely against other currencies, which would avoid the build-up of chronic imbalances in the demand for and supply of foreign currency in Egypt and preserve the FX reserves of the CBE. This will also entail the removal of restrictions on the financing of imports, so importers do not face delays in accessing foreign exchange and that the backlogs in clearing imports do not continue.
Under this framework, one would expect to observe two-way movements in the exchange rate, as it appreciates or depreciates in line with economic conditions. Flexibility in the exchange rate would bring several benefits. It would help Egypt’s domestic economy adjust more smoothly to external shocks, support the ability of Egyptian businesses to sell their goods and services abroad, and encourage greater investment by reducing the likelihood of large abrupt changes in the exchange rate. It would also help preserve the reserves of the CBE. Once there is confidence in the application of this framework, we expect to see stronger investment flows into Egypt.
Meanwhile, the CBE has been making progress to enhance monetary transmission, mainly by moving the subsidised lending schemes to the government and ensuring the transmission of the policy rate to other interest rates in the economy.
As a result, the CBE will be better able to use monetary policy to steer inflation to the CBE’s target range and to anchor inflation expectations. Inflation has been a global challenge this year, and Egypt is not an exception. We expect inflation to remain elevated during FY2022/23 before falling back towards the target range in subsequent years.
In addition to the monetary policy tightening in late October — which was intended to reduce pressure on prices — we commend the social measures taken by the Egyptian authorities to protect vulnerable groups for the deterioration of their purchasing power caused by inflation.
Does Egypt need more social protection programmes?
The Egyptian authorities have made very good progress in designing and implementing targeted social protection programmes. The Takaful and Karama programme is an excellent and exemplary programme because it targets the most vulnerable and thus ensures that public resources are used more efficiently for those who need them.
Under the IMF-supported programme, the authorities are taking several measures to strengthen social protection, including: (I) implementing the recently announced expansion of Takaful and Karama to cover five million households by the end of January 2023; (II) expanding the coverage of the social registry to 50 million people by the end of December 2023 to enable the government to strengthen targeting in several other social protection schemes; (III) rolling out the universal health insurance scheme and the COVID-19 vaccination programme; and (IV) extending emergency support to ration card holders and measures to protect the purchasing power of vulnerable wage earners and pensioners. These will reinforce the ongoing efforts to foster human capital formation and reduce poverty.
How can Egypt achieve economic stability and better living standards?
These are precisely the objectives of this home-grown economic programme supported by the IMF’s EFF arrangement. Economic stability is necessary to support economic activity, while structural reforms are critical to increase Egypt’s growth potential and sustainably raise the living standards of the Egyptian people.
The programme includes elements aiming to support inclusive growth and prevent the emergence of imbalances that have in the past necessitated abrupt and destabilising adjustments. Exchange rate flexibility is critical to allow the economy to absorb shocks and adjust to changes in the external environment in a non-disruptive manner, avoiding the accumulation of imbalances.
This, along with prudent monetary and fiscal policies, would help secure macroeconomic stability. Wide-ranging structural reforms are needed to strengthen the ability of the economy to grow sustainably and generate quality jobs.
As noted above, key reforms in this regard include reducing the role of the state in the economy, enabling the private sector by levelling the playing field, improving the business climate, facilitating trade, and strengthening the governance and transparency of the public sector.
How does the Ukrainian-Russian War impact MENA’s economies?
Like other parts of the world, the Middle East and North Africa (MENA) region is facing exceptional uncertainties and downside risks. The impact of the war in Ukraine on countries in the Middle East varies from one country to another depending on each country’s characteristics and conditions.
The first channel is the increase in commodity prices, including fuel and food. Egypt and commodity and food importers in general are facing large pressures on their external sector (through the cost of critical imports). In countries where price subsidies are prevalent like Egypt, the fiscal position has also come under pressure (through higher spending on subsidies).
Higher imported commodity prices have put pressure on domestic inflation. Nonetheless, in recent months inflation has broadened — meaning inflation is not just limited to food prices — which is also a concern, as it may require a stronger policy response to tame inflation.
Additionally, tightening global financial conditions has added further pressure on capital flows as well as interest payments, particularly in countries with high debt.
Now is the time to act to mitigate the cost-of-living crisis while preserving fiscal sustainability and building resilience. This is the most pressing policy priority for all countries in the region. This means:
(I) Restoring price stability by tightening monetary policy in countries where inflation is becoming broad-based or where there are signs of a de-anchoring of inflation expectations.
(II) Tackling food insecurity through decisive efforts to scale up next season’s agricultural production by securing access to fertilisers and investing in climate-resilient agriculture.
(III) Protecting the vulnerable while ensuring fiscal sustainability, with support targeted to those in need. This will help contribute to disinflation while supporting social cohesion.
Here, it is worth highlighting Egypt’s efforts in this regard; the government has provided support to the most vulnerable through an initial package of social protection and food security measures worth EGP 130bn (1.7% of GDP), including allocations for new beneficiaries under the Takaful and Karama conditional cash transfer programme, and additional support to households that was announced in July to mitigate the effects of the cost-of-living crisis.
I encourage you to read our October 2022 Regional Economic Outlook for the Middle East and North Africa, which provides much more information on the economic outlook facing the region.