The International Monetary Fund (IMF) approved in December 2022, a 46-month arrangement under the Extended Fund Facility (EFF) for Egypt to receive a loan of $3bn, with the agreement expected to draw in an additional $14bn in financing for the country.
According to a report published by the IMF on Tuesday, Egypt will receive the second tranche of the loan next March.
On 15 March 2023, Egypt will receive a tranche worth $347m (equivalent to 261.13 million Special Drawing Rights units), which is the same value as the first tranche it obtained after signing the loan agreement last December.
The fund explained further that first tranche was disbursed last December, following the approval of the Executive Council, at a value equivalent to $347m.
The rest of the loan will be disbursed in equal amounts of $347m (equivalent to 261.13 million Special Drawing Rights units) during March and September of each year until 2026.
The fund said that the authorities’ economic programme, supported by the proposed EFF arrangement, aims to sustainably address macroeconomic vulnerabilities and promote private-sector-led growth and job creation
The IMF explained further that the 46-month programme aims to support both short- and medium term goals and will be based on three broad pillars:
First, the exchange rate and monetary policies should focus on restoring external resilience and maintaining price stability will be critical to absorb external shocks, including the ongoing spillovers from the war, improve the functioning of the FX market, rebuild reserve buffers, and anchor inflation developments.
Second, the fiscal discipline and fiscal structural policies will 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 make room for social spending.
Third, the broad-based structural reforms will reduce the state footprint and increase the role of the private sector in the economy will focus on the gradual exit of the public sector from non-strategic sectors, levelling the playing field between state-owned enterprises (SOEs) and private companies, removing barriers to trade, and enhancing transparency and governance in the public sector.
The fund reduced its forecast for Egypt’s economic growth during the current fiscal year to 4% in its latest economic outlook released on Tuesday, compared to the 4.4% that was projected in October and the 4.8% that was projected in July and 5% in April.
The fund expects that Egypt`s GDP to reach 5.3% in the next FY 2023/2024, rising to 5.7% in FY 2024/2025, stabilizing in 5.9% during the FYs of 2025/2026, and 2026/2027, then it will be strengthen to 6% in FY 2027/2028.
Talking about the macroeconomic Outlook and Risks, The IMF said that the Medium-term prospects remain favorable provided strong programme implementation, including meaningful progress on structural reforms.
“Macroeconomic stability, a durable move to a flexible exchange rate, and the positive impact of structural reforms to improve non-price competitiveness and the business environment would boost private investment and exports, unleashing untapped growth potential,” the IMF said.
“Growth under the programme is projected to gradually rise to between 5½ and 6 percent, after short-term challenges including the impact of the spillovers from the war in Ukraine have dissipated, and as the state footprint is gradually replaced with private activity. The current account deficit would improve towards 2 percent of GDP over the medium term while reserves are rebuilt to adequate range. Inflation, anchored by data-dependent monetary policy, is expected to converge back to around 7 percent by FY2024/25. A return to a sustained primary surplus of around 2.1 percent of GDP by FY2023/24 and towards 2½ percent thereafter would ensure the reduction of general government debt to around 78 percent of GDP by FY2026/27,” according to the IMF.
The IMF stressed that baseline projections are subject to considerable uncertainty, with risks tilted to the downside.
The major risks in the near term include a greater exchange rate misalignment than assumed in the baseline, prolonged inflationary pressures that could undermine social cohesion, and financing costs remaining high with a further shortening of domestic debt maturities and limited external market access.
“Over the medium term, risks to debt sustainability include lower growth and tighter domestic and external financing conditions. The challenging external market conditions may also result in a lower build-up of reserve buffers. Potential reversion to limiting exchange rate flexibility and slower-than-expected progress on structural reforms present risks to the medium-term outlook. Meanwhile COVID-19 risks have not disappeared—Egypt’s low vaccination rate (38 percent fully vaccinated, 51 percent with at least one dose) leaves the population vulnerable to new waves of infection. Annex I contains the Risk Assessment Matrix, the fund explained.
Talking about the Monetary and Exchange Rate Policies, the IMF said that the Egyptian authorities are committed to a flexible exchange rate that adjusts to balance of payments dynamics, avoids a re-accumulation of imbalances, and supports competitiveness.
The fund said that increasing gross reserves and moving the composition away from borrowed components are key objectives under the authorities’ adjustment programme.
“Monetary policy would continue to be data dependent, firmly anchored to the CBE’s price stability mandate,” according to the fund.
The fund added that the CBE will further strengthen monetary policy transmission by ensuring full passthrough of the policy rate to the interbank market and discontinuing subsidized lending.
The IMF said that the fiscal policy will aim to reduce Egypt’s high public debt and gross financing needs through fiscal consolidation and active debt management.
The fund mentioned that the fuel price indexation mechanism will be fully implemented, with targeted compensation for the most vulnerable.
The IMF mentioned that supported by the Rapid Financing Instrument (RFI) and Stand-By Arrangement (SBA) in 2020-21, Egypt exhibited resilience to the global pandemic shock.
The fund explained further that the authorities’ timely fiscal and monetary policy responses to the crisis, supported by the 12-month SBA that ended in June 2021, balanced health and social spending with preserving fiscal sustainability while containing the disruption to economic activity. Despite initial lockdowns and a prolonged standstill in tourism, reserve buffers were rebuilt, and a positive growth rate was maintained during FY2020/21.
“While economic recovery gained momentum during FY2021/22, imbalances also started building amidst a stable exchange rate,” according to the IMF.
The report noted that the outbreak of the war in Ukraine, in addition to its impact on commodity prices, crystallized pre-existing pressures, leading the authorities to take a series of policy actions in response to the fallout.
