## cr1717

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### Economic and political context
- Egypt faces long-standing problems of low and non-inclusive growth, high fiscal deficits, and external vulnerability.
- Labor market pressure: 700,000 young people entering the workforce every year.
- Fiscal pressures: persistently low tax revenue and excessive public spending, including on subsidies, led to high deficits and high public debt.
- External weaknesses: low non-oil exports, lack of private foreign capital, recurrent balance of payments problems, high inflation, and a fixed exchange rate that produced a significant overvaluation of the Egyptian pound and eroded international reserves.
- Real economy shocks: foreign exchange and energy shortages, an unfavorable business climate, security concerns and occasional terrorist attacks that damaged tourism.
- Political transition completed: newly elected Parliament convened in January 2016; new central bank Governor (November 2015) and new Minister of Finance (March 2016).
- Authorities request Fund support under a three-year EFF arrangement to achieve macroeconomic stabilization, strengthen the environment for private sector development, and promote inclusive growth and employment.

### Recent macroeconomic developments
- Growth and demand:
  - Growth slowdown accelerated after the 2011 revolution; Egypt’s growth averaged 2.7 percent in 2011–2016.
  - Real growth recovered to 4.2 percent in 2014/15; growth estimated at 3.8 percent in 2015/16.
  - At factor costs, real GDP in 2015/16 estimated to have grown by 2.5 percent.
- Fiscal outcomes and public debt:
  - Overall fiscal deficit widened from 7–8 percent of GDP prior to the revolution to 10–13 percent thereafter.
  - Overall fiscal deficit of the budget sector increased from 11.5 percent of GDP in 2014/15 to 12.1 percent in 2015/16.
  - Public debt increased from 70 percent of GDP in 2009/10 to 89 percent in 2014/15; general government gross debt reached almost 95 percent of GDP in 2015/16.
  - Interest payments reached almost one third of total budget spending (nearly 9 percent of GDP); interest payments increased by 0.9 percent of GDP in 2015/16.
- External and monetary:
  - Current account deficit estimated at 5.5 percent of GDP in 2015/16 (from 3.7 percent in 2014/15).
  - Reserves in June 2016: $17.1 billion, equivalent to 3.1 months of prospective imports and 76 percent of the Fund’s ARA for floating regimes and 45 percent for fixed regimes.
  - External public debt less than 20 percent of GDP.
  - Headline inflation rose from around 9 percent in early 2016 to 14.1 percent in September; core inflation increased from 9 to 13.9 percent.
  - Exchange rate: March 2016 official devaluation by 13 percent; parallel market premium widened to more than 30 percent by end-September; official exchange rate estimated overvalued by about 25 percent in real effective terms.
- Banking sector (through June 2016):
  - Regulatory capital to risk-weighted assets: 13.7 percent.
  - Nonperforming loans share: 6.8 percent, with loan loss provisioning close to 100 percent.
  - Deposits continued to grow but more slowly; banks have large exposure to government securities and a small net open foreign exchange position.
- Key shocks to sectors:
  - Tourism: arrivals declined by about 63.9 percent between October 2015 and June 2016; improved to negative 41.8 percent in July 2016; tourism sector contracted by an estimated 25 percent in fiscal year 2015/16.
  - Exports contracted by 3.1 percent of GDP; imports of goods and services fell by 2.5 percent of GDP; tourism receipts fell by about $3.6 billion, or 1.1 percent of GDP.

### Program objectives and pillars
- Overall aim: address macroeconomic vulnerabilities and promote inclusive growth and job creation under a three-year EFF arrangement.
- Four pillars:
  1. Significant policy adjustment to restore confidence and credibility:
     - Unify the foreign exchange market under a new floating exchange rate.
     - Implement prudently tight monetary policy to bring inflation down to single digits.
     - Pursue strong fiscal consolidation to ensure public debt sustainability.
  2. Strengthen social safety nets by spending an additional 1 percent of GDP on food subsidies and cash transfers to the poor.
  3. Far-reaching structural reforms to promote higher and inclusive growth, job creation, and exports: improve public finance management, simplify business regulations, strengthen governance including in public enterprises, and reform the energy sector.
  4. Mobilize fresh external financing to close financing gaps: program estimates a financing gap of about $35 billion, almost half of which results from the need to rebuild international reserves.

### Monetary and exchange rate policies and actions
- November 3, 2016 CBE actions:
  - Devalued the Egyptian pound by 32.5 percent against the US dollar and allowed the exchange rate to float.
  - CBE set the official exchange rate to EGP/$13 and removed restrictions on banks setting their buy and sell rates; eliminated the priority import list.
  - Subsequent foreign exchange auction of $100 million produced a weighted average exchange rate of EGP/$ 14.645.
  - On November 6 buy and sell rates were quoted at 15.7/16.3 per U.S. dollar.
- Monetary tightening measures:
  - CBE raised policy rates by 300 basis points on November 3.
  - Introduced sterilization of liquidity via deposit auctions with maturities of 118 days; first auction offered EGP50 billion and accepted EGP38.8 billion at an average interest rate of 17.5 percent.
  - CBE and MOF signed a protocol limiting direct CBE financing of the budget through overdrafts.
- Monetary strategy and targets:
  - Money targeting with a tight reserve money path for 2016/17; program targets accumulation of about $5 billion in reserves in 2016/17.
  - CBE to maintain short-term interest rates at levels that ensure tight liquidity conditions and be prepared to tighten again if needed.
  - Reserve management: new investment guidelines; cap allocations to foreign subsidiaries/branches of Egyptian banks at $5.6 billion.

### Fiscal consolidation, revenue and expenditure measures
- Fiscal targets and adjustment:
  - Program targets an adjustment in the primary balance of 5½ percent of GDP over three years.
  - Overall deficit projection: from 12.1 percent of GDP to 4.7 percent of GDP during the program.
  - 2016/17 budget targets a primary deficit of 0.8 percent of GDP, corresponding to fiscal consolidation of 2.6 percent of GDP.
  - General government debt projected to reach 85.8 percent of GDP by end of the program and decline to 78.3 percent of GDP by 2020/21 (Box 1 projects below 80 percent by 2020/21).
- Revenue measures:
  - Replace General Sales Tax with VAT; VAT standard rate of 13 percent in FY 2016/2017 rising to 14 percent starting in FY 2017/2018.
  - VAT expected to yield an additional 1 percent of GDP in 2016/17 compared to GST.
  - Tax revenues projected to increase by 2.5 percent of GDP during the program, mainly because of VAT.
  - Capital gains tax to be reinstated from May 2017 (expected revenue around 0.1 percent of GDP).
  - Tobacco excise increases projected to generate 0.2 percent of GDP in 2016/17.
- Expenditure measures:
  - Primary expenditure projected to decline by 3.5 percent of GDP owing to reductions in wages and subsidies.
  - Elimination of indexation on public sector bonuses and allowances will generate 0.9 percent of GDP in fiscal savings.
  - Wage bill projected to decline from 8.5 percent of GDP in 2013/2014 to 7.6 percent in 2015/16 and to 6.7 percent in 2016/17.
  - Subsidy savings budgeted: electricity subsidy savings 0.6 (percent of GDP) and fuel subsidy savings 0.6 (percent of GDP).
- Fiscal safeguards and PFM reforms:
  - Review classification of economic authorities for budget inclusion; report on outstanding state guarantees by January 31, 2017.
  - Develop medium-term budgeting framework and fiscal risk statements by March 31, 2017.
  - Road map for pension reforms by June 2017.

### Social spending, mitigation, and safety nets
- Authorities will spend an additional 1 percent of GDP on food subsidies and cash transfers to the poor in 2016/17.
- Program directs about 1 percent of GDP in fiscal savings to additional food subsidies, cash transfers to the elderly and poor families, and other targeted social programs.
- Preserve or increase spending on school meals, subsidies for infant milk and children’s medicines, vocational training for young people, social solidarity pensions, and low-cost housing provisions.
- Planned spending to support women’s labor force participation: about EGP250 million on improving availability of public nurseries and a study to improve safety of public transportation.
- Program requests staff to carry out distributional analysis and update incidence analysis by the first review.

### Energy sector reforms and EGPC
- Energy subsidy reform begun in 2014 and continuing; current scheme not well targeted.
- Electricity tariffs raised by about 40 percent in July 2016.
- Gasoline and diesel prices increased on November 3 by 35 percent on average to achieve a pre-tax cost-recovery ratio of 56 percent.
- Commitment to periodically increase pre-tax cost recovery ratio to achieve 100 percent in 2018/19.
- Commitment to eliminate electricity subsidies over the next five years.
- EGPC finances and arrears:
  - EGPC’s accumulated arrears to international oil companies: $3.6 billion (stock as of September 30, 2016).
  - Integrated plan to restore EGPC’s financial sustainability to be finalized by March 31, 2017; EGPC to gradually reduce existing arrears and not accumulate new net arrears.
  - Earlier peak arrears above $6 billion in 2014; declined to $3.6 billion at end-September 2016.
- Natural gas production and prospects:
  - Daily output fell from 7 billion cubic feet (bcf) in 2010 to about 4 bcf currently.
  - During 2016/17 gas production set to increase from 3.8 bcf to 4.9 bcf by June 2017.
  - Over the next three years gas production from these fields projected to increase to 7.7 bcf per day, which exceeds Egypt's domestic need.
  - Existing production cited as "5.2 bcf per day) and offers an excellent opportunity to save excess quantities for future generations"; ongoing offshore explorations suggest larger deposits likely.

### Financial sector stability, supervision, and resilience
- Banking system indicators:
  - Average capital adequacy ratio (June 2016): 13.7 percent.
  - Basel-recommended floor: 8.625 percent.
  - CBE-mandated ratio: 10 percent.
  - Return on equity: 19 percent.
  - Share of non-performing loans: 6.8 percent.
  - Loan-loss provisioning: close to 100 percent.
- Stress testing and risks:
  - CBE conducted extensive bank-by-bank stress tests prior to devaluation; banking system would remain sound but a few small banks could fall below the Basel-recommended 10.5 percent in a severe shock.
  - Depreciation implications on credit risk expected to be moderate given relatively small dollarization of corporate and household balance sheets.
  - Main risks: exchange rate and interest rate risks, negative net open FX positions, large holdings of government debt exposing banks to valuation losses.
- Supervisory and policy actions:
  - CBE to monitor banks closely and share data with IMF staff; requested Fund technical assistance on stress testing.
  - Regulatory strengthening: review supervisory model, implement Basel III-aligned practices, enhance transparency, governance, bank resolution, and emergency liquidity assistance frameworks.
  - Maintain access to liquidity for solvent and viable banks.

### Structural reforms for private sector growth and employment
- Constraints and objectives:
  - Unemployment: 12.7 percent (period average) in 2015/16; higher rates for youth and women; low labor force participation; weak employment intensity of growth.
  - Egypt ranks 122 out of 190 in World Bank Doing Business Indicators.
- Key structural measures and timelines:
  - New licensing law to be adopted by March 2017 to streamline industrial licensing and delegate factory permitting to local authorities.
  - New insolvency law to be adopted by June 30, 2017 to simplify bankruptcy procedures and de-criminalize insolvency.
  - Develop a collateral registry by end-March 2017 to facilitate access to finance.
  - Develop action plan to rationalize export-promotion regime and minimize non-tariff barriers by end-March 2017.
  - Implement job intermediation schemes and specialized training programs for youth.
  - Commit EGP250 million to improve public nurseries to boost women’s labor force participation.
  - Announced five-year IPO program to attract investments worth $5bn over three years, initial focus on select viable public companies; first offering expected in Q1 2017.

### Financing, IMF access, and program conditionality
- IMF access request and schedule:
  - Proposed three-year EFF arrangement access: SDR8.59657 billion (about $12 billion, or 422 percent of quota).
  - Frontloaded disbursement on Board approval: SDR 1.97005 billion (about $2.75 billion) on November 11, 2016.
  - Proposed schedule of purchases totals 8,596.57 Millions of SDR; 12,000 Millions of US Dollars.
- Financing gaps and secured pledges:
  - Staff projects financing gaps of about $35 billion for the next three years; $16.3 billion of gross financing requirements for 2016/17 in one table.
  - With proposed Fund disbursement schedule the 2016/17 financing gap narrows to $12.3 billion in one summary and a residual financing gap of $7.9 billion in another financing table pending rollovers and potential sources.
  - Secured/assured financing for first 12 months includes:
    - $2 billion from World Bank Development Policy Financing ($1 billion disbursed early September upon VAT law adoption).
    - $0.5 billion from the African Development Bank.
    - $3.2 billion rolling over loans from Afreximbank.
    - $1 billion from a UAE deposit.
    - $1.35 billion from a repo transaction with international commercial banks.
    - $950 million from planned issuance of a Eurobond.
    - $2.7 billion from a currency swap with China.
    - $250 million from Germany.
    - $150 million from the U.K.
    - $150 million from France.
    - $50 million from Japan.
    - In addition, significant project financing expected from France and Japan.
- Program monitoring and conditionality:
  - Semi-annual reviews; first review based on end-December 2016 performance criteria.
  - Performance criteria on net international reserves, net domestic assets of the CBE, the primary fiscal balance, fuel subsidies, accumulation of external debt payment arrears.
  - Indicative targets on average reserve money, tax revenues, and EGPC arrears.
  - Prior actions implemented: VAT law adoption (late August), gasoline and diesel pump prices raised by 35 percent, CBE devaluation by 32.5 percent (November 3), policy rates raised by 300 basis points, EGP50 billion offered in longer term deposit auctions.

### Debt sustainability, stress tests, and external debt outlook
- Public debt assessment:
  - "Egypt’s public debt is sustainable, but not with high probability."
  - Baseline projects debt falling from 94 percent of GDP in 2015/16 to 76 percent of GDP in 2020/21 in one assessment; other program projections cite reduction to 85.8 percent by 2018/19 and 78.3 percent by 2020/21.
  - Program targets an adjustment in the primary balance of 5½ percent of GDP over three years.
- DSA baseline assumptions (selected):
  - Real GDP growth: 4 percent in 2016/17; gradually increasing to around 5–6 percent over the medium term.
  - Inflation (GDP deflator): around 19 percent in 2016/17; projected to decline to around 7 percent over the medium term.
  - Primary balance: projected to switch from deficits to surpluses from 2017/18.
- Stress tests and downside scenarios (selected outcomes):
  - One standard deviation decline in growth for 2016/17 and 2017/18: debt-to-GDP reaches 96.4 percent in 2017/18 and falls to 83 percent in 2020/21.
  - Extending growth shock to 2020/21: debt forecast of 90 percent of GDP.
  - Combined macro-fiscal shock: debt-to-GDP would reach 101 percent by 2017/18, declining to around 90 percent thereafter.
  - Contingent liability shock (standardized 10 percent of banking assets): debt-to-GDP would exceed 100 percent in 2017/18 and decline to 86 percent in 2020/21.
- External debt and financing needs:
  - External debt (baseline percent of GDP): 2016: 14.0; 2017: 23.1; 2018: 27.1; 2019: 28.3; 2020: 27.3; 2021: 26.1.
  - External debt-to-exports ratio: 2016: 137.0; 2017: 169.0; 2018: 187.4; 2019: 193.3; 2020: 182.6; 2021: 171.4.
  - Gross external financing need (in billions of US$): 2016: 23.9; 2017: 22.0; 2018: 17.9; 2019: 14.4; 2020: 15.3; 2021: 15.1.
  - Memorandum: Gross international reserves (GIR) projections: 22,000; 29,000; 33,000; 33,435; 37,588 (selected years shown in table).
- Mitigating factors:
  - Public debt largely held by domestic financial institutions; external component about 8 percent of total debt.
  - Government deposits average around 10 percent of GDP, providing a liquidity cushion.

### Risks, implementation challenges, and mitigation
- Main risks:
  - Implementation risks from broad reform program: fiscal slippages (revenue shortfalls, higher-than-programmed wages), delays in expenditure measures, resistance from vested interests.
  - Exchange rate management attempts could cause reserve loss or reemergence of parallel market premium.
  - Insufficient monetary tightening could lead to exchange rate and inflationary pressures and reserve loss.
  - External shocks: tighter global financial conditions, lower growth in trade partners (Eurozone, Russia), worsening regional security, persistently lower energy prices affecting remittances and Gulf financing.
- Risk mitigation:
  - Strength of program policies, significant frontloading of major measures, high-level political backing, prior action implementation, and reliance on secured external financing pledges.

*IMF staff report excerpt: "1. Prospects for Medium-Term Growth", Arab Republic of Egypt.*

### 1. Prospects for Medium-

### 1. Prospects for Medium-Term Growth

### Economic and political context
- Egypt faces long-standing problems of low and non-inclusive growth, high fiscal deficits, and external vulnerability.
- Labor market pressure: 700,000 young people entering the workforce every year.
- Fiscal pressures: persistently low tax revenue and excessive public spending, including on subsidies, led to high deficits and high public debt.
- External weaknesses: low non-oil exports, lack of private foreign capital, recurrent balance of payments problems, high inflation, and a fixed exchange rate that produced a significant overvaluation of the Egyptian pound and eroded international reserves.
- Real economy shocks: foreign exchange and energy shortages, an unfavorable business climate, security concerns and occasional terrorist attacks that damaged tourism.
- Political transition completed: newly elected Parliament convened in January 2016; new central bank Governor (November 2015) and new Minister of Finance (March 2016).
- Authorities request Fund support under a three-year EFF arrangement to address immediate policy challenges and long-standing structural problems, aiming to achieve macroeconomic stabilization, strengthen the environment for private sector development, and promote inclusive growth and employment.

### Recent developments
- Growth slowdown accelerated after the 2011 revolution; GDP declined well below potential.
- Behavioral shifts: investment and exports fell; consumption supported by remittances and government current spending.
- Fiscal outcomes:
  - Overall fiscal deficit widened from 7–8 percent of GDP prior to the revolution to 10–13 percent thereafter.
  - Public debt increased from 70 percent of GDP in 2009/10 to 89 percent in 2014/15 (fiscal years end in June).
  - Interest payments reached almost one third of total budget spending (nearly 9 percent of GDP).
- Financing: deficit primarily financed through borrowing from the banking system, about one third direct financing from the central bank.
- Monetary and external pressures: accommodative monetary policy kept inflation elevated; fixed exchange rate produced overvaluation and growing balance of payments pressures.
- Reserves: foreign exchange reserves declined from nearly 7 months of imports in 2009/10 to 3½ months in 2014/15.
- 2014/15 policy adjustment measures:
  - CBE devalued the pound by 5 percent and raised interest rates.
  - Fiscal consolidation via subsidy, tax, and civil service reforms.
  - Fuel and electricity prices raised; plan for gradual phasing out of subsidies developed.
  - Subsidy bill fell by nearly 3 percentage points of GDP and the budget deficit narrowed from over 13 percent of GDP in 2013/14 to 11.5 percent in 2014/15. (Excluding grants, the adjustment was about 4 percentage points of GDP.)
  - Decision to replace General Sales Tax with VAT and draft new Civil Service Law.
  - Egypt issued a $1.5 billion Eurobond in June 2015.
  - Positive growth momentum from construction of the parallel Suez Canal, investment in power generation, and discovery of major gas fields; real growth recovered to 4.2 percent in 2014/15.
- 2015/16 developments:
  - Reform momentum slowed: income tax rates cut, capital gains tax postponed, parliamentary consideration of VAT delayed to 2016/17; planned fuel price increases deferred.
  - Subsidies still declined by 1.1 percent of GDP reflecting lower world oil prices.
  - Interest payments increased by 0.9 percent of GDP due to higher public debt.
  - 2015/16 deficit widened to 12.1 percent of GDP (budgeted 8.9 percent); general government gross debt reached almost 95 percent of GDP.
  - Growth estimated at 3.8 percent in 2015/16. (At factor costs, real GDP is estimated to have grown by only 2.5 percent, but larger net indirect taxes due to the reduction in subsidies pushed up growth at market prices.)
  - Inflation: headline inflation rose from around 9 percent in early 2016 to 14.1 percent in September; core inflation increased from 9 to 13.9 percent.
  - External: current account deficit estimated at 5.5 percent of GDP in 2015/16 (from 3.7 percent in 2014/15); balance of goods and services worsened by about 1 percent of GDP.
  - Reserves in June 2016: $17.1 billion, equivalent to 3.1 months of prospective imports and 76 percent of the Fund’s reserve adequacy metric (ARA) for floating regimes and 45 percent for fixed regimes.
  - Saudi agreement to provide oil import financing of about $4 billion per year for five years eased pressures but did not fully address foreign exchange needs.
  - External public debt remains relatively low at less than 20 percent of GDP.
- Exchange rate developments:
  - March 2016 official devaluation by 13 percent did not restore market equilibrium; by end-September parallel market premium widened to more than 30 percent; official exchange rate estimated overvalued by about 25 percent in real effective terms.
- Banking system soundness through June 2016:
  - Regulatory capital to risk-weighted assets: 13.7 percent.
  - Nonperforming loans share: 6.8 percent, with loan loss provisioning close to 100 percent.
  - Deposits continued to grow but more slowly; banks have large exposure to government securities and a small net open foreign exchange position.

### Program objectives and policies
- Program aims: address macroeconomic vulnerabilities and promote inclusive growth and job creation.
- Four pillars:
  1. Significant policy adjustment to restore confidence and credibility:
     - Unify the foreign exchange market under a new floating exchange rate to eliminate FX shortages and overvaluation, and encourage investment and exports.
     - Implement prudently tight monetary policy to keep inflation contained and bring it down to single digits, and to facilitate build-up of international reserves.
     - Pursue strong fiscal consolidation to ensure public debt sustainability.
  2. Strengthen social safety nets by spending an additional 1 percent of GDP on food subsidies and cash transfers to the poor.
  3. Far-reaching structural reforms to promote higher and inclusive growth, job creation, and exports:
     - Improve public finance management, simplify business regulations, strengthen governance including in public enterprises, and reform the energy sector.
  4. Mobilize fresh external financing to close financing gaps:
     - Program estimates a financing gap of about $35 billion, almost half of which results from the need to rebuild international reserves to adequate medium-term levels.

### Macroeconomic outlook and risks
- Medium-term prospects are favorable conditional on addressing short-term challenges and implementing growth-friendly reforms; inherent strengths include a dynamic and young population, large market size, favorable location, and access to important foreign markets.
- Positive developments supporting medium-term growth: opening of the parallel Suez Canal, investments in the energy sector, discovery of a major gas field.
- Program projections and assumptions:
  - GDP growth is projected to recover to potential growth of 5–6 percent over the medium term, helped by macro stabilization, removal of FX shortages, improved business climate, depreciation improving competitiveness, and rising investment including FDI and exports replacing debt-financed consumption.
  - Prudent monetary policy projected to bring inflation down to single digits after one-off effects of depreciation, subsidy reforms, and VAT introduction dissipate. Pass-through from exchange rate to inflation expected to be limited in the current year given imports are already priced at the parallel market rate.
  - Fiscal consolidation underpinned by improved revenue mobilization (new VAT law, better tax administration) and expenditure optimization (PFM measures, subsidy reductions, civil service reform). General government debt projected to reach 85.8 percent of GDP by the end of the program and decline to 78.3 percent of GDP by 2020/21.
  - Current account deficit expected to narrow to 3 percent of GDP by 2018/19. Export recovery hinges on exploration of new gas fields and competitiveness gains from real depreciation and reforms. Imports of investment goods expected to be partly financed by rising FDI. Financial account expected to benefit from increased access to international capital markets; overall BoP surpluses would rebuild international reserves.
  - Short-term: in 2016/17 output projected to remain well below potential; fiscal consolidation and monetary tightening will constrain growth, with structural reforms taking time to bear fruit. Elimination of FX shortages and removal of currency overvaluation expected to boost production and exports. Real GDP growth expected to be about 4 percent in 2016/17, broadly the same as the previous year.
- Risks:
  - Significant implementation risks from broad reform program: fiscal slippages due to revenue shortfalls, higher than programmed wage increases, or delays in expenditure measures could undermine debt sustainability.
  - Attempts to manage the exchange rate could cause reserve loss or reemergence of large parallel market premium.
  - Insufficient monetary tightening could lead to exchange rate and inflationary pressures and reserve loss.
  - Opposition by vested interests could derail structural reforms and weaken growth prospects.
  - External shocks: tighter or more volatile global financial conditions may raise borrowing costs; lower growth in trade partners (Eurozone, Russia) or worsening regional security would hurt trade and tourism; persistently lower energy prices could reduce remittances and financing from Gulf countries (but on the upside would help trade and fiscal balances).
- Risk mitigation: strength of program policies, significant frontloading of major measures, high-level political backing, and prior action implementation.

### Monetary and exchange rate policies
- November 3, 2016 actions by CBE:
  - Devalued the Egyptian pound by 32.5 percent against the US dollar and allowed the exchange rate to float.
  - Prior to the move, parallel market premium exceeded 50 percent at end-October; on November 1–2 the pound rebounded somewhat in the parallel market.
  - CBE set the official exchange rate to EGP/$13 and removed restrictions on banks setting their buy and sell rates, eliminated the priority import list, and allowed the exchange rate to be market-determined.
  - Subsequent foreign exchange auction of $100 million produced a weighted average exchange rate of EGP/$ 14.645.
  - On November 6 buy and sell rates were quoted at 15.7/16.3 per U.S. dollar.
- Monetary tightening measures:
  - On November 3 the CBE raised policy rates by 300 basis points.
  - Introduced sterilization of liquidity via deposit auctions with maturities of 118 days; at the first auction the CBE auctioned EGP50 billion and accepted EGP38.8 billion at an average interest rate of 17.5 percent.
  - CBE and MOF signed a protocol limiting direct CBE financing of the budget through overdrafts to prevent injection of new liquidity.

*IMF staff report excerpt: "1. Prospects for Medium-Term Growth", Arab Republic of Egypt.*

### Box 1. Prospects for Medium-Term Growth

### Box 1. Prospects for Medium-Term Growth

### Growth outlook and baseline projection
- Egypt’s growth averaged 2.7 percent in 2011–2016, sustained by domestic consumption and accompanied by widening fiscal deficits and a deteriorating external sector.
- With sound implementation of planned policies under the three-year EFF arrangement, Egypt’s growth could rise to 6 percent over the medium term.
- For comparison, annual growth averaged 5.9 percent in 2005–2010.

### Demand-side drivers and policy measures
- Growth drivers:
  - Higher investment.
  - Improvement of the net external sector.
  - Private sector development from fiscal consolidation and business-climate reforms.
  - Greater exchange rate flexibility to strengthen external competitiveness and support exports.
  - Energy subsidy reform to remove bias towards energy and capital-intensive industries, encouraging investment in labor-intensive activities and fostering job creation.
  - Energy subsidy reform will also allow the authorities to increase growth-enhancing investments and spending in social sectors (notably health and education).
- Fiscal and financial measures to support demand management and private sector activity:
  - Fiscal consolidation and reforms to improve business climate to crowd in private sector access to finance and remove constraints to starting and doing business.
  - The CBE will maintain short-term interest rates at levels that ensure tight liquidity conditions to anchor inflation expectations while permitting future easing as inflation declines.
  - In 2016/17 the program targets accumulation of about $5 billion in reserves.

### Supply-side prospects and constraints
- Manufacturing projected to recover as a unified and better functioning foreign exchange market and a gradual increase in electricity production (from investments since 2014/15) remove major constraints.
- Construction and services expected to remain buoyant and expand at dynamic rates.
- New opportunities such as recently discovered gas fields and the enlarged Suez Canal could boost medium-term growth.

### Debt sustainability and fiscal consolidation targets
- Under baseline forecasts, the interest rate-growth differential and improved primary balances will reduce public debt to below 80 percent by 2020/21.
- Program debt targets:
  - Reduce general government debt from 95 percent of GDP in 2015/16 to 86 percent of GDP in 2018/19.
  - Further reduce to 78 percent of GDP by 2020/21.
- The program targets an adjustment in the primary balance of 5½ percent of GDP over three years.
- Overall deficit projection: from 12.1 percent of GDP to 4.7 percent of GDP during the program.
- The 2016/17 budget targets a primary deficit of 0.8 percent of GDP, corresponding to fiscal consolidation of 2.6 percent of GDP.
- Revenue and expenditure measures:
  - Tax revenues projected to increase by 2.5 percent of GDP during the program, mainly because of VAT.
  - Primary expenditure projected to decline by 3.5 percent of GDP owing to reductions in wages and subsidies.
  - The new VAT is expected to yield an additional 1 percent of GDP in 2016/17 compared to the GST.
  - Elimination of indexation on public sector bonuses and allowances will generate 0.9 percent of GDP in fiscal savings.

### Monetary policy strategy and inflation
- Inflation dynamics and policy stance:
  - Depreciation, VAT, and the energy subsidy reform are estimated to contribute to inflation rising to 18 percent in 2016/17.
  - The CBE will accommodate first-round effects but maintain adequately tight monetary policy to contain secondary pressures and reduce inflation to single digits in the next three years.
  - The CBE will maintain short-term interest rates at levels that ensure tight liquidity conditions and will be prepared to tighten again if demand pressures reemerge.
- Monetary framework:
  - Monetary policy will rely on money targeting with a tight reserve money path for 2016/17, achieved by controlling credit to government and banks.
  - The program requires improved liquidity forecasting and management and strengthening of CBE independence by removal of fiscal dominance.
  - The MoF and the CBE have agreed to bring budget overdrafts below EGP75 billion in 2016/17 by securitizing about EGP250 billion and minimizing new issuances.
  - The CBE will closely monitor banks’ excess reserves and rely primarily on indirect policy tools such as deposit auctions and repo/reverse repo transactions; it may change reserve requirements if warranted.
  - The CBE will ensure that solvent and viable banks retain access to liquidity to operate uninterrupted.

### Exchange rate policy, reserves, and multiple currency practice (MCP)
- Exchange rate and reserves:
  - Authorities plan to maintain a flexible exchange rate regime and accumulate significant international reserves as buffers.
  - Program targets accumulation of about $5 billion in 2016/17.
  - By the end of the program, gross international reserves are expected to reach almost $33 billion, equivalent to 5 months of prospective imports of goods and services.
  - Once market confidence and FX supply increase, the CBE will mainly operate on the buy-side but may occasionally sell FX to prevent excessive short-term exchange rate fluctuations.
  - The CBE will consult the Fund on needed policy adjustments in the event of excessive FX sales (including direct sales to SOEs and the government).
- Multiple currency practice (MCP) and capital/FX limits:
  - Authorities are committed to eliminate the MCP; multiple price currency auctions that give rise to the MCP will help develop a well-functioning FX market.
  - The MCP will be eliminated once the interbank market is well developed.
  - The current limit of $100,000 on transfers abroad by individuals without an underlying commercial transaction and a cap of $50,000 on cash deposits for importing non-priority goods will be lifted by June 30, 2017.
  - A full analysis of the exchange system will be conducted by staff prior to the first review to verify Egypt’s compliance with Article VIII.

### Central Bank of Egypt (CBE) operations and transparency
- Reserve management and reporting:
  - The CBE will bring its investment regulations for reserve management in conformity with best international practices, ensuring reserves are invested in low risk and highly liquid instruments.
  - Reserve allocation to foreign subsidiaries and branches of Egyptian banks will be capped at the current stock of $5.6 billion.
- Communications and transparency measures:
  - The CBE will develop a new communications strategy, including publishing financial stability reports (from December 2016) and quarterly reports on monetary policy and inflation (from March 2017), and will engage more actively with media.

*IMF staff summary as presented in Box 1 of the source document.*

### 0.4 percent of GDP in 2016/17 (see ¶27).

### cr1717 - 0.4 percent of GDP in 2016/17 (see ¶27).

### Social spending and safety nets
- Authorities’ program directs about 1 percent of GDP in fiscal savings to additional food subsidies, cash transfers to the elderly and the poor families, and other targeted social programs.
- Objective: replace poorly targeted energy subsidies with programs that directly support poor households.
- Resources for programs protecting vulnerable groups (school meals; subsidies for infant milk and children’s medicines; vocational training for young people) will be preserved or increased.
- Planned spending to support women’s labor force participation: about EGP250 million on improving availability of public nurseries and a study to improve safety of public transportation.

### Energy subsidy reforms (policy actions and commitments)
- Energy subsidy reforms began in 2014 and are continuing; current scheme is not well targeted and benefits the well-off disproportionately.
- Authorities consider significant reductions in fuel subsidies during the program essential.
- Electricity tariffs were raised by about 40 percent in July 2016.
- Gasoline and diesel prices increased on November 3 by 35 percent on average to achieve a pre-tax cost-recovery ratio of 56 percent and to reduce the fuel subsidy bill.
- Authorities are prepared to further adjust fuel prices or take other measures if larger-than-projected depreciation of the pound or higher global oil prices occur.
- Commitment to periodically increase the pre-tax cost recovery ratio further on most fuel products to achieve 100 percent in 2018/19.
- Commitment to eliminate electricity subsidies over the next five years.
- Budgeted deficit-reducing measures include electricity subsidy savings 0.6 (percent of GDP) and fuel subsidy savings 0.6 (percent of GDP) (see Egypt: Fiscal Measures table).

### Fiscal safeguards and public financial management (PFM) reforms
- Main risks to fiscal consolidation: lower economic growth, higher interest rates, weaker-than-anticipated VAT performance, wage bill overruns, and obligations to non-performing state-owned enterprises.
- To preserve fiscal targets authorities will consider:
  - Better targeting of food subsidies by improving the current smart card system.
  - Accelerating energy subsidy reforms.
  - Revisiting tax exemptions and other tax expenditures.
  - Further cutting non-priority expenditures, as needed.
- PFM reform measures and timelines:
  - Review classification of economic authorities in fiscal accounts to incorporate those serving public policy objectives into the state budget.
  - Strengthen framework governing issuance and monitoring of state guarantees; prepare by January 31, 2017 a report on all outstanding state guarantees.
  - Develop by June 2017 a road map for pension reforms, including a plan to address implicit liabilities of the budget sector to the Social Insurance Fund.
  - Introduce a medium-term budgeting framework with multi-year rolling ceilings for major spending categories with greater emphasis on programmatic budgeting.
  - Prepare and present to Parliament a pre-budget statement on economic and public finance developments.
  - Develop by March 31, 2017 fiscal risk statements covering macroeconomic risks, public enterprises, debt management, contingent liabilities, pensions, and resource mobilization.

### Energy sector reforms and EGPC
- Authorities are developing a comprehensive reform agenda for the energy sector (petroleum, electricity and gas) to modernize the sector, improve regulatory framework for private investment, strengthen finances, and promote competition.
- Ministry of Petroleum retained an external consultant to conduct a diagnostic study; by March 31, 2017 authorities will develop a medium-term strategy for energy sector reform.
- EGPC financial sustainability:
  - EGPC’s finances deteriorated since 2011; accumulation of $3.6 billion in arrears to international oil companies.
  - An integrated plan for restoring EGPC’s financial sustainability will be finalized by March 31, 2017, incorporating fuel subsidy reform, efficiency, transparency, accountability measures, and a strategy to deal with existing arrears.
  - Meanwhile, EGPC will gradually reduce existing arrears and not accumulate new net arrears.

### Financial stability and banking sector
- CBE conducted extensive stress tests prior to the devaluation to confirm banks’ capital and liquidity buffers adequate to withstand devaluation and higher interest rates.
- Stress test results: banking system would remain sound, but in a severe shock capital adequacy ratio of a few small banks could fall below the Basel-recommended 10.5 percent.
- Depreciation implications on credit risk expected to be moderate given relatively small dollarization of corporate and household balance sheets.
- Data limitations: absence of sufficiently detailed bank data limits staff’s ability to fully assess risks from combined currency depreciation and higher market interest rates.
- CBE commitments:
  - Monitor banks carefully during adjustment.
  - Share banks’ financial data with IMF staff and work closely to assess sector health and perform bank-by-bank stress tests as needed.
  - Recent CBE request for Fund technical assistance on stress testing is noted positively.
- Regulatory strengthening: CBE reviewing supervisory model to implement Basel III-aligned practices, enhance transparency, monitor systemic risks, develop sophisticated stress-testing and early warning systems, and enhance governance, bank resolution, and emergency liquidity assistance frameworks.

### Structural reforms for growth and employment
- Challenges: unemployment marginally declined in 2015/16 but remains high at 12.7 percent (period average) with higher rates for youth and women; historically low labor force participation; weak employment intensity of growth.
- Structural impediments: Egypt ranks 122 out of 190 in World Bank Doing Business Indicators; excessive regulations and licensing, barriers to trade, rigid labor markets, lack of access to finance deter investment and depress potential output.
- Government measures and timelines:
  - New licensing law to be adopted by March 2017 to streamline industrial licensing (except vital public interests), make factory permitting risk-based and delegated to local authorities, simplify Civil Defense and Fire pre-approvals.
  - New insolvency law to be adopted by June 30, 2017 to simplify bankruptcy procedures and de-criminalize insolvency.
  - Develop a collateral registry to facilitate access to finance.
  - Develop action plan to rationalize export-promotion regime and minimize non-tariff barriers.
  - Implement job intermediation schemes and specialized training programs for youth.
  - Support women’s labor participation with EGP250 million for public nurseries and study public transport safety improvements.

### Program financing, IMF access, and conditionality
- Proposed three-year EFF arrangement access: SDR8.59657 billion (about $12 billion, or 422 percent of quota).
- Staff projects financing gaps of about $35 billion for the next three years.
- Proposed access distribution: evenly over three fiscal years but frontloaded in first year with disbursement of SDR 1.97005 billion (about $2.75 billion) on program approval.
- Program monitoring: semi-annual reviews; first review based on performance at end-December 2016.
- Performance criteria set on net international reserves, net domestic assets of the CBE, the primary fiscal balance, fuel subsidies, accumulation of external debt payment arrears; indicative targets on average reserve money, tax revenues, and EGPC arrears.
- Prior actions implemented: VAT law adopted in late August; pump prices on gasoline and diesel raised by 35 percent on average (achieving average pre-tax price-to-cost ratio of about 56 percent); CBE devalued exchange rate by 32.5 percent on November 3; policy interest rates raised by 300 basis points; EGP50 billion offered in longer term deposit auctions.
- 2016/17 financing: with proposed Fund disbursement schedule the 2016/17 financing gap narrows to $12.3 billion. Financing assurances for first 12 months secured as follows:
  - $2 billion from World Bank Development Policy Financing ($1 billion disbursed in early September upon adoption of the VAT law).
  - $0.5 billion from the African Development Bank.
  - $3.2 billion from rolling over loans from Afreximbank.
  - $1 billion from a UAE deposit.
  - $1.35 billion from a repo transaction with international commercial banks.
  - $950 million from planned issuance of a Eurobond.
  - $2.7 billion from a currency swap with China.
  - $250 million from Germany.
  - $150 million from the U.K.
  - $150 million from France.
  - $50 million from Japan.
  - In addition, significant project financing expected from France and Japan.
- Note: financing gaps for 2017/18 and 2018/19 are much smaller with good prospects for coverage through multilateral support, rollovers, and limited fresh financing.

### Staff appraisal, program aims, and risks
- Staff identifies three interlinked problems: urgent balance of payments problem, rising public debt, and low growth with high unemployment.
- Program aims:
  - Exchange rate depreciation and greater flexibility to improve balance of payments, sustain reserves, reduce vulnerability, and promote exports.
  - Budget measures (including VAT and resumption of fuel subsidies reform) to reduce deficit, put debt on a declining path, and strengthen social safety nets.
  - Monetary policy geared to containing and reducing inflation.
  - Structural reforms to improve business environment, raise potential growth, and create jobs; education and female labor participation reforms to make growth more inclusive.
- Program is a departure from past policies: exchange rate move, subsidy reforms, civil service reform; constitutes transformation in relationship with the Fund.
- Key risks and implementation challenges:
  - Potential pressure on CBE to limit exchange rate flexibility.
  - Volatility and uncertainty as exchange rate liberalization takes time to bear fruit.
  - Pressure to weaken fiscal policy must be resisted to contain inflation and public debt.
  - Subsidy reform is essential but difficult; November 2016 fuel price increases were significant yet barely enough given world oil price increases and pound depreciation.
  - Further significant increases in energy prices will be needed to achieve goal of eliminating most subsidies in coming years.
  - Structural reform will take years and may be at risk from vested interests.
- External risks: domestic security vulnerabilities to terrorism; spillovers from neighboring crises; as Egypt re-engages globally, global financial risks and performance of trading partners will matter more.
- Importance of external financial support: World Bank, African Development Bank, China, UAE, and G7 countries critical for closing financing gap and program viability.

### Key macro-fiscal and balance-sheet statistics (select figures cited)
- Social protection and fiscal reallocations: about 1 percent of GDP directed to targeted social programs.
- Electricity tariff increase: about 40 percent (July 2016).
- Fuel price increase: 35 percent on November 3; pre-tax cost-recovery ratio achieved about 56 percent; target 100 percent in 2018/19.
- EGPC arrears: $3.6 billion.
- CBE actions on November 3: exchange rate devaluation by 32.5 percent; policy interest rates raised by 300 basis points; EGP50 billion in longer term deposit auctions.
- IMF access request: SDR8.59657 billion (about $12 billion, or 422 percent of quota); frontloaded disbursement SDR 1.97005 billion (about $2.75 billion).
- Financing gaps: staff projects about $35 billion over next three years; 2016/17 financing gap narrows to $12.3 billion with Fund schedule.
- Unemployment rate (period average): 12.7 percent in 2015/16.
- Program social spending: Takaful and Karama cash transfer programs listed in measures with a deficit impact of -0.1 (percent of GDP) in the Egypt: Fiscal Measures summary.
- Planned nursery spending to support women: EGP250 million.

*Source: cr1717 - 0.4 percent of GDP in 2016/17 (see ¶27).*

### 99.0    Sept

### cr1717 - 99.0    Sept

### Profitability
- Return on assets: 0.8; 1.0; 1.0; 1.0; 1.0; 1.3; 1.3 (Sept)
- Return on average equity: 13; 14.3; 14.3; 13.9; 14.5; 18.9; 18.9 (Sept)
- Source: Central Bank of Egypt.

### Capacity to Repay the Fund (2013/14–2020/21)
- Fund repurchases and charges (Millions of SDRs): 0.0; 0.0; 0.1; 26.3; 65.0; 144.6; 193.5; 357.0
- Repurchases (Millions of SDRs): 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 164.2
- Charges and fees (Millions of SDRs): 0.0; 0.0; 0.1; 26.3; 65.0; 144.6; 193.5; 192.8
- Fund repurchases and charges (Millions of US$): 0.0; 0.0; 0.1; 36.8; 90.7; 201.8; 270.1; 498.3
- Percent of exports of goods and nonfactor services: 0.0; 0.0; 0.0; 0.0; 0.1; 0.2; 0.4; 0.5; 0.8
- Percent of total debt service: 0.0; 0.0; 0.0; 0.0; 0.0; 0.1; 0.1; 0.2; 0.3
- Percent of quota: 0.0; 0.0; 0.0; 0.0; 1.3; 3.2; 7.1; 9.5; 17.5
- Percent of gross international reserves: 0.0; 0.0; 0.0; 0.0; 0.2; 0.3; 0.6; 0.8; 1.3
- Fund credit outstanding (Millions of SDRs): 0; 0; 0; 2,866; 5,731; 8,597; 8,597; 8,432
- Fund credit outstanding (Millions of US$): 0; 0; 0; 4,000; 8,000; 12,000; 12,000; 11,771
- Fund credit outstanding as percent of exports of goods and nonfactor services: 0.0; 0.0; 0.0; 10.1; 18.1; 24.3; 22.0; 19.6
- Fund credit outstanding as percent of quota: 0.0; 0.0; 0.0; 140.7; 281.3; 422.0; 422.0; 413.9
- Fund credit outstanding as percent of gross international reserves: 0.0; 0.0; 0.0; 18.2; 27.6; 36.4; 35.9; 31.3
- Memorandum items:
  - Exports of goods and nonfactor services (Millions of US$): 43,556; 43,870; 34,784; 39,482; 44,279; 49,471; 54,452; 60,161
  - Debt service (Millions of US$): 141,972; 176,897; 153,028; 125,032; 146,090; 161,009; 173,302; 180,502
  - Quota (Millions of SDRs, end of period): 943.7; 943.7; 2,037.1; 2,037.1; 2,037.1; 2,037.1; 2,037.1; 2,037.1
  - Quota (Millions of US$ at eop exchange rate): 613.96; 671.8; 1,447.1; 1,459.3; 1,459.3; 1,459.3; 1,459.3; 1,459.3
  - Gross international reserves (Millions of US$): 16,289; 19,549; 17,097; 22,000; 29,000; 33,000; 33,435; 37,588

- Notes:
  - Fiscal year starts on July 1 and ends on June 30.
  - Assumes repurchases are made on obligations schedule.
  - Debt service includes interest on the entire debt stock and amortization of medium- and long-term debt.
  - Quota changed from 943.7 to 2037.1 millions SDRs effective as of February 2016.

### External Financing Requirement and Sources (2014/15–2020/21) (In billions of US$, unless otherwise indicated)
- Gross financing requirements: 17.0; 24.0; 21.6; 18.1; 14.7; 15.5; 15.4
- Current account deficit: 12.2; 18.7; 14.9; 13.6; 10.1; 10.0; 9.3
  - Of which: Net interest payments: 0.4; 0.4; 1.0; 1.1; 1.1; 0.6; 0.5
- Maturing short-term debt: 2.6; 2.7; 2.3; 2.4; 2.6; 2.8; 3.1
  - Private sector: 2.6; 2.7; 2.3; 2.4; 2.6; 2.8; 3.1
  - Public sector: 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0
- Amortization of medium and long-term debt: 2.3; 2.7; 4.5; 2.1; 1.9; 2.6; 3.0
  - Private sector: 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0
  - Public sector: 2.2; 2.6; 2.4; 1.9; 1.7; 2.4; 2.8
- MLT to external official creditors: 2.2; 2.6; 2.4; 1.9; 1.7; 2.4; 2.8
  - IMF: 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0
  - To other official creditors: 2.2; 2.6; 2.4; 1.9; 1.7; 2.4; 2.8
- Sources of financing: 17.0; 27.8; 5.6; 9.2; 6.4; 16.2; 16.0
  - Foreign direct investment (net): 6.1; 6.7; 9.4; 10.4; 11.5; 11.9; 12.9
  - Roll-over of short-term debt: 2.7; 2.3; 2.4; 2.6; 2.8; 3.1; 3.1
    - Private sector: 2.7; 2.3; 2.4; 2.6; 2.8; 3.1; 3.1
      - Bank: 1.7; 1.4; 1.5; 1.7; 1.8; 2.0; 2.0
      - Nonbank: 1.3; 1.1; 1.2; 1.3; 1.4; 1.5; 1.5
  - Medium- and long-term borrowing: 1.5; 3.0; 7.3; 9.4; 6.1; 6.2; 6.4
    - Private sector: 0.2; 0.9; 0.0; 0.0; 0.0; 0.0; 0.0
    - Public sector: 1.3; 2.1; 7.3; 9.4; 6.1; 6.2; 6.4
      - From private creditors: 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0
      - From official creditors: 1.3; 2.1; 7.3; 9.4; 6.1; 6.2; 6.4
  - Borrowing from IMF (gross): 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0
  - Borrowing from other official creditors: 1.3; 2.1; 7.3; 9.4; 6.1; 6.2; 6.4
  - Other net capital flows: 12.3; 13.4; -7.3; -5.0; -8.9; -4.6; -2.2
    - Of which: portfolio investment: -0.6; -1.1; 0.0; 2.0; 3.0; 1.1; 3.0
  - Change in reserves (- increase): -3.3; 2.5; -4.9; -7.0; -4.0; -0.4; -4.2
  - Change in arrears ("-" indicates decrease): -2.4; 0.0; -1.2; -1.2; -1.1; 0.0; 0.0
- Net financing gap: 0.0; 0.0; 16.0; 8.9; 8.2; 0.0; 0.0
- Gross financing gap: 0.0; 0.0; 16.3; 9.4; 8.9; 0.0; 0.0
- Prospective financing:
  - Net use of Fund resources: 0.0; 0.0; 4.0; 4.0; 4.0; 0.0; 0.0
  - Other IFIs: 0.0; 0.0; 5.7; -1.2; 0.0; 0.0; 0.0
    - World Bank: 0.0; 0.0; 2.0; 1.0; 0.0; 0.0; 0.0
    - African Development Bank: 0.0; 0.0; 0.5; 0.5; 0.0; 0.0; 0.0
    - African Export Import Bank: 0.0; 0.0; 3.2; -2.7; 0.0; 0.0; 0.0
    - China: 0.0; 0.0; 2.7; 0.0; 0.0; 0.0; 0.0
    - France: 0.0; 0.0; 0.2; 0.0; 0.0; 0.0; 0.0
    - Germany: 0.0; 0.0; 0.3; 0.0; 0.0; 0.0; 0.0
    - Japan: 0.0; 0.0; 0.1; 0.0; 0.0; 0.0; 0.0
    - United Arab Emirates: 0.0; 0.0; 1.0; 0.0; 0.0; 0.0; 0.0
    - United Kingdom: 0.0; 0.0; 0.2; 0.0; 0.0; 0.0; 0.0
  - Eurobond issuance: 0.0; 0.0; 1.0; 0.0; 0.0; 0.0; 0.0
  - International bank financing: 0.0; 0.0; 1.4; -1.4; 0.0; 0.0; 0.0
- Residual financing gap: 0.0; 0.0; 0.0; 7.9; 4.9; 0.0; 0.0
- Potential sources of financing: 0.0; 0.0; 0.0; 5.4; 4.9; 0.0; 0.0
  - Rollover of African Export Import Bank debt: 0.0; 0.0; 0.0; 3.2; 0.0; 0.0; 0.0
  - Rollover of GCC deposits: 0.0; 0.0; 0.0; 2.2; 4.9; 0.0; 0.0
- Memorandum items:
  - Gross international reserves (GIR): 19.5; 17.1; 22.0; 29.0; 33.0; 33.4; 37.6
  - External debt: 47.2; 47.6; 66.0; 82.3; 94.9; 98.7; 102.4

### Proposed Schedule of Purchases Under the Extended Arrangement (Table 13)
- November 11, 2016: 1,970.05 Millions of SDR; 2,750 Millions of US Dollars; 96.7 percent of Quota; Condition: Board approval of the EFF
- March 15, 2017: 895.48 Millions of SDR; 1,250 Millions of US Dollars; 44.0 percent of Quota; Condition: First review and end-December 2016 performance criteria
- November 11, 2017: 1,432.76 Millions of SDR; 2,000 Millions of US Dollars; 70.3 percent of Quota; Condition: Second review and end-June 2017 performance criteria
- March 15, 2018: 1,432.76 Millions of SDR; 2,000 Millions of US Dollars; 70.3 percent of Quota; Condition: Third review and end-December 2017 performance criteria
- November 11, 2018: 1,432.76 Millions of SDR; 2,000 Millions of US Dollars; 70.3 percent of Quota; Condition: Fourth review and end-June 2018 performance criteria
- March 15, 2019: 1,432.76 Millions of SDR; 2,000 Millions of US Dollars; 70.3 percent of Quota; Condition: Fifth review and end-December 2018 performance criteria
- Total: 8,596.57 Millions of SDR; 12,000 Millions of US Dollars; 422.0 percent of Quota
- Memorandum items:
  - Quota (SDR, million): 2037.1
  - USD/SDR exchange rate: 1.3959

### Public Debt Sustainability Analysis (DSA) — Key Findings and Projections
- Overall assessment:
  - "Egypt’s public debt is sustainable, but not with high probability."
  - Baseline projects debt falling from 94 percent of GDP in 2015/16 to 76 percent of GDP in 2020/21.
  - DSA has been shared with authorities who are broadly in agreement with its findings.

- Baseline scenario assumptions:
  - Real GDP growth: 4 percent in 2016/17; gradually increasing to around 5–6 percent over the medium term.
  - Inflation (GDP deflator): around 10 percent in 2015/16; around 19 percent in 2016/17; projected to decline to around 7 percent over the medium term.
  - Primary balance: projected to switch from deficits to surpluses from 2017/18 based on a considerable adjustment program.
    - Expenditure measures: (i) controlling the public sector wage bill; (ii) implementing the next phase of energy subsidy reform; and (iii) improving the targeting of social transfers.
    - Revenue measures: (i) introduction of a VAT at a higher rate than the current GST; (ii) improvements in tax administration; and (iii) ensuring appropriate dividends are paid to government by profitable public agencies.
  - Investment boost sources: public investment in social and economic infrastructure; large investments in the energy sector; discovery of a major gas field.

- Risks and sensitivity:
  - Baseline projections are ambitious with downside risks; Egypt’s forecasts tend to be systematically optimistic.
  - Growth shock:
    - A one standard deviation decline in growth for 2016/17 and 2017/18: debt-to-GDP reaches 96.4 percent in 2017/18 and falls to 83 percent in 2020/21.
    - Extending the growth shock to 2020/21: debt forecast of 90 percent of GDP.
  - Macro-fiscal shock (simultaneous shocks to growth, interest rate, and primary balance): debt-to-GDP would reach 101 percent by 2017/18, declining to around 90 percent thereafter.
  - Contingent liability shock (standardized shock of 10 percent of banking assets): debt-to-GDP would exceed 100 percent in 2017/18 and decline to 86 percent in 2020/21.
  - Fan charts:
    - Symmetric fan chart width around 25 percent of GDP (equal-probability upside and downside).
    - Asymmetric fan chart restricts upside shocks to growth and primary balance to zero, reflecting risks skewed to the downside.

- Debt profile and market perception:
  - Public debt in foreign currency and held by non-residents is below the lower risk-assessment benchmark.
  - External financing needs slightly above the lower risk-assessment benchmark.
  - Sovereign spreads are slightly above the upper risk-assessment benchmark, indicating increased risk perception by international capital market participants.

- Mitigating factors:
  - Investor base: debt largely held by domestic financial institutions; external component about 8 percent of total debt; significant share of domestic debt held by the CBE.
  - Buffers: government deposits average around 10 percent of GDP, implying a markedly lower public debt-to-GDP ratio on a net basis and some liquidity cushion.

### Stress Tests and Alternative Scenarios — Selected Assumptions and Results
- Baseline underlying assumptions (selected years 2016–2021):
  - Real GDP growth: 3.8; 4.0; 4.8; 5.5; 5.8; 6.0
  - Inflation: 10.1; 19.0; 13.3; 9.6; 7.0; 7.1
  - Primary balance: -3.9; -2.6; -0.5; 1.0; 1.4; 1.5
  - Effective interest rate: 10.3; 16.5; 14.7; 11.4; 9.9; 8.5

- Stress test scenarios (examples of altered assumptions):
  - Primary Balance Shock (alternative values shown for some years): Primary balance: -8.0; -5.5; -1.4; 0.6; 1.1; 1.2
  - Real GDP Growth Shock (alternative path): Real GDP growth: 3.8; 1.8; 2.6; 5.5; 5.8; 6.0
  - Real Interest Rate Shock (effective interest rate): 10.3; 16.5; 15.7; 12.4; 11.0; 9.5
  - Real Exchange Rate Shock (inflation adjustment example): Inflation: 10.1; 26.7; 13.3; 9.6; 7.0; 7.1
  - Combined Shock and Contingent Liability Shock include larger deviations in primary balance and effective interest rate, with contingent liability cases showing primary balance declines (e.g., -5.7 in 2017 under one table).

- Alternative scenarios displayed:
  - Historical Scenario: Real GDP growth around 3.8–4.3; Primary Balance -8.0 to -4.4; Effective interest rate declines from 10.3 to 6.5 by 2021.
  - Constant Primary Balance Scenario: Primary Balance held at -8.0 for all years 2016–2021; Real GDP growth as per baseline; Effective interest rate shown declining modestly.

- Stress-test outputs (graphical summaries in source):
  - Gross Nominal Public Debt (in percent of GDP) under baseline and various shocks (Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock, Real Exchange Rate Shock, Combined Macro-Fiscal Shock, Contingent Liability Shock).
  - Public Gross Financing Needs (in percent of GDP) under baseline and shocks.
  - Composition of public debt by maturity (Medium and long-term vs Short-term) and by currency (Local currency-denominated vs Foreign currency-denominated) across projection period.

*Source: Central Bank of Egypt; and IMF staff estimates and projections.*

### Annex II. External Debt Sustainability

### Annex II. External Debt Sustainability

### Framework, 2011–2021 (In percent of GDP, otherwise indicated)
- Baseline: External debt
  - 2011: 14.1
  - 2012: 12.5
  - 2013: 15.1
  - 2014: 15.3
  - 2015: 14.3
  - 2016: 14.0
  - 2017: 23.1
  - 2018: 27.1
  - 2019: 28.3
  - 2020: 27.3
  - 2021: 26.1
- Debt-stabilizing non-interest current account 6/: -5.8
- Change in external debt (line 2)
  - 2011: -0.6
  - 2012: -1.6
  - 2013: 2.7
  - 2014: 0.1
  - 2015: -1.0
  - 2016: -0.3
  - 2017: 9.1
  - 2018: 4.0
  - 2019: 1.2
  - 2020: -1.0
  - 2021: -1.2
- Identified external debt-creating flows (4+8+9) (line 3)
  - 2011: 1.9
  - 2012: 2.7
  - 2013: 0.0
  - 2014: -1.7
  - 2015: 0.7
  - 2016: 3.4
  - 2017: 1.3
  - 2018: -0.7
  - 2019: -2.7
  - 2020: -2.3
  - 2021: -3.2
- Current account deficit, excluding interest payments (line 4)
  - 2011: 2.2
  - 2012: 3.5
  - 2013: 2.0
  - 2014: 0.5
  - 2015: 3.5
  - 2016: 5.3
  - 2017: 4.7
  - 2018: 4.0
  - 2019: 2.6
  - 2020: 2.5
  - 2021: 2.1
- Deficit in balance of goods and services (line 5)
  - 2011: 5.3
  - 2012: 8.0
  - 2013: 6.4
  - 2014: 8.4
  - 2015: 8.5
  - 2016: 9.1
  - 2017: 9.3
  - 2018: 8.8
  - 2019: 7.2
  - 2020: 6.9
  - 2021: 6.2
- Exports (line 6)
  - 2011: 19.6
  - 2012: 16.6
  - 2013: 17.2
  - 2014: 14.5
  - 2015: 13.3
  - 2016: 10.2
  - 2017: 13.7
  - 2018: 14.5
  - 2019: 14.7
  - 2020: 15.0
  - 2021: 15.2
- Imports (line 7)
  - 2011: 24.9
  - 2012: 24.6
  - 2013: 23.6
  - 2014: 22.9
  - 2015: 21.7
  - 2016: 19.3
  - 2017: 22.9
  - 2018: 23.3
  - 2019: 21.9
  - 2020: 21.8
  - 2021: 21.4
- Net non-debt creating capital inflows (negative) (line 8)
  - 2011: 0.5
  - 2012: 0.5
  - 2013: -1.8
  - 2014: -1.7
  - 2015: -1.7
  - 2016: -1.6
  - 2017: -3.2
  - 2018: -4.1
  - 2019: -4.3
  - 2020: -3.6
  - 2021: -4.0
- Automatic debt dynamics 1/ (line 9)
  - 2011: -0.8
  - 2012: -1.2
  - 2013: -0.2
  - 2014: -0.6
  - 2015: -1.2
  - 2016: -0.3
  - 2017: -0.2
  - 2018: -0.6
  - 2019: -0.9
  - 2020: -1.3
  - 2021: -1.3
- Contribution from nominal interest rate (line 10)
  - 2011: 0.2
  - 2012: 0.2
  - 2013: 0.3
  - 2014: 0.2
  - 2015: 0.2
  - 2016: 0.2
  - 2017: 0.5
  - 2018: 0.5
  - 2019: 0.4
  - 2020: 0.3
  - 2021: 0.3
- Contribution from real GDP growth (line 11)
  - 2011: -0.2
  - 2012: -0.3
  - 2013: -0.3
  - 2014: -0.3
  - 2015: -0.6
  - 2016: -0.5
  - 2017: -0.7
  - 2018: -1.1
  - 2019: -1.4
  - 2020: -1.5
  - 2021: -1.5
- Contribution from price and exchange rate changes 2/ (line 12)
  - 2011: -0.8
  - 2012: -1.2
  - 2013: -0.2
  - 2014: -0.5
  - 2015: -0.8
  - 2016: -0.3
  - 2017: [data truncated in source]
- Residual, incl. change in gross foreign assets (2-3) 3/ (line 13)
  - 2011: -2.5
  - 2012: -4.3
  - 2013: 2.6
  - 2014: 1.8
  - 2015: -1.7
  - 2016: -3.7
  - 2017: 7.9
  - 2018: 4.7
  - 2019: 3.9
  - 2020: 1.3
  - 2021: 2.0
- External debt-to-exports ratio (in percent)
  - 2011: 72.0
  - 2012: 75.3
  - 2013: 88.2
  - 2014: 105.7
  - 2015: 107.6
  - 2016: 137.0
  - 2017: 169.0
  - 2018: 187.4
  - 2019: 193.3
  - 2020: 182.6
  - 2021: 171.4
- Gross external financing need (in billions of US dollars) 4
  - 2011: 11.2
  - 2012: 14.9
  - 2013: 11.3
  - 2014: 11.6
  - 2015: 18.1
  - 2016: 23.9
  - 2017: 22.0
  - 2018: 17.9
  - 2019: 14.4
  - 2020: 15.3
  - 2021: 15.1
- Gross external financing need (in percent of GDP)
  - 2011: 4.5
  - 2012: 5.4
  - 2013: 4.0
  - 2014: 3.8
  - 2015: 5.5
  - 2016: [value truncated in source]
- Scenario with key variables at their historical averages 5/
  - 2011: 14.0
  - 2012: 13.7
  - 2013: 13.3
  - 2014: 13.0
  - 2015: 10.4
  - 2016: 8.6
  - 2017: -4.3

Notes and definitions (preserved from source)
- 1/ Derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.
- 2/ The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).
- 3/ For projection, line includes the impact of price and exchange rate changes.
- 4/ Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.
- 5/ The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.
- 6/ Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

### Key Macroeconomic Assumptions Underlying Baseline (Historical average, Standard deviation)
- Real GDP growth (in percent)
  - Historical average and projections (values in source):
    - 1.8; 2.2; 2.1; 2.2; 4.2; 4.3; 2.2; 3.8; 4.0; 4.8; 5.5; 5.8; 6.0
- GDP deflator in US dollars (change in percent)
  - 5.8; 8.9; 1.4; 3.3; 5.3; 8.8; 4.7; -0.7; -18.6; 1.2; 4.4; 2.0; 2.3
- Nominal external interest rate (in percent)
  - 1.6; 1.5; 2.2; 1.7; 1.4; 1.8; 0.3; 1.6; 2.8; 2.2; 1.8; 1.0; 1.0
- Growth of exports (US dollar terms, in percent)
  - 3.9; -5.7; 7.3; -11.1; 0.7; 5.5; 15.0; -20.7; 13.5; 12.1; 11.7; 10.1; 10.5
- Growth of imports (US dollar terms, in percent)
  - 8.1; 10.0; -0.8; 2.6; 4.2; 9.9; 14.6; -8.4; 0.5; 7.6; 3.8; 7.5; 6.6
- Current account balance, excluding interest payments
  - -2.2; -3.5; -2.0; -0.5; -3.5; -1.0; 2.1; -5.3; -4.7; -4.0; -2.6; -2.5; -2.1
- Net non-debt creating capital inflows
  - -0.5; -0.5; 1.8; 1.7; 1.7; 3.4; 4.1; 1.6; 3.2; 4.1; 4.3; 3.6; 4.0

### Bound Tests (External debt in percent of GDP)
- Presentation notes from source:
  - Shaded areas represent actual data.
  - Individual shocks are permanent one-half standard deviation shocks.
  - Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented.
  - Ten-year historical average for the variable is also shown.
  - For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.
  - Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.
  - One-time real depreciation of 30 percent occurs in 2010 (noted in figure caption).
- Selected scenario labels and baseline comparison points (values shown in figures)
  - Interest rate shock: Baseline 26
  - Historical: 9 (figure label)
  - Growth shock: Baseline 26; Historical: 27 (figure label)
  - Non-interest current account shock: Baseline 26; CA shock 31 (figure label)
  - Combined shock 3/: Combined shock 29; Combined shock 30 (figure labels)
  - 30% depreciation: Baseline 26; 30% depreciation 35 (figure labels)
  - Gross financing need under baseline (right scale) shown in figure (values presented graphically in source)

### Selected findings and indicators from text around the DSA and program context
- Tourism: arrivals declined by about 63.9 percent between October 2015 and June 2016; improved to negative 41.8 percent in July 2016; tourism sector contracted by an estimated 25 percent in fiscal year 2015/16.
- Inflation: CPI inflation averaged 10.1 percent in 2015/16 (compared to 11 percent a year ago); end-of-period CPI inflation increased to 14.1 percent in September 2016; core inflation rose from 8 percent in 2014/15 to 13.9 percent in September 2016.
- External position: current account deficit widened to 5.5 percent of GDP in 2015/16 from 3.7 percent in 2014/15.
  - Imports of goods and services fell by 2.5 percent of GDP.
  - Exports contracted by 3.1 percent of GDP.
  - Tourism receipts fell by about $3.6 billion, or 1.1 percent of GDP.
  - Gross international reserves declined by about $2.5 billion from 3.6 months of prospective imports in 2014/15 to 3.1 months in 2015/16.
- Fiscal: overall fiscal deficit of the budget sector increased from 11.5 percent of GDP in 2014/15 to 12.1 percent in 2015/16.

*International Monetary Fund — Annex II. External Debt Sustainability (Egypt), extracted from source content provided.*

### 8.9 percent of GDP. Because of the delays in implementing some of the main planned reforms

### cr1717 - 8.9 percent of GDP. Because of the delays in implementing some of the main planned reforms

### Fiscal and macro outcomes
- Revenues fell short of expectations because of delays in implementing some of the main planned reforms including the VAT, postponement of the capital gains tax, the unification of income tax rates and slowdown in economic activities.
- General government gross debt increased to an estimated 94.6 percent of GDP.
- Objective: reduce general government gross debt from the 94.6 percent of GDP in 2015/16 to about 85.8 percent of GDP by 2018/19 and to 78.2 percent by 2020/21.
- Budget path: move from the budget sector primary fiscal deficit of 3.4 percent of GDP in 2015/16 to a surplus of 2.1 percent of GDP in 2018/19 and broadly maintain those surpluses through 2020/21.
- 2016/17 budget (approved by Parliament in late June) targets a primary deficit of 0.8 percent of GDP (frontloaded adjustment).

### Monetary and exchange rate policies
- Exchange rate regime:
  - On November 3 a flexible exchange rate regime was adopted (prior action).
  - Banks allowed to buy and sell FX at their own rates; priority imports lists eliminated.
  - CBE will only participate in trading sessions sporadically to minimize disorderly exchange rate movements.
- Monetary tightening accompanying regime change:
  - Policy rates raised by 300 basis points.
  - Removed EGP38.8 billion of the liquidity surplus via newly introduced deposit auctions of 118-day maturities.
- Monetary policy objectives and framework:
  - Seek to control and gradually reduce inflation to single digits over the medium term.
  - Monetary stance preemptively tightened before moving to flexible exchange rate and excess liquidity sterilized.
  - As inflation moderates, CBE envisages a measured easing; will delay loosening or tighten further if demand pressures persist.
  - Monetary policy framework during the program period will be based on money targeting. Reserve money will be an indicative target.
  - Monetary operations will rely on indirect instruments (deposit auctions, standing facilities); may change reserve requirements if needed.
- Limits on central bank financing of government:
  - By December 31, 2016 convert EGP250 billion of government overdrafts at the CBE into government securities (structural benchmark).
  - Cap overdrafts thereafter to EGP 75 billion in 2016/17.
- Reserve accumulation targets:
  - Goal to accumulate about $4.9 billion between June 2016 and June 2017, $7 billion in 2017/18 and an additional $4 billion in 2018/19 to reach 136 percent of the Fund's reserve adequacy metric for flexible exchange rate regimes.
- Reserve management and communication:
  - Develop new investment guidelines; allocations in banks headquartered in Egypt and located abroad limited to $5.6 billion. Investment guidelines to be approved by the CBE board by December 31, 2016 (structural benchmark).
  - From March 2017 the CBE will regularly publish financial stability reports and start publishing quarterly monetary policy and/or inflation reports (structural benchmark).
- Multiple currency practice (MCP) and capital controls:
  - CBE will gradually remove MCP identified by the Fund.
  - Conditional on continued FX market stability and reserve build-up, remove the $50,000 cash deposit cap for non-priority goods and eliminate the restriction on resident individuals to transfer abroad no more than $100,000 annually without an underlying commercial transaction.
  - Request temporary approval for MCP measure and welcome assessment by first program review.

### Fiscal consolidation measures (revenue and expenditure)
- Revenue measures:
  - VAT reform:
    - New VAT law approved by Parliament in August; effective September 8, 2016, replacing General Sales Tax.
    - Standard rate of 13 percent in FY 2016/2017 before increasing to 14 percent starting in FY 2017/2018.
    - At 14 percent VAT rate, reform will generate 1.1-1.3 percent of GDP in additional revenues in 2016/17–2018/19.
  - Small business tax regime:
    - New simplified tax dispute settlement law approved by end of August; introduction of simplified tax regime for SMEs before end-March 2017 with reduced flat tax on annual recorded turnover levels.
  - Tax base expansion and administrative reforms:
    - Aim to increase revenue by 0.4–0.6 percent of GDP in 2018/19.
  - Capital gains tax or stamp tax:
    - Capital gains tax introduced in 2014 but temporarily suspended for listed companies; to be reinstated from May 2017 (structural benchmark).
    - Revenue initially around 0.1 percent of GDP.
  - Tobacco excise: increased excise rates projected to generate 0.2 percent of GDP in 2016/17.
  - Other revenue measures: additional 0.3 percent of GDP in 2016/17 increasing to 0.5 percent in 2018/19 (includes sale of telecom licenses and land, fees and licensing, return of positive cash balances in government agencies).
- Expenditure measures:
  - Wage bill:
    - Declined from 8.5 percent of GDP in 2013/2014 to 7.6 percent of GDP in 2015/16 and projected to decline to 6.7 percent in 2016/17.
    - Drivers: elimination of indexation of bonuses and allowances, scrutiny of new hiring, new civil service law.
  - Energy subsidies and price reforms:
    - Third consecutive phase of electricity tariff increases announced early August 2015.
    - Electricity tariffs increased by an average of 40 percent effective July 2016; will be increased further in 2017/18 and 2018/19 to achieve cost recovery.
    - Fuel: retail prices for gasoline and diesel raised by an average of 35 percent in early November.
    - Continue subsidy reform with objective of achieving average pre-tax price to cost ratios of about 56 percent in 2016/17 (prior action), and in steps to reach 100 percent in 2018/19.
    - LPG prices increased by 87.5 percent.
    - Government prepared to adjust fuel prices periodically to keep subsidies consistent with fiscal targets; progress assessed at each program review.

### Social protection and mitigation measures
- About 1 percent of GDP of the savings in 2016/17 have been set aside to be spent on social protection in addition to amounts allocated in the budget last year (structural benchmark). These include food subsidies and targeted social cash transfers.
- Within overall budget envelope, preserve or increase:
  - social solidarity pensions, children pension, low-cost housing provisions, health insurance and free medicine for the poor, school meals, subsidies for infant milk and medicine for children, transportation subsidies for students and low-income areas, health insurance for young children and female primary providers, and vocational training for the youth.
- Priorities: constitutionally mandated health, education and R&D, and investment in public infrastructure.
- Plans to improve female labor force participation by enhancing availability and quality of pre-school childcare and study improvements in safety of public transport.

### Contingent measures and fiscal flexibility
- Additional measures, as needed, to achieve primary balance targets may include:
  - better targeting of food subsidies by improving the current smart card system;
  - accelerating energy subsidy reforms;
  - revisiting tax exemptions and other tax expenditures;
  - further cutting non-priority expenditures.
- If external budget support exceeds programmed levels, consider using part of excess for public investment projects with high social/economic returns and seek modification to performance criteria in next program review.

### Public financial management and transparency
- Established a unit within the Ministry of Finance in July 2016 to modernize public finance management.
- Measures include:
  - Economic authorities: review operational performance and finances to ensure correct classification; rationalize and incorporate public functions in state budget where appropriate.
  - State guarantees:
    - Prepare a report on all outstanding guarantees as at end-June 2016 by end-January 2017 (structural benchmark).
    - Use report as basis for an explicit guarantee ceiling to be set for end-June 2017.
    - Establish a committee of senior MoF officials to evaluate guarantee requests; request technical assistance.
  - Social Insurance Fund (SIF): comprehensive reform and roadmap of pension reform by June 2017 with technical assistance.
  - Medium-term budgeting: introduce a medium-term expenditure framework with multi-year expenditure ceilings and present a pre-budget statement to Parliament with every budget.
  - Fiscal risks: prepare by March 31, 2017 a comprehensive statement of fiscal risks covering macroeconomic risks, public enterprises, debt management, contingent liabilities, pensions, and resource mobilization (structural benchmark).

### Energy sector reform and sector-specific measures
- Comprehensive reform program covering petroleum, gas and electricity to improve financial position and efficiency; aim to gradually remove untargeted subsidies and attract private participation.
- Institutional reforms:
  - Separate policy making and regulatory functions; form an independent energy regulator to promote competition and transparent cost-recovery pricing.
  - Contracted international consultant to perform diagnostic study; report expected by September 30, 2016.
  - Develop medium-term strategy for energy sector reforms by March 31, 2017 (structural benchmark).
- EGPC (Egyptian General Petroleum Company):
  - Arrears peaked above $6 billion in 2014, declined to $3.6 billion at end-September 2016.
  - By March 31, 2017 develop an action plan to place EGPC on a financially sustainable footing (structural benchmark).
  - Plan to propose corporate governance strengthening, operating cost optimization, offer minority shares in state-owned energy companies via IPOs, and include strategy to settle outstanding arrears.
  - EGPC to ensure no new arrears and reach repayment agreements to gradually eliminate current stock by end-June 2019.
- Natural gas potential and production projections:
  - Daily output fell from 7 billion cubic feet (bcf) in 2010 to about 4 bcf currently.
  - During 2016/17, gas production set to increase from 3.8 bcf to 4.9 bcf by June 2017.
  - Over the next three years gas production from these fields projected to increase to 7.7 bcf per day, which exceeds Egypt's domestic need.

*cr1717 - 8.9 percent of GDP. Because of the delays in implementing some of the main planned reforms*

### 5.2 bcf per day) and offers an excellent opportunity to save excess quantities for future generations

### cr1717 - 5.2 bcf per day) and offers an excellent opportunity to save excess quantities for future generations

### Gas potential and exploration
- Existing production cited as "5.2 bcf per day) and offers an excellent opportunity to save excess quantities for future generations".
- Ongoing offshore explorations suggest that a presence of even larger deposits of gas is highly likely.
- Negotiations with international gas exploration companies on development of new fields and on favorable to Egypt production sharing agreements are at an advanced stage.
- Policy intent: save excess quantities for future generations and/or export gas to other countries in the region and elsewhere.

### Financial Sector Policies — status and objectives
- Banking system performance and resilience:
  - Average capital adequacy ratio (June 2016): 13.7 percent.
  - Basel-recommended floor: 8.625 percent.
  - CBE-mandated ratio: 10 percent.
  - Return on equity: 19 percent.
  - Share of non-performing loans (NPLs): 6.8 percent (from 8.5 percent in 2014 and close to 11 percent in 2011).
  - Loan-loss provisioning: close to 100 percent.
- Main program objective: preserve and further strengthen the health and resilience of Egypt's financial system.
- Ongoing monitoring: continuous surveillance of developments in the sector to ensure financial surveillance, lending policies, and governance practices are adequate.
- Focus areas:
  - a) Strengthening the regulatory and supervisory framework.
  - b) Improving banking capitalization strategy, which may call for additional resources in light of added exchange rate and interest rate risks.
  - c) Promoting competition to enhance efficiency in the delivery of financial services.
  - d) Strengthening the crisis management and resolution framework to mitigate potential systemic risks.
  - e) Promoting financial inclusion by encouraging banks to lend to SMEs while not compromising credit quality.

### Financial sector risks and supervisory actions
- Exchange rate and interest rate risks:
  - Negative net open FX position exposes banks to exchange rate depreciation.
  - Large holdings of government debt expose banks to valuation losses should interest rates increase.
- CBE actions:
  - Banking Supervision conducted rigorous bank-by-bank stress tests before moving to the new exchange regime; tests found the banking sector resilient to exchange rate and interest rate shocks.
  - Continued monitoring of the impact of the exchange rate regime change on banks' and non-banks' balance sheets.
  - Close monitoring of currency mismatches on balance sheets of large corporations and state-owned enterprises.
- Regulatory improvements planned:
  - Review of the CBE supervisory model.
  - Promote competition by increasing transparency and reporting requirements.
- Crisis response capacity:
  - History: 2006–07 restructuring and consolidation succeeded without systemic panic or deposit runs; more than 20 banks merged or restructured.
  - Planned enhancements: review and update monitoring and coping mechanisms, enhance early warning systems including more complex stress-testing techniques, improve governance and failing bank resolution tools, and strengthen emergency liquidity provision arrangements.

### Business environment and structural reforms — objectives and key measures
- Overall objective: unlock Egypt's growth potential, increase exports and industrial production, and create adequate and well-paid jobs to absorb a rapidly growing labor force; improve Doing Business and Global Competitiveness rankings.
- Key reform measures:
  - Licensing reform:
    - Introduce a one-stop shop for licenses.
    - Passed a law for single proprietorship companies to facilitate establishment and registration of small companies.
    - Abolish industrial licensing in Egypt with the exception of industries that affect vital public interests; retain only factory permitting.
    - Industrial licenses to be issued by responsible ministries; factory permits to be issued by local authorities on a risk-management basis.
    - Industrial register to be used for statistical purposes only and not linked to the exercise of industrial activities.
  - Civil Defense and Fire pre-approval reform:
    - Establish a threshold for low risk production facilities.
    - Review the fire code for consistency, adequacy, appropriateness, and simplicity.
    - Expected impact: reduce duration for obtaining Construction Permits.
  - Bankruptcy and insolvency reform:
    - Revised draft insolvency law prepared in line with best international standards.
    - Submission to Parliament before end-2016 and expected adoption no later than June 30, 2017.
  - Collateral registry:
    - Develop an efficient collateral registry by end-March 2017.
  - Export promotion:
    - Non-oil exports of goods are 4 percent of GDP.
    - Develop an action plan to improve export promotion regime by end-March 2017 and target reduction of non-tariff barriers.
  - Labor market and women’s participation:
    - Enhance active labor market policies, develop specialized training programs for youth and job intermediation schemes.
    - Commit to spend around EGP 250 million to improve availability of public nurseries and other facilities to enhance ability of women to actively seek jobs (structural benchmark).
    - Form a joint committee including relevant stakeholders to propose interventions to improve women participation rate.
  - IPO program:
    - Announced five-year IPO program to widen ownership base, enhance transparency and corporate governance in state owned companies, diversify investment sources, and attract investments worth $5bn over three years.
    - Initial focus sectors: banking and financial services, oil and gas, petrochemicals, building materials, and real estate development.
    - The first offering is expected to take place in the first quarter of 2017.

### Financing and program monitoring — gaps, commitments, and monitoring framework
- Remaining financing gap for the program period (next three years): about $35 billion, of which $16.3 billion is for 2016/17.
- Secured and expected financing to close the 2016/17 gap:
  - Secured: $1 billion from the UAE.
  - Secured: $2.7 billion from China as part of a currency swap.
  - Secured: $1 billion from the World Bank.
  - Rolled over: $3.2 billion loan from Afreximbank.
  - Secured: $1.35 billion from a repo transaction with foreign commercial banks.
  - Secured: $950 million from the Eurobond.
  - Secured: $250 million from Germany.
  - Secured: $150 million from the U.K.
  - Secured: $150 million from France.
  - Secured: $50 million from Japan.
  - Expected: $4 billion from the IMF under the EFF arrangement.
  - Expected: $1 billion from the second tranche of the World Bank's Development Policy Financing.
  - Expected: $0.5 billion from the African Development Bank.
- Monitoring framework:
  - Program monitored through prior actions, quantitative performance criteria (PCs), indicative targets (ITs), and structural benchmarks.
  - Semi-annual program reviews based on December and June test dates.
  - Quantitative PCs and ITs reported in Table 1; prior actions and structural benchmarks in Table 2.
  - Technical Memorandum of Understanding describes definitions of quantitative PCs and data provision requirements.

### Table 1: Selected reported quantitative figures (as presented)
- Net international reserves of the CBE ($ million; cumulative change, floor): 1,920 ; 4,175
- Net domestic assets of the CBE (at program rates; ceiling): 196 ; 204
- Fuel subsidies (cumulative, ceiling): 45.0 ; 62.2
- Primary fiscal balance of the budget sector (cumulative, floor): -52.0 ; -29.0
- Accumulation of external debt payment arrears ($ million; continuous PC ceiling): 00 ; 531 ; 555 ; 180 ; 473 ; 0 ; -1,200
- Memorandum item: Program disbursements ($ million; cumulative): 10,350 ; 16,300
- Memorandum item: External budget support loans ($ million; cumulative): 4,700 ; 7,450
- Memorandum item: Project loans ($ million, cumulative): 00 ; 1
- Note: Cumulative from the beginning of the fiscal year (July 1). (Table reproduced as presented in the source.)

### Table 2: Prior actions and structural benchmarks (selected entries and timing)
- Hold a foreign exchange auction at a rate which eliminates the estimated real overvaluation; issue a notice to banks that they can quote and trade at any exchange rate; increase CBE policy interest rates by at least 300 basis points; and introduce longer-term deposit auctions with an initial auction offer of at least 50 billion pounds — Objective: Eliminate misalignment and foreign exchange shortages — Status: Met
- Replace the sales tax with a broad-based VAT while providing taxpayers with input tax credits and refunds — Objective: Modernize tax system and improve revenue collection — Status: Met
- Increase gasoline and diesel prices at the pump by an average of 35 percent to achieve pre-tax price to-cost ratios of 56 percent and the projected fiscal savings — Objective: Continue implementing fuel subsidy reform — Status: Met
- Monetary policy conditionality: If FX sales in auctions or the interbank market are excessive, the CBE will tighten monetary policy (by raising policy rates or increasing deposit auctions, or raising reserve requirements) — Objective: Ensure adequate monetary conditions to facilitate accumulation of international reserves — Timing: Continuous
- Reduce the stock of the government overdrafts to EGP75 billion by converting EGP 250 billion of into securities — Objective: Improve liquidity management and remove fiscal dominance — Timing: December 31, 2016
- CBE Board to approve new investment guidelines for foreign exchange reserve management; cap allocations in banks headquartered in Egypt and located abroad at the current stock of $5.6 billion — Objective: Strengthen foreign exchange reserves management — Timing: December 31, 2016
- Start publishing quarterly monetary policy and/or inflation reviews and financial stability reports — Objective: Increase transparency of monetary policy — Timing: March 31, 2017
- Introduce capital gains tax or stamp tax on stock exchange transactions to be effective no later than 2017/18 — Objective: Improve revenue collection — Timing: May 31, 2017
- Increase social spending by at least EGP 25 billion — Objective: Strengthen social protections — Timing: June 30, 2017
- Prepare a report on outstanding stock of state guarantees at end June 2016 — Objective: Improve debt management — Timing: January 31, 2017
- Prepare a comprehensive statement of fiscal risks covering all key areas — Objective: Improve monitoring and management of fiscal risks — Timing: March 31, 2017
- Energy sector: adopt an energy sector reform strategy based on external consultant report — Objective: Improve efficiency of the energy sector — Timing: March 31, 2017
- Develop an action plan to place the EGPC on a financially sustainable footing — Objective: Improve efficiency of EGPC and minimize related fiscal risks — Timing: March 31, 2017
- Adopt a new licensing law to abolish industrial licensing with specified exceptions and limit Civil Defense and Fire pre-approvals to high-risk facilities — Objective: Streamline the licensing regime — Timing: March 31, 2017
- Spend EGP 250 million to improve availability of public nurseries and other facilities to enhance ability of women to seek jobs — Objective: Improve labor force participation for women — Timing: June 30, 2017

### Technical Memorandum of Understanding — exchange rates (as of June 30, 2016)
- Program exchange rates are those prevailing on June 30, 2016.
- Currency unit per US$:
  - Egyptian pound8.77
  - SDR0.7056
  - Euro0.9019
  - British Pound0.7462
  - Japanese Jen102.7004
  - Saudi Riyal3.7506
  - Chinese Yuan6.6480
- For all other foreign currencies, the current exchange rates to the U.S. dollar will be used.
- Monetary gold is valued at $1,2

*Source: cr1717 (IMF country report excerpt).*

### 58.65 per troy ounce.

### cr1717 - 58.65 per troy ounce.

### A. Floor on Net International Reserves (PC)
- Net international reserves (NIR) of the Central Bank of Egypt under the program: difference between foreign reserve assets and reserve-related liabilities; program targets the change in NIR calculated as the cumulative change since the beginning of the fiscal year.
- NIR is monitored in US$; assets and liabilities in currencies other than US$ are converted into dollar equivalents using the program exchange rates.
- Foreign reserve assets (consistent with SDDS) include: CBE holdings of monetary gold, SDRs, foreign currency cash, foreign currency securities, deposits abroad, the country’s reserve position at the Fund and other official reserve assets; include the Chinese Yuan.
- Exclusions from foreign reserve assets: assets that are frozen, pledged, used as collateral, or otherwise encumbered, including but not limited to assets acquired through short-term currency swaps (with original maturity of less than 360 days), claims on residents, precious metals other than gold, assets in nonconvertible currencies, and illiquid assets.
- As of June 30, 2016, foreign reserve assets thus defined amounted to $17,097 million.
- Foreign reserve-related liabilities: all short-term foreign exchange liabilities of the CBE with original maturity of less than 360 days, including government’s foreign currency deposits with original maturity of less than 360 days, banks’ required reserves in foreign currency, and all credit outstanding from the Fund on the CBE balance sheet.
- As of June 30, 2016, reserve-related liabilities thus defined amounted to $9,144 million.
- Adjustor: NIR floor will be adjusted up (down) by the full amount of the cumulative excess (shortfalls) in program disbursements (as defined in paragraph 7) relative to the baseline projections shown under the memo items in Table 1.
- Program disbursements defined as external disbursements of loans (including IMF disbursements), grants and deposits for budget support purposes, foreign reserve asset creating loans and deposits to the CBE with original maturity of more than 360 days, and rollovers by more than 360 days of existing foreign loans and foreign reserve-related liabilities, in foreign currency, from official multilateral creditors, official bilateral creditors, and private creditors, including external bond placements.
- Program disbursements exclude project loans and grants.

### B. Ceiling on Average Reserve Money (IT)
- Reserve money (RM) defined as sum of currency in circulation outside the CBE, and balances on commercial banks’ correspondent accounts and required reserves in local currency at the CBE (excludes balances in deposit auctions and in term deposits at the CBE).
- For each semester, average reserve money is calculated from daily balance sheets of the CBE as the average for the last month of the semester.
- For the second semester of 2015/16, average reserve money amounted to EGP460.67 billion.
- Adjustor: In the event of a change in reserve requirement ratio (rr) in local currency, the reserve money ceiling will be adjusted according to the formula:
  - Revised RM ceiling = Program RM ceiling + banks’ correspondent accounts in local currency x (new rr/old rr)

### C. Ceiling on Net Domestic Assets of the CBE (PC)
- Net domestic assets (NDA) defined as sum of net credit of the government, net credit to public economic authorities, credit to banks, and open market operations, excluding foreign currency components such as loans and deposits of the government, public economic authorities and banks.
- As of June 30, 2016, NDA of the CBE amounted to EGP626.37 billion.
- Adjustors:
  1. NDA targets will be adjusted down (up) by the full amount of the cumulative excess (shortfall) relative to the baseline projections shown under the memo items in Table 1 in external budget support loans and grants, in U.S. dollars, from official multilateral creditors, official bilateral creditors, private creditors, and external bond placements. Project loans and grants are excluded. U.S. dollar amounts will be converted in Egyptian pounds using the official EGP/$ exchange rate on the day of disbursement.
  2. In the event of a change in reserve requirement ratio (rr) in local currency, the NDA ceiling will be adjusted according to the formula:
     - Revised NDA ceiling = Program NDA ceiling + banks’ correspondent accounts in local currency x (new rr/old rr)

### D. Floor on Primary Fiscal Balance of the Budget Sector (PC)
- General government comprises the budget sector, the Social Insurance Funds and the National Investment Bank (NIB).
- Budget sector comprises central government (administration), governorates (local administration) and public service authorities, including the General Authority for Government Services, other regulatory authorities and supervisory agencies, funds, universities and hospitals.
- Primary balance of the budget sector under the program defined as overall balance of the budget sector plus total interest paid.
- Overall balance measured from the financing side and includes with the minus sign: (i) net domestic financing of the budget sector; and (ii) net foreign financing of the budget sector.
- For fiscal year 2015/16 these variables amounted to EGP341.3 billion (net domestic financing) and EGP-4.5 billion (net foreign financing), respectively.
- Components:
  i. Net domestic financing consists of cumulative changes from the beginning of the fiscal year in:
     - outstanding stocks of loans, advances, and overdrafts of the budget sector from the CBE, holdings of government securities and promissory notes by the CBE, and all other CBE accounts receivable due from the budget sector, minus all deposits of the budget sector at the CBE;
     - outstanding stock of loans, advances, and overdrafts of the budget sector from domestic commercial banks, holdings of government securities and promissory notes by domestic commercial banks, and all other accounts receivable by commercial banks from the budget sector, minus all deposits of the budget sector at domestic commercial banks;
     - outstanding stock of domestic debt held outside the central bank and domestic commercial banks including domestically issued government securities held by non-residents; includes private sector as well as loans and advances to, and holdings of government securities and promissory notes by public entities not covered by the budget sector accounts, except bonds issued by the government to the Social Insurance Fund (SIF) to securitize past arrears.
  ii. Net external financing measured cumulatively from the beginning of the fiscal year defined as disbursements minus amortization of budget support loans, project loans, Euro-bonds and similar instruments, and any other forms of government external debt, excluding domestically issued government securities held by non-residents. Definition of debt per point 8 of Guidelines on Public Debt Conditionality in Fund Arrangements (Executive Board Decision No. 15688-(14/107 adopted on December 5, 2014). Net external financing measured in domestic currency at the official exchange rate on the date of the transactions.
  iii. Interest paid measured cumulatively from the beginning of the fiscal year defined as total interest bill paid by the budget sector on all its interest bearing liabilities. In FY 2015/16 total interest paid amounted to EGP241.5 billion.
  iv. For 2015/16 the primary deficit of the budget sector amounted to EGP95.3 billion.
- Off-budget funds: authorities will inform IMF staff of creation of any new off-budgetary funds or programs immediately (includes any new funds or other special budgetary and extra-budgetary programs as per IMF’s Manual on Government Finance Statistics 2001).
- Adjustor: Target for the primary balance will be adjusted up (down) by the full amount of the shortfall (excess) in the disbursement of external project loans; U.S. dollar amounts converted into Egyptian pounds using the official EGP/$ exchange rate on the day of the disbursements.

### E. Tax Revenue (IT)
- Tax revenue includes personal income tax, corporate income tax, GST/VAT, excises, international trade taxes, and other taxes.

### F. Fuel Subsidies (PC)
- Fuel subsidies defined as total amount of subsidies paid by the budget sector for gasoline, diesel, kerosene, LPG and fuel oil.
- Measured in domestic currency on a cumulative basis from the beginning of the fiscal year.

### G. EGPC Arrears (IT)
- EGPC arrears ceiling applies to accumulation of EGPC arrears to foreign creditors (international oil companies) on a net basis, reflecting industry practice of attributing payments to the most overdue receivables.
- EGPC arrears measured in $.
- As of September 30, 2016 the stock of EGPC arrears amounted to $3.6 billion.

### H. Continuous Performance Criteria
- Non-accumulation of external debt payments (principal and interest) arrears by the general government (as defined in paragraph 12). No new external debt payments (including on long-term leases) arrears will be accumulated during the program period.
- External debt payment arrear defined as amount of payment obligation (principle and interest) due to nonresidents by the general government and the CBE, which has not been made when due under the contract, including any applicable grace period.
- Standard continuous performance criteria include prohibitions on:
  1. imposition or intensification of restrictions on making of payments and transfers for current international transactions;
  2. introduction or modification of multiple currency practices;
  3. conclusion of bilateral payments agreements inconsistent with Article VIII;
  4. imposition or intensification of import restrictions for balance of payments reasons.

### I. Consultation Clause
- Direct sales of foreign exchange to SOEs and the government include sales by the CBE to the government other than for debt service and to SOEs such as EGPC, GASC, and other.
- If foreign exchange sales (including direct sales to SOEs and the government) are excessive, a consultation will be held with the IMF Executive Board on policies comprising:
  - (i) the stance of monetary policy;
  - (ii) the reasons for deviations from the program targets, taking into account compensating factors;
  - (iii) necessary remedial actions.

### J. Monitoring and Reporting Requirements
- Performance under the program will be monitored using data supplied to the IMF by the Ministry of Finance and the CBE as outlined in Tables 3A and 3B, consistent with the program definitions above.
- Authorities will transmit promptly to IMF staff any data revisions.

### K. Data Reporting (selected items and lags)
- Ministry of Finance (Table 1) selected items and lags:
  - Overall deficit of the budget sector: M 30 days
  - Overall deficit of the general government, NIB and SIFs: M 45 days
  - Summary of budget sector accounts, consistent with IMF GFS 2001 Manual: M 30 days
  - Program disbursements and project loans to the general government: W and M 30 days
  - Domestic debt stock and debt service costs of the general government and budget sector: M 30 days (45 days for the general government)
  - Net domestic borrowing of the general government and budget sector, including net t-bill and t-bond issuance in local and foreign currency: W and M 30 days (45 days for the general government)
  - Auctions of t-bills and t-bonds via primary dealers: W 7 days
  - Gross transfers to EGPC: Q 90 days
  - Fuel subsidies to EGPC: Q 90 days
  - Stock of EGPC arrears to foreign creditors: Q 90 days
  - Use of overdraft facility at the CBE (end of period stock): W 15 days
  - Stock of outstanding domestic arrears by creditor: M 30 days
  - Value and volume of crude oil, oil product, liquid and natural gas, and bunker and jet fuel exports and imports: Q 90 days
  - Components of foreign direct investment to the petroleum sector: Q 60 days
  - Note: M = Monthly; W = Weekly

- Central Bank of Egypt (Table 2) selected items and lags:
  - Program net international reserves and its components at program and current exchange rates: M 7 working days
  - Program disbursements and its breakdown by components: M 7 days
  - Breakdown of gross foreign assets and liabilities by currency at actual and program exchange rates: M 15 days
  - Breakdown of foreign reserve-related liabilities by original maturity at actual and program exchange rates: M 15 days
  - Program NDA of the CBE and its components: M 15 days
  - Stock of outstanding external debt payment arrears of the general government (if any) by creditor: M 30 days
  - Projections for external debt payments falling due in the next four quarters, interest and amortization: Q 30 days
  - Monthly cash flow table (past outcomes and projections for 12 months): M 15 days
  - Balance of payments data in electronic format: Q 90 days
  - CBE foreign exchange deposits held at commercial banks headquartered in Egypt: W 5 working days
  - Commercial banks deposits by sector (foreign exchange and Egyptian pound): M 30 days
  - Commercial banks core FSI indicators by peer group (Net open position; Liquidity ratios): M 30 days
  - Commercial banks core FSI indicators by peer group (Capital adequacy ratio; Regulatory capital; Nonperforming loans; Provisions): Q 75 days
  - Other depository corporations balance sheet information in SRF (preliminary): M 30 days
  - Central bank balance sheet in SRF (preliminary): M 15 days
  - Central bank’s weekly analytical balance sheet (preliminary data once a week): W 7 business days after the end of the week
  - Daily official exchange rates EGP/US$ (submitted once a week for the previous week): W 5 business days after the end of the week
  - Central bank daily purchases and sales of foreign exchange by counterparts – commercial banks, EGPC, GASC, government: W 2 business days after the end of the week
  - Daily average buy and sell exchange rates EGP/US$ as quoted by foreign exchange bureaus and banks (submitted once a week for the previous week): W 5 business days after the end of the week
  - Note: Q = Quarterly; M = Monthly; W = Weekly

### Monetary and Exchange Rate Policies (statement excerpts)
- Egyptian authorities undertaking momentous reforms to restore macroeconomic stability, ensure robust inclusive growth, build confidence, and rebuild reserves.
- Program aims to restore a healthy foreign exchange market, reduce the fiscal deficit and high debt, remove internal supply bottlenecks to achieve growth potential, and create jobs as laid out in the MEFP.
- Decisive reform of the foreign exchange system by the CBE on November 3, 2016 to eliminate persistent foreign currency shortages; accompanied by a 300 bp rate hike and substantial fiscal tightening.
- Following initial devaluation from 8.8 to 13 (CBE announced as nonbinding foreign exchange rate to serve as soft guidance), banks free to set buy and sell rates; operating hours for banks’ foreign exchange units extended to 12 hours including weekends; priority import list abolished.
- Initial outcomes:
  - Pound traded at an average of 14.65 at the central bank’s initial auction on November 3.
  - Interbank market the following three business days: buy rates of 15.7-17.8 and sell rates of 16.3-18.25 to the U.S. dollar.
- Expected effects: improve external competitiveness, support exports, attract foreign investment, rebuild CBE international reserves.
- CBE stands ready to adjust monetary policy to stave off excess pound liquidity and contain inflationary impact of the devaluation.
- Initial indications suggest parallel market transactions have diminished considerably and are likely to disappear as more dollar liquidity is diverted to banks.
- Monetary policy objective: reduce inflation back to single digits within two years, especially to contain second round impact of the energy price increases, VAT.

*Statement by Hazem Beblawi, Executive Director for Arab Republic of Egypt and Wafa Abdelati, Senior Advisor to Executive Director; November 11, 2016.*

### introduction, and devaluation. CBE hiked policy rates and introduced longer maturity deposit

### cr1717 - introduction, and devaluation. CBE hiked policy rates and introduced longer maturity deposit

### Monetary Policy and Inflation
- The CBE hiked policy rates and introduced longer maturity deposit auctions in early November to tighten the monetary stance and sterilize excess liquidity.
- Inflation had reached 14 percent prior to the devaluation and is expected to rise further this fiscal year before coming down.
- Disinflation will be supported by minimizing liquidity injection through direct credit to government from the overdraft facility by applying strict limits; the overdraft has recently accounted for one third of deficit financing.
- The CBE will begin to publish its quarterly inflation and monetary policy report in 2017.

### Fiscal Policy and Public Financial Management
- Deficits averaged 12.5 percent of GDP in the past four years.
- Debt approaching 100 percent of GDP.
- The interest bill at 30 percent of government expenditure.
- Gross financing needs exceeding 55 percent of GDP annually (including rollover of domestic debt).
- The government’s 2016/17 budget, as approved by the newly-appointed Parliament, reduces the primary fiscal deficit by 2½ percentage points of GDP.
- The budget target ensures that budget sector debt will be on a declining path starting this year.
- Fiscal-reducing measures undertaken this year amount to 5½ percent of GDP on an annualized basis.
  - Notes: This figure is higher than the 3.9 percent of GDP shown in the staff report, as it (i) annualizes the fiscal yield from the VAT and fuel price increase that became effective in September and November, respectively; and (ii) includes 0.9 percent of GDP as the decline in the wage bill this year as described in paragraph 15 of the MEFP.
- Implemented fiscal measures include:
  - A third increase in electricity prices by an average 40 percent.
  - Adoption of a modern VAT system at an initial rate of 13 percent.
  - A simplified business tax regime.
  - Increases in tobacco excises.
  - An increase in fuel and natural gas prices between 35 to 87 percent on November 4, 2016.
  - The public wage bill is projected to decline by nearly 1 percent of GDP.
- Even with current measures the fiscal deficit would remain high at 10 percent of GDP.
- Future consolidation aims for a primary surplus exceeding 1 percent of GDP next year and 2 percent of GDP in 2018/19, delivering a swing in the primary deficit by 5½ percent of GDP in three years.
- The subsidy bill has declined from a peak of 6½ percent of GDP in 2012/13 to 1¾ this year; and will be further reduced to below ½ percent of GDP.
- Public debt is forecast to decline by close to 20 percentage points of GDP within 5 years.
- Institutional reforms and PFM strengthening:
  - A new Ministry of Finance unit established in July 2016 to modernize public financial management.
  - Introduction of medium-term budgeting and a pre-budget statement to Parliament.
  - Review of operational performance of economic authorities and incorporation into the budget where appropriate.
  - Compilation of a list of all state guarantees, proposal of ceilings on future guarantees, and review of the framework for issuing state guarantees.
  - Review of the finances of the Social Insurance Fund with external technical assistance.
  - Preparation of a comprehensive statement of fiscal risks in the first quarter of 2017 covering contingent liabilities, pensions and public enterprises.

### Social Mitigation Measures
- To mitigate impact on the vulnerable, authorities plan to increase budget spending by an additional 1 percent of GDP, over and above normal allocations, to expand social assistance programs.
- Authorities request staff to carry out analysis of the distributional impact of the full package of reforms and to collaborate with the World Bank as needed.
- Authorities request staff to update and expand the 2013-2014 incidence analysis by the first review to better assess social costs and need for pro-poor measures.

### Energy Sector Reforms
- A comprehensive reform of the energy sector launched in 2014.
- First priority: increase capacity to ensure more reliable electricity supply.
- Second step: create an independent energy regulator to ensure transparent pricing on the basis of an energy sector strategy to be prepared by March 2017.
- Based on recent discoveries, gas production will exceed Egypt’s domestic needs within 2017, while ongoing exploration could further increase Egypt’s gas potential.
- Petroleum sector near-term focus: place the Egyptian General Petroleum Corporation on a financially sound footing by implementing an action plan to be prepared by external consultants and by removal of fuel subsidies.
- The plan will suggest ways to strengthen corporate governance, optimize operating costs and provide avenues to involve the private sector.

### Financial Sector
- The financial system is described as strong, well capitalized, liquid and profitable.
- The CBE’s supervision department conducted rigorous bank-by-bank stress tests and found the system resilient to severe exchange rate and interest rate shocks; it continues to monitor stability.
- The CBE will:
  - Continue strengthening the regulatory and supervisory framework.
  - Promote effective competition.
  - Improve access to financial services.
  - Strengthen the crisis management and resolution framework.
  - Publish its financial stability report starting in December 2016.

### Private Sector Growth and Export Potential
- Authorities launching a wide-ranging structural reform program to unlock growth and export potential.
- Key measures include:
  - A new licensing regime with a one-stop shop.
  - Simplified bankruptcy and liquidation procedures and adoption of a new insolvency law.
  - Development of an efficient collateral registry to facilitate access to finance.
  - Development of an action plan to address bottlenecks to the growth of nonoil exports (to be developed in early 2017).
  - Development of specialized training programs for youth, intermediation programs, and increased spending on public nurseries to support higher female labor force participation.
  - A five-year IPO program aiming to attract investments worth $5 billion over three years, focusing initially on a small number of viable public companies in the financial services and banking, oil and gas, petrochemicals, and real estate development.

### Growth Outlook and Inclusion
- Authorities expect a return to higher growth over the medium-term, building on human and natural resources.
- Authorities acknowledge potential near-term contractionary effects but anticipate a potential higher-than-currently-projected investment response to the strong package of reforms and credibility gains from approval of a Fund program.
- H.E. President el-Sisi emphasized protecting low income groups while undertaking reforms.
- Authorities will accelerate work to develop a database of vulnerable groups, enhance social safety net programs, and better target assistance to deserving households.
- Macroeconomic and structural reforms are expected to revitalize the economy and be supplemented by measures to improve human capital through better health and education.

*Source: cr1717 - introduction, and devaluation. CBE hiked policy rates and introduced longer maturity deposit*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr1717.pdf_