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Key Questions on Egypt
Last Updated: February 16, 2017
On August 11, 2016 the IMF announced it had reached a staff-level agreement with authorities in Egypt for a three-year Extended Fund Facility (EFF) in the amount of SDR 8.5966 billion (422 percent of quota or about US$12 billion). This agreement is subject to approval by the IMF's Executive Board, which is expected to consider Egypt's request in the coming weeks. The EFF supports the authorities' comprehensive economic reform program to restore macroeconomic stability and to support strong, sustainable and job-rich growth. The program, once approved by the Executive Board, aims to improve the functioning of the foreign exchange markets, bring down the budget deficit and government debt, and to raise growth and create jobs, especially for women and young people. It also aims to strengthen the social safety net to protect the vulnerable groups during the process of adjustment.
Read on for the key questions regarding the IMF agreement with Egypt:
- How can an IMF loan help the Egyptian people?
- What kind of loan does Egypt have?
- What measures are being considered for Egypt as part of a reform program?
- What steps will be taken to shelter the poor and vulnerable from the effects of reforms?
- Can you list the social protection measures adopted so far to help the most vulnerable?
- The focus in the program is on the most vulnerable. What about the middle class?
- Won't this loan just add to Egypt's debt and make the problem worse?
- Why is a flexible exchange rate better for Egypt's economy?
- Will a more flexible exchange rate increase inflation?
- Would the next step be a free float?
- What is the IMF views on the increase in fuel prices announced by the government?
- Does the IMF program require a reduction in food subsidies?
- Does the approval of the IMF loan depend on financing from other sources?
- How is this program different from others supported by the IMF in the region?
- Will the IMF loan help promote good governance and increase transparency in Egypt?
- How can the people of Egypt share their views on an IMF engagement with the country?
Q. How can an IMF loan help the Egyptian people?
Financial assistance from the IMF can support the country’s finances while the authorities implement an economic reform program to restore financial stability and robust, job-rich growth. In other words, it can provide a financial cushion while the country adopts changes needed to help the economy grow again, bringing prosperity to all. It can also catalyze financial support from other development partners and facilitate access to international capital markets.
Q. What kind of loan does Egypt have?
The Egyptian authorities expressed interest in a type of loan called Extended Fund Facility (EFF). This facility seeks to help authorities overcome the immediate challenges while providing a financial buffer to address some longstanding structural problems. Disbursement—or what we call tranches-- under this facility are made semi-annually, as completion of agreed targets is achieved. If approved by the Executive Board, it would support the authorities' three-year economic program and it would be repaid over a 10-year period. More details on this type of facility can be found here.
Q. What measures are being considered for Egypt as part of a reform program?
The Egyptian authorities have designed a comprehensive package of reforms to help the economy recover. Over the program period general government debt is expected to decline from about 98% of GDP in 2015/16 to about 88% of GDP in 2018/19 –via a review of expenditure and tax policies – while protecting the vulnerable. This set of measures includes, for example, introduction of the VAT, and taking a closer look at energy subsidies, which generally tend to be expensive and benefit disproportionately the well-off, and redirecting this kind of spending to immediate needs, like education and health. The reform program also aims to make Egypt's currency more flexible, strengthen competitiveness, improve the availability of foreign exchange, support exports and tourism, and attract foreign direct investment.
Q. What steps will be taken to shelter the poor and vulnerable from the effects of reforms?
Social protection is a cornerstone in the government's reform program. Budgetary savings that come from other measures will be partially spent on social protection: including specifically food subsidies and targeted social transfers. The social protection measures will preserve or increase support for insurance and medicine for the poor, subsidies for infant milk and medicine for children, health insurance for young children and female primary providers, and vocational training for youth. The government will also develop a plan to enhance the school meals program. Priority will also be given to investment in public infrastructure.
Q. Can you list the social protection measures adopted so far to help the most vulnerable?
There are different programs put in place, by the authorities, and in the phase of implementation that are mainly targeted to help the most vulnerable groups. These programs include increased food subsidies, and reforms to the social pension budget. Here are some details:
- Increased food subsidies by raising the value of the subsidy offered through food smart cards from 15 to 21 Egyptian pounds per person.
- Expanded Takaful and Karama to reach 1.7 million households and 7.3 million beneficiaries.
- Expanded social pension budget to reach another 1.7 million households, and the general pension will be increased.
- There are smaller programs targeted to specific vulnerable groups, such as more free school meals, and new gas connections for poor districts. The government will increase subsidies for infant milk and children’s medicines, and will preserve or increase vocational training for young people.
Q. The focus in the program is on the most vulnerable. What about the middle class?
The reforms government has made in recent months—introducing the value added tax (VAT), floating the pound, and cutting fuel subsidies—will in the long term help all Egyptians. The reforms will help the middle class as well as the vulnerable by raising growth and creating jobs. But there are also short-term costs.
Q. Won't this loan just add to Egypt's debt and make the problem worse?
Countries generally turn to the IMF for financing when they have run into economic difficulties. These difficulties may come about because of an external shock—for example, a sharp increase in the price of energy or other key imports, or because domestic economic policies have led to growing economic imbalances and vulnerabilities—for example, unsustainable budget deficits have been financed through borrowing, which has led to a build-up of public debt to levels that pose threats to macroeconomic stability.
Dealing with these shocks and imbalances generally entails resolute decisions by the governments: a cut-back in government spending, an increase in interest rates, or structural reforms to improve business environment and support growth and job creation. The role of IMF financing is to help countries ease the adjustment by providing a cushion of support and more time to address the underlying problem.
Q. Why is a flexible exchange rate better for Egypt's economy?
Egypt’s external situation was unsustainable under the previous exchange rate regime. It was leading to foreign exchange shortages that were hindering operation of businesses and constraining growth. It was making Egypt uncompetitive vis a vis rest of the world and it was also causing the Central Bank of Egypt (CBE) to lose reserves. The flexible exchange rate regime, where the exchange rate is determined by market forces, will improve Egypt’s external competitiveness, support exports and tourism and attract foreign investment. All of this will help foster growth, job creation and stronger external position for the country.
Q. Will a more flexible exchange rate increase inflation?
In the short term, the move to a flexible exchange rate could increase inflation as imports will become more expensive. However, we estimate this effect to be limited because to a large extent prices already reflect the more depreciated exchange rate at which many people buy foreign exchange. Moreover, the Central Bank is ready to adjust monetary policy to keep inflation under control, as evidenced by the increase in interest rates which it has just announced.
Q. Would the next step be a free float?
The aim is that the exchange rate reflects supply and demand. We do not expect continued volatility beyond this, but continued flexibility will be important, to adapt to changes in the economic environment.
Q. What is the IMF views on the increase in fuel prices announced by the government?
The Egyptian government's implementation of the second phase of the fuel subsidy reform, which the government started in July of 2014, is an important measure in the authorities' reform agenda. In the past, fuel subsidies have benefited wealthier people disproportionately. They have contributed to increased budget deficits and public debt, resulting in lower spending on key social expenditures such as health, education and infrastructure.
The implementation of the fuel subsidy reform is part of the Egyptian authorities' comprehensive reform program. It will contribute to lower budget deficits and will free up public resources for much-needed social spending on health and education and growth-enhancing investments. Part of the savings from the reform will be used to strengthen targeted social programs such as "Takaful and Karama" to protect the most vulnerable. The subsidy reform will also make investment in labor-intensive activities more attractive, thereby contributing towards higher job creation.
Q. Does the IMF program require a reduction in food subsidies?
The IMF has not called for Egypt's government to cut food subsidies. The budget for 2016/17 provided for an increase in the food subsidies based on trends in underlying cost factors at the time that the budget was passed. Since then, higher than anticipated food prices have increased the need to provide additional protection for low income households. In response to this, the authorities are planning to increase expenditure on both the food and the cash based Takaful and Karama programs. The financing of this will be achieved through savings within the government's existing fiscal program. The IMF supports the authorities in looking to reprioritize within the budget to protect vulnerable and poor households from the impact of food inflation.
Q. Does the approval of the IMF loan depend on financing from other sources?
All economic programs supported by the IMF need to be fully financed for at least the first year after Board approval, to support the country while the authorities implement reforms. In the case of Egypt, this requires financing assurances of $5-6 billion from bilateral creditors, in addition to the $4 billion to be disbursed by the IMF during the first year. The IMF will be working together with the Egyptian authorities in the coming weeks to help them secure this financing. The IMF's full commitment over the three-year period of the program amounts to $12 billion.
Q. How is this program different from others supported by the IMF in the region?
While it is true that some countries may face similar challenges, like high unemployment, the circumstances behind those challenges in each society are unique. One key lesson of development is that one size does not fit all. Every country must find its own path to dealing with economic and social challenges, even if there are important lessons from experience of other countries on which policies generally work well to achieve a given objective.
Programs that are home grown and have the full ownership of country authorities are most likely to be effectively implemented. Imposing policies from outside is generally unsuccessful. The IMF supports programs that are developed by the country authorities and designed to meet the country's needs.
Q. Will the IMF loan help promote good governance and increase transparency in Egypt?
The IMF promotes good governance and transparency when lending to a country to support an economic program. Since poor governance can be detrimental to economic activity and welfare, specific measures to combat it can be part of a program, when warranted. Also, many of the structural reforms in programs supported by the IMF across the world focus on improving governance, including through better fiscal expenditure control, publication of audited accounts of government agencies and state enterprises, streamlined and less discretionary revenue administration, and better enforcement of banking supervision.
In addition, the IMF promotes good governance by enhancing transparency in the disclosure of documents, including the publication of all staff reports, as well as compliance with international transparency standards. The IMF also assesses the governance and transparency frameworks within central banks of countries to which it lends money. In the process, it promotes sound oversight, internal control, auditing, and public financial reporting mechanisms in these critical financial institutions. In the case of Egypt, public financial management and fiscal transparency will be strengthened to improve governance and delivery of public services, enhance accountability in policymaking, and combat corruption.
Q. How can the people of Egypt share their views on an IMF engagement with the country?
people. In this process, staff members regularly engage with representatives of various civil society groups, as well as parliamentarians, academics and youth leaders through information sharing, dialogue, and consultation at both the global and national level. You can find more information here. Also, the IMF has policies in place to ensure that meaningful and accurate information—both about its own role in the global economy and the economies of its member countries—is provided to its global audiences.
We are committed to this approach in Egypt as in other countries. We also aim in our financial support for our members to improve people's living standards and protect the poor and vulnerable. Any program in support of Egypt would be guided by these principles.