## 1. Moving to Targeted Social Protection ## Source details **Canonical URL:** [1. Moving to Targeted Social Protection](https://www.imf.org/-/media/files/publications/cr/2017/cr17290.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr17290.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr17290.pdf.json) --- ### Recent developments - Authorities adopted the VAT, floated the exchange rate, and increased fuel prices. - Eurobond placements and portfolio inflows: - Eurobond placements of $4 billion in January 2017 and $3 billion in May 2017. - At least $5 billion in portfolio inflows registered since the float. - FX market and reserves: - FX shortages and the parallel market virtually disappeared; bid/ask spreads narrowed. - CBE did not intervene in the FX market except to supply FX to state-owned enterprises (SOEs) for critical imports. - Exchange rate stabilized at about EGP/$18 at end-May compared to EGP/$8.8 before the float. - Gross reserves rose from $16.4 billion in October to $28 billion in April 2017. - Current account and trade: - Current account deficit in 2016/17 expected to reach 5.8 percent of GDP, which is 0.6 percentage points of GDP more than in the program. - Unification of the exchange rate and elimination of FX shortages attracted informal trade into formal channels, masking underlying strengthening of the trade balance. - Inflation and growth: - Inflation reached 31 percent in April, eased to 30 percent in May. - GDP growth accelerated in Q1 2017 from 3.6 percent to 4.3 percent, led by manufacturing, construction, tourism, and retail trade. - Program performance and slippages: - All end-December performance criteria (PC) were met; an indicative target on tax revenues was missed due to delay in VAT executive regulations. - Two end-June PCs likely missed: primary balance and the fuel subsidy bill will be missed by about 1 percent of GDP each, driven by large depreciation increasing the price in pounds of imported oil products and food. - Most structural benchmarks implemented with some short delays; investment guidelines for reserve management approved in May after further study; comprehensive fiscal risks statement extended coverage through March 2017 instead of December 2016. ### Outlook and risks - Updated macroeconomic projections (reflecting larger-than-expected depreciation): - Current account deficit projected to narrow to 4.6 percent of GDP in 2017/18 and 3.8 percent of GDP in 2018/19. - International reserves expected to reach $30 billion in 2017/18 and $31 billion in 2018/19, or 120 percent of the ARA metric for floating regimes in 2018/19. - Annual inflation for June 2017 revised from 17 to 33 percent to account for larger depreciation. - Inflation expected to return to the programed path by end-2017/18 given recent monetary tightening and fading first-round effects of the VAT and energy price increases. - Growth projections: 3.5 percent for 2016/17 and 4.5 percent for 2017/18. - Nominal GDP in 2017/18 is now forecast 11 percent higher than before. - Gross public debt projected to decline from 98 percent of GDP in 2016/17 to 88 percent of GDP in 2017/18 and 78 percent in 2020/21. - Key risks to the program: - Fragile stability, difficult reform agenda, possible deterioration of security conditions. - High and persistent inflation could threaten macroeconomic stability and monetary policy credibility. - Discretionary attempts to minimize exchange rate volatility could weaken confidence in the float. - Pressures to raise spending, including on wages, could undermine fiscal objectives. - Opposition by vested interests, corruption, and social tensions could derail structural reforms and hurt medium-term growth. - Lower growth in trade partners could weaken demand for Egyptian output; removal of flight bans would support tourism. - Worsening domestic security could undermine market confidence and the business climate. - Mitigants: - Strength of the policies under the program, the flexible exchange rate regime, and the program’s backing at the highest political level. ### Monetary and exchange rate policies - Monetary tightening and liquidity management: - CBE raised policy rates by 200 basis points in May and 200 basis points in July. - Drained excess liquidity with open market operations using deposit auctions with maturities of 90–270 days. - Reduced banks’ overnight and 7-day deposit balances from nearly EGP 100 billion in March to below EGP 30 billion by mid-June. - CBE announced objective to bring inflation down to single digits over the medium term; medium-term objective to reduce inflation to mid-single digits. - Operational framework and instruments: - CBE will mainly rely on indirect policy instruments: manage banks’ excess reserves and money supply using deposit auctions; interest rate corridor to bound overnight interbank rates. - CBE may resort to reserve requirements if liquidity surpluses or shortages are structural. - CBE lending to the government to remain within limits set in the Memorandum of Understanding with the Ministry of Finance (MoF). - Lending to banks primarily for short-term liquidity support; maintain subsidized lending programs for SMEs and mortgages to qualified low income households, with a cap: total volume of new loans in 2017/18 capped at EGP 31 billion. - Mission recommendation: discontinue or budget-finance subsidized lending as it undermines monetary policy effectiveness. - Exchange rate regime and related measures: - Authorities will maintain a flexible exchange rate regime; CBE will refrain from FX interventions in the interbank market except to mitigate disorderly market conditions. - Mission recommended phasing out the profit repatriation mechanism; authorities prefer to maintain it currently to attract foreign capital. - CBE decided not to place any new funds in foreign subsidiaries and branches of Egyptian banks and to keep such deposits below the end-April level of $5.4 billion. - If FX sales become excessive, the CBE will consult the Fund on needed policy adjustments. - Institutional reforms: - CBE initiated amendments to the CBE law to improve governance and accountability; amendments to be submitted to Cabinet by December 31, 2017 (structural benchmark). - Provisions include strengthening governance structure, improving recapitalization and profit distribution rules, normalizing financial relationship with government and commercial banks, enhancing transparency, and separating emergency liquidity assistance (CBE responsibility) and solvency support to troubled banks (primarily government responsibility). - Financial reporting to be better aligned with the IFRS; procedures for selecting external auditors to be modified in accordance with best international practices (structural benchmark). - Article VIII assessment and exchange restrictions: - May mission found multiple currency practice (MCP) from the multiple price auction and an inoperative bilateral payment arrangement (BPA) between Egypt and Bulgaria giving rise to an exchange restriction. - Staff does not recommend approval of the exchange restriction arising from the BPA due to its discriminatory nature. - In June, CBE eliminated the restriction on resident individuals transferring abroad no more than $100,000 annually without an underlying commercial transaction. - By December 2017 authorities will remove the $50,000 cash deposit cap for non-priority goods. ### Fiscal policy and public finance management - 2016/17 fiscal outturn and drivers: - 2016/17 primary deficit expected at 1.8 percent of GDP, exceeding the program target by 1 percent of GDP. - Tax revenue shortfall partly due to delayed VAT executive regulations; bulk of underperformance from higher energy subsidies resulting from weaker pound and higher world oil prices. - Subsidy overruns partly offset by small savings: wages (0.2 percent of GDP) and goods and services spending (0.1 percent of GDP). - Authorities view 2016/17 outcome as a sizeable consolidation of nearly 1.6 percent of GDP compared to previous year. - Medium-term fiscal anchor and adjustment path: - MoF aims to maintain three-year cumulative fiscal consolidation of 5.5 percent of GDP as in the program. - Goal to reduce gross public debt to about 86 percent of GDP by end of the program. - The 1 percent of GDP shortfall in fiscal adjustment in 2016/17 will be phased over the next two years to avoid excessive adjustment in any one year given fragile growth outlook. - 2017/18 budget and measures: - Budget passed by Parliament on June 21, 2017 (prior action). - Primary surplus projected at 0.4 percent of GDP, constituting fiscal consolidation of 2.2 percent of GDP. - Overall deficit projected to decline by 1.8 percent of GDP; monetary tightening will temporarily raise debt service costs. - Tax revenue projected to increase by 0.7 percent of GDP due to: - Increase in the VAT rate from 13 to 14 percent, effective July 1, 2017. - Higher excises. - New stamp duty on stock market transactions. - Tax administration reform pilots producing encouraging results; authorities, supported by IMF and other agencies, aim to expand reforms to reduce tax evasion and corruption. - Authorities raised some import tariffs in December 2016 on 364 product categories within the WTO limits to offset revenue shortfalls from lower import volumes; staff does not support this measure. - Expenditure structure adjustments: - Wage bill expected to decline by 1 percent of GDP. - Nominal wage increases of 7–10 percent (below inflation) and expected headcount reduction due to natural attrition to permit wage bill outcome. - Energy subsidies expected to decline by 0.8 percent of GDP. - Strengthening targeted social protection and increasing investment noted as budget priorities. ### Fiscal measures and budget composition (selected figures) - Fuel subsidy reduction of 0.5 percent of GDP. - Public investments will increase by 0.4 percent of GDP. - Contingency fund of 0.2 percent of GDP included in the budget as a cushion for possible fiscal slippages. - Authorities prepared to delay low-priority spending, if needed. - Fiscal measures in the 2017/18 Budget include revenue impacts from Non-oil excise duties, VAT, Non-Tax revenue, Other revenue; and non-interest expenditure impacts from Other spending, Wages, Electricity subsidy, Fuel subsidy, Other subsidies, Investment (numerical chart values present in source). ### Energy subsidy reforms and fuel pricing policy - Energy subsidy reforms central to planned fiscal consolidation and social equity; subsidies represent a big share of government spending and mostly benefit the rich. - Electricity: - Authorities raised electricity tariffs by about 20 percent in July 2016. - Electricity tariffs will increase again in July 2017 sufficiently to reduce electricity subsidies in 2017/18 to the budgeted 0.6 percent of GDP. - Fuel: - Price increases last November produced gains in price-to-cost ratios that have been eroded by large depreciation and higher oil prices. - In June, average gasoline and diesel prices were increased by 53 percent. - Prices for kerosene and fuel oil (for cement) were increased by 55 percent and 40 percent respectively. - These changes achieved pre-tax price-to-cost ratios of 55 percent for gasoline and diesel and 58 percent for all fuel products. - LPG prices were doubled. - Authorities plan to further raise gasoline and diesel prices to reach full cost-recovery and eliminate fuel subsidies in 2018/19 except for LPG. - By end-September 2017 the Ministry of Petroleum will propose to the Prime Minister an automatic price indexation mechanism (structural benchmark) to adjust diesel, gasoline, kerosene, and fuel oil prices to changes in the exchange rate, oil prices, and the share of imported fuel products in the consumption basket. - Timing and details of the mechanism will be discussed in subsequent reviews. - Authorities are prepared to adjust fuel prices or take other measures as needed to offset any larger-than-projected costs of fuel production. ### Social protection and targeting reforms - Move from energy-subsidy-based social protection to a better-targeted social safety net. - Cash transfer programs: - Takaful and Karama coverage planned to increase from 1.5 million households to 1.7 million in 2017/18. - Social Solidarity Pensions covers 1.7 million households and provides between EGP 323 and EGP 450 depending on household size. - 2016/17 budget includes provisions to cover medical insurance for Social Solidarity Pension beneficiaries. - Food subsidies: - Beneficiaries entitled to up to five loaves of subsidized bread per day and ration cards for certain food. - Monthly allowance per ration card increased from EGP 15 to EGP 21 in 2016, and will increase to EGP 50 in 2017 for about 69 million beneficiaries. - Additional measures: - Tax credits and an increased minimum personal income tax threshold to enhance tax relief at the lower income level. - Extensive VAT exemptions continue to support the poor. ### Public financial management (PFM) and fiscal institutions - PFM reforms will focus on strengthening fiscal risk management and enhancing top-down expenditure restraint. - Institutional changes: - Establish an interagency technical committee comprising relevant ministries and agencies to coordinate macroeconomic forecasts and produce official projections for budget preparation. - MoF to prepare and submit to Cabinet by end-November 2017 a fiscal strategy paper outlining medium-term fiscal objectives and approach to setting expenditure ceilings (structural benchmark). - Budget Circular for the next cycle will be guided by the Fiscal Strategy Paper and provide aggregate and entity-specific expenditure ceilings and assumptions for budget preparation. - Fiscal risks statement finalized in April 2017 covering macroeconomic risks, public debt management, policy, budget execution and contingent liabilities; coverage extended through March 2017. ### Financial stability and banking sector assessment - Banking sector health (March 2017 / 2016 data): - Aggregate capital adequacy at 14.9. - NPLs at 5.7 percent of gross loans. - Specific provisioning at 91.5 percent. - Aggregate banking system profits in 2016: EGP62 billion. - Return on equity: 24.4 percent. - Banking sector resilience: - Sector generally healthy and resilient to moderate shocks; capital and liquidity buffers sufficient. - Vulnerabilities in a few smaller banks (capital adequacy, asset quality, profitability below sector averages); under close monitoring by CBE. - CBE supervisory framework and plans: - Core elements of Basel II and Basel III part of CBE’s prudential framework; plan to implement Basel III liquidity coverage and net stable funding ratios. - Strengthen emergency liquidity assistance and bank resolution frameworks; require amendments to the CBE law and bank resolution laws. - MoF and CBE to develop clear rules on deploying public funds to maintain financial stability. ### Structural reforms for growth and employment - Governance and business climate reforms to continue; issues include excessive regulations, lack of transparency, heavy licensing requirements, punitive insolvency regime, and state entities’ commercial activities. - April 2017 Industrial Licensing Law: - Eliminates pre-approval requirements and establishes simplified procedures. - Expected to reduce time to start a business from more than 600 days to under 30 days. - Revised draft insolvency law: - De-criminalizes insolvency, aligns with international standards, allows restructuring or settlement under conditions, strengthens sanctions for financial fraud. - Support for female employment: - 2016/17 budget allocated EGP 250 million for improving availability of public nurseries. - 2017/18 allocation to increase funding for public nurseries to EGP 500 million and resources for improving safety of public transportation. ### Financing, safeguards, and program definitions - Program financing 2017/18: - Financing gap projected at about $2 billion. - Secured financing: $1 billion from the World Bank, $350 million from the African Development Bank, and $600 million from G7 countries. - Financing gap for 2018/19 slightly larger; expected to be covered with multilateral support, rollovers of some maturing liabilities, and market financing. - Safeguards assessment (April 2017): - CBE maintained a strong control framework; capacity constraints identified in external audit and financial reporting. - Recommendations: strengthen CBE Law; develop medium-term plan to unwind FX deposits at foreign branches of state-owned banks; adopt robust external auditor selection policy. - Revisions to program definitions: - Reclassify highly liquid overnight and 7-day deposits at the CBE from NDA to reserve money. - Primary deficit to be measured more accurately from above-the-line given accounting difficulties for valuation changes of FX-denominated deposits. - Quantitative targets for end-December 2017 and beyond based on these definitions. - Repayment capacity and Fund exposure: - By end of arrangement in 2018/19, Fund credit outstanding as a share of gross reserves projected to peak at 39 percent, then decline. - Debt service to the Fund as a ratio of exports of goods and services would reach 0.5 percent in the same year. - CBE and MoF signed a memorandum of understanding on respective responsibilities for servicing Fund credit. ### Staff appraisal, priorities, and risks - Staff view: - Authorities made a strong start to the program; early weeks of the move to a flexible exchange rate went smoothly. - MoF has contained discretionary expenditure and exercised restraint in wage policies. - Social safety net strengthening and structural reform efforts underway. - Key priorities: - Top priority to bring inflation under firm control; headline rates rose above 30 percent. - Continued fiscal adjustment important to remove root causes of high inflation. - Energy subsidy reforms remain critical but delayed; commitment to eliminate subsidies for most fuel products by June 2019. - Importance of implementing automatic fuel price adjustment mechanism and readiness to adjust fuel prices as needed. - Risks and challenges: - Weaker pound helps external sector but led to higher energy subsidies and undermined fiscal consolidation. - Pause in significant fuel price increases until 2018/19 carries risk of slippage related to global oil prices and exchange rate. - Need to ensure foreign exchange market functions well and monetary policy gains credibility under new exchange rate regime. - Worsening of the security situation could undermine adjustment efforts, impede growth and worsen living standards. ### Annex I — Public Debt Sustainability Analysis (summary) - Summary assessment: - Egypt’s public debt is sustainable, but risks are significant. - Under program assumptions, general government debt projected to fall from 98 percent of GDP this year to 73 percent of GDP in 2021/22. - Implementation risk—especially for growth-enabling reforms—is highlighted as the main downside risk. - Mitigants: large captive domestic investor base, limited growth in short-term financing, moderate external debt levels, government deposits averaging around 10 percent of GDP. - Drivers of recent debt dynamics (2016/17): - Main driver of the increase in debt stock in 2016/17: larger-than-anticipated depreciation. - Foreign debt increased from 13 percent of GDP in 2015/16 to 22 percent of GDP in 2016/17. - Total debt stock for 2016/17 expected to increase to 98 percent from 97 percent last year. - Baseline assumptions and projections: - Real GDP growth: forecast to increase from 3.5 percent in 16/17 to 6 percent over the medium term. - Inflation (GDP deflator): from around 6.3 percent in 2015/16 to 24.8 percent in 2016/17, then decline to around 7 percent over the medium term. - Primary balance projected to switch from deficits to surpluses from 2017/18. - Stress test scenarios (selected outcomes): - Growth shock (one standard deviation): debt-to-GDP falls to 78 percent by 2021/22. - Macro-fiscal (combined) shock: debt-to-GDP broadly unchanged until 2018/19, declining to around 89 percent in 2021/22. - Contingent liability shock (10 percent of banking assets): debt-to-GDP of 95 percent by 2018/19 and 81 percent in 2021/22. - Fan chart: symmetric width around 25 percent of GDP; asymmetric fan chart constrains upside shocks to growth and primary balance to zero. ### Appendix I — Letter of Intent (selected items) - Program request and procedural items: - Request completion of the first review and disbursement of the second tranche equivalent to SDR 895.48 million (44 percent of quota and about $1.25 billion). - Request waivers of nonobservance for end-June quantitative PCs on fuel subsidies and the primary balance; waivers of applicability for NIR and NDA because end-June data are not yet available. - Second review expected on or after November 11, 2017; third review on or after March 15, 2018. - Recent developments and program performance (selected): - CPI inflation rose to 30 percent in May 2017; core inflation 31 percent in May 2017. - With the November float, pound depreciated from EGP/$8.8 to almost EGP/$19 in January 2017, then stabilized around EGP/$18 since mid-March. - Gross international reserves reached $30.4 billion at end-May, exceeding the programmed June target of $22 billion. - Workers' remittances increased by 13 percent, reaching about $8.0 billion since the float. - Holdings of Egyptian T-bills by non-residents rose to about $5.8 billion by April 2017 compared with $40.6 million a year ago. - All five quantitative PCs and two out of three ITs for December met; indicative tax revenue target missed. - Monetary commitments: - Aim to raise gross international reserves to $31 billion in 2018/19 (120 percent of the Fund's reserve adequacy metric). - Cap on government overdrafts: EGP47.5 billion in 2016/17 and EGP52.9 billion in 2017/18; thereafter overdrafts to remain below 10 percent of the previous three years’ average tax revenues as mandated by CBE law. - CBE developing medium-term plan to divest FX deposits at foreign branches to be submitted by end-September 2017; no new funds to be placed in these branches and total deposits to be kept below end-April level of $5.4 billion (structural benchmark). - Fiscal estimates: - Projected fuel subsidies for 2016/17: EGP101.2 billion. - Projected primary deficit for 2016/17: EGP62.2 billion, or 1.8 percent of GDP. - Identified additional savings: about EGP6 billion in the wage bill and EGP3 billion in goods and services. - Raised prices for gasoline, diesel, LPG, kerosene and fuel oil; electricity tariffs increased in July 2017 as planned. ### Program financing and monitoring (TMU highlights) - Remaining financing gap for 2017/18: $1.9 billion after accounting for $4 billion from the IMF. - Expected sources: $1 billion from the World Bank; $350 million from the AfDB; $600 million from G7. - Key quantitative aggregates and program figures: - Foreign reserve assets (as of June 30, 2016): $17,097 million. - Reserve-related liabilities (as of June 30, 2016): $9,144 million. - Monetary gold valuation: $1,258.65 per troy ounce. - Program exchange rates (as of June 30, 2016): SDR 0.7056 per US$; Euro 0.9019 per US$; British Pound 0.7462 per US$; Japanese Jen 102.7004 per US$; Saudi Riyal 3.7506 per US$; Chinese Yuan 6.6480 per US$. - Program exchange rate of the pound against the US dollar: 8.77 for FY2016/17; 18.05 (actual on May 31, 2017) for FY2017/18. - Average reserve money: December 2016: EGP611.1 billion; Second semester of 2015/16: EGP460.67 billion. - NDA of the CBE: As of December 29, 2016, NDA amounted to EGP648.76 billion; As of June 30, 2016, NDA amounted to EGP626.37 billion. - Primary balance of the budget sector for fiscal year 2015/16: EGP-91.9 billion. - Definitions and monitoring: - NIR defined as foreign reserve assets minus reserve-related liabilities; monitored in US$ using program exchange rates. - Program disbursements defined as external disbursements of loans, grants, deposits for budget support, foreign reserve asset creating loans and deposits with original maturity > 360 days, and rollovers > 360 days; starting July 1, 2017, includes net issuance of government T-bills in foreign currency. - Reserve money definitions, NDA adjustors, and primary balance adjustors specified in TMU. - Reporting requirements: - Detailed monthly, weekly, and quarterly data reporting timetables for MoF and CBE items enumerated (e.g., overall deficit: M, 30 calendar days; program NIR: M, 7 working days; daily official exchange rates EGP/$: W, 5 working days after the end of the week). ### Article VIII mission and other statements - Article VIII mission: - Confirmed absence of any new multiple currency practice. - Temporary foreign exchange limit on bank transfers removed. - Remaining deposit restriction will be phased out as planned. - Smooth operation of FX market without evidence of suasion or intervention. - Statement by Hazem Beblawi and Wafa F. Abdelati (July 13, 2017) — selected findings: - Pound floated; VAT introduced and standard rate increased from 10 to 14 percent. - Second and third fuel price hikes implemented by averages of 35 and 55 percent, respectively. - Electricity tariff increases of 40 and 37 percent implemented within a 9 month period. - Three large interest rate hikes amounting to 700 bps since November 2016. - Growth picked up in Q1 2017 to 4.3 percent; net portfolio inflows exceeded $16 billion since the float. - Gross official reserves increased from $15.5 billion in July 2016 to $31.3 billion in June 2017. - Aim to bring deficits down to 3.5 percent of GDP by 2022; deficit-reducing measures amounted to 3.9 percent of GDP in 2016/17 and an additional 3.4 percent of GDP in 2017/18. - Social spending will increase by 1 percent of GDP and is financed to safeguard fiscal targets. *Source: IMF staff report "1. Moving to Targeted Social Protection" (cr17290).* ### 1. Moving to Targeted Social Protection _________________________________________________________ 11 ### 1. Moving to Targeted Social Protection ### Recent developments - Authorities demonstrated strong ownership of the program: adopted the value-added tax (VAT), floated the exchange rate, and increased fuel prices. - Eurobond placements and portfolio inflows: - Eurobond placements of $4 billion in January 2017 and $3 billion in May 2017. - At least $5 billion in portfolio inflows registered since the float. - FX market and reserves: - FX shortages and the parallel market virtually disappeared; bid/ask spreads narrowed. - The Central Bank of Egypt (CBE) did not intervene in the FX market except to supply FX to state-owned enterprises (SOEs) for critical imports. - Exchange rate stabilized at about EGP/$18 at end-May compared to EGP/$8.8 before the float. - Gross reserves rose from $16.4 billion in October to $28 billion in April 2017. - Current account and trade: - Current account deficit in 2016/17 expected to reach 5.8 percent of GDP, which is 0.6 percentage points of GDP more than in the program. - Unification of the exchange rate and elimination of FX shortages attracted informal trade into formal channels, masking underlying strengthening of the trade balance. - Inflation and growth: - Inflation reached 31 percent in April, eased to 30 percent in May. - GDP growth accelerated in first quarter of 2017 from 3.6 percent to 4.3 percent, led by manufacturing, construction, tourism, and retail trade. - Program performance and slippages: - All end-December performance criteria (PC) were met; an indicative target on tax revenues was missed due to delay in VAT executive regulations. - Two end-June PCs likely missed: primary balance and the fuel subsidy bill will be missed by about 1 percent of GDP each, driven by large depreciation increasing the price in pounds of imported oil products and food. - Most structural benchmarks implemented with some short delays; investment guidelines for reserve management approved in May after further study; comprehensive fiscal risks statement extended coverage through March 2017 instead of December 2016. ### Outlook and risks - Updated macroeconomic projections (reflecting larger-than-expected depreciation): - Current account deficit projected to narrow to 4.6 percent of GDP in 2017/18 and 3.8 percent of GDP in 2018/19. - International reserves expected to reach $30 billion in 2017/18 and $31 billion in 2018/19, or 120 percent of the ARA metric for floating regimes in 2018/19. - Annual inflation for June 2017 revised from 17 to 33 percent to account for larger depreciation. - Inflation expected to return to the programed path by end-2017/18 given recent monetary tightening and fading first-round effects of the VAT and energy price increases. - Growth projections reduced slightly to 3.5 percent for 2016/17 and 4.5 percent for 2017/18. - Nominal GDP in 2017/18 is now forecast 11 percent higher than before. - Gross public debt projected to decline from 98 percent of GDP in 2016/17 to 88 percent of GDP in 2017/18 and 78 percent in 2020/21. - Key risks to the program: - Fragile stability, difficult reform agenda, possible deterioration of security conditions. - High and persistent inflation could threaten macroeconomic stability and monetary policy credibility. - Discretionary attempts to minimize exchange rate volatility (including moral suasion or non-transparent interventions) could weaken confidence in the float. - Pressures to raise spending, including on wages, could undermine fiscal objectives. - Opposition by vested interests, corruption, and social tensions could derail structural reforms and hurt medium-term growth. - Lower growth in trade partners could weaken demand for Egyptian output; removal of flight bans would support tourism. - Worsening domestic security could undermine market confidence and the business climate. - Mitigants: - Strength of the policies under the program, the flexible exchange rate regime, and the program’s backing at the highest political level. ### Policy discussions — Monetary and exchange rate policies - Monetary tightening and liquidity management: - CBE raised policy rates by 200 basis points in May and 200 basis points in July. - Drained excess liquidity with open market operations using deposit auctions with maturities of 90–270 days. - Reduced banks’ overnight and 7-day deposit balances from nearly EGP 100 billion in March to below EGP 30 billion by mid-June. - CBE announced objective to bring inflation down to single digits over the medium term; medium-term objective to reduce inflation to mid-single digits. - Operational framework and instruments: - CBE will mainly rely on indirect policy instruments: manage banks’ excess reserves and money supply using deposit auctions; interest rate corridor to bound overnight interbank rates. - CBE may resort to reserve requirements if liquidity surpluses or shortages are structural. - CBE lending to the government to remain within limits set in the Memorandum of Understanding with the Ministry of Finance (MoF). - Lending to banks primarily for short-term liquidity support; CBE intends to maintain subsidized lending programs to commercial banks in support of small and medium enterprises and mortgages to qualified low income households, with a cap: total volume of new loans in 2017/18 capped at EGP 31 billion. - Mission recommendation: discontinue or budget-finance subsidized lending as it undermines monetary policy effectiveness. - Exchange rate regime and related measures: - Authorities will maintain a flexible exchange rate regime; CBE will refrain from FX interventions in the interbank market except to mitigate disorderly market conditions. - Mission recommended phasing out the profit repatriation mechanism; authorities prefer to maintain it currently to attract foreign capital. - CBE decided not to place any new funds in foreign subsidiaries and branches of Egyptian banks and to keep such deposits below the end-April level of $5.4 billion. - If FX sales become excessive, the CBE will consult the Fund on needed policy adjustments. - Institutional reforms: - CBE initiated amendments to the CBE law to improve governance and accountability; amendments to be submitted to Cabinet by December 31, 2017 (structural benchmark). - Provisions include strengthening governance structure, improving recapitalization and profit distribution rules, normalizing financial relationship with government and commercial banks, enhancing transparency, and separating emergency liquidity assistance (CBE responsibility) and solvency support to troubled banks (primarily government responsibility). - Financial reporting to be better aligned with the IFRS; procedures for selecting external auditors to be modified in accordance with best international practices (structural benchmark). - Article VIII assessment and exchange restrictions: - May mission found multiple currency practice (MCP) from the multiple price auction and an inoperative bilateral payment arrangement (BPA) between Egypt and Bulgaria giving rise to an exchange restriction. - Staff does not recommend approval of the exchange restriction arising from the BPA due to its discriminatory nature. - In June, CBE eliminated the restriction on resident individuals transferring abroad no more than $100,000 annually without an underlying commercial transaction. - By December 2017 authorities will remove the $50,000 cash deposit cap for non-priority goods. ### Policy discussions — Fiscal policy and public finance management - 2016/17 fiscal outturn and drivers: - 2016/17 primary deficit expected at 1.8 percent of GDP, exceeding the program target by 1 percent of GDP. - Tax revenue shortfall partly due to delayed VAT executive regulations; bulk of underperformance from higher energy subsidies resulting from weaker pound and higher world oil prices. - Subsidy overruns partly offset by small savings: wages (0.2 percent of GDP) and goods and services spending (0.1 percent of GDP). - Authorities view 2016/17 outcome as a sizeable consolidation of nearly 1.6 percent of GDP compared to previous year. - Medium-term fiscal anchor and adjustment path: - MoF aims to maintain three-year cumulative fiscal consolidation of 5.5 percent of GDP as in the program. - Goal to reduce gross public debt to about 86 percent of GDP by end of the program. - The 1 percent of GDP shortfall in fiscal adjustment in 2016/17 will be phased over the next two years to avoid excessive adjustment in any one year given fragile growth outlook. - 2017/18 budget and measures: - Budget passed by Parliament on June 21, 2017 (prior action). - Primary surplus projected at 0.4 percent of GDP, constituting fiscal consolidation of 2.2 percent of GDP. - Overall deficit projected to decline by 1.8 percent of GDP; monetary tightening will temporarily raise debt service costs. - Tax revenue projected to increase by 0.7 percent of GDP due to: - Increase in the VAT rate from 13 to 14 percent, effective July 1, 2017. - Higher excises. - New stamp duty on stock market transactions. - Tax administration reform pilots producing encouraging results; authorities, supported by IMF and other agencies, aim to expand reforms to reduce tax evasion and corruption. - Authorities raised some import tariffs in December 2016 on 364 product categories within the WTO limits to offset revenue shortfalls from lower import volumes; staff does not support this measure. - Expenditure structure adjustments: - Wage bill expected to decline by 1 percent of GDP. - Nominal wage increases of 7–10 percent (below inflation) and expected headcount reduction due to natural attrition to permit wage bill outcome. - Energy subsidies expected to decline by 0.8 percent of GDP. - Strengthening targeted social protection and increasing investment noted as budget priorities. *Based on: IMF staff report "1. Moving to Targeted Social Protection" (cr17290).* ### 0.5 percent is a fuel subsidy reduction. At the same time, public investments will increase by ### cr17290 - 0.5 percent is a fuel subsidy reduction. At the same time, public investments will increase by ### Fiscal measures and budget composition - Fuel subsidy reduction of 0.5 percent of GDP. - Public investments will increase by 0.4 percent of GDP. - Contingency fund of 0.2 percent of GDP included in the budget as a cushion for possible fiscal slippages. - Authorities prepared to delay low-priority spending, if needed. - Fiscal Measures in the 2017/18 Budget (percent of GDP) — components noted in the source: - Revenue impacts shown include: Non-oil excise duties, VAT, Non-Tax revenue, Other revenue (numerical chart values present in source). - Non-interest Expenditure impacts shown include: Other spending, Wages, Electricity subsidy, Fuel subsidy, Other subsidies, Investment (numerical chart values present in source). ### Energy subsidy reforms and fuel pricing policy - Energy subsidy reforms are central to planned fiscal consolidation and social equity; they represent a big share of government spending and mostly benefit the rich. - Electricity: - Authorities raised electricity tariffs by about 20 percent in July 2016. - Electricity tariffs will increase again in July 2017 sufficiently to reduce electricity subsidies in 2017/18 to the budgeted 0.6 percent of GDP. - Fuel: - Price increases last November produced gains in price-to-cost ratios that have been eroded by large depreciation and higher oil prices. - In June, average gasoline and diesel prices were increased by 53 percent. - Prices for kerosene and fuel oil (for cement) were increased by 55 percent and 40 percent respectively. - These changes achieved pre-tax price-to-cost ratios of 55 percent for gasoline and diesel and 58 percent for all fuel products. - LPG prices were doubled. - Authorities plan to further raise gasoline and diesel prices to reach full cost-recovery and eliminate fuel subsidies in 2018/19 except for LPG. - By end-September 2017 the Ministry of Petroleum will propose to the Prime Minister an automatic price indexation mechanism (structural benchmark) to adjust diesel, gasoline, kerosene, and fuel oil prices to changes in the exchange rate, oil prices, and the share of imported fuel products in the consumption basket. - Timing and details of the mechanism will be discussed in subsequent reviews. - Authorities are prepared to adjust fuel prices or take other measures as needed to offset any larger-than-projected costs of fuel production. ### Social protection and targeting reforms - Egypt is moving from energy-subsidy-based social protection to a better-targeted social safety net. - Cash transfer programs: - Takaful and Karama coverage planned to increase from 1.5 million households to 1.7 million in 2017/18. - Social Solidarity Pensions covers 1.7 million households and provides between EGP 323 and EGP 450 depending on household size. - 2016/17 budget includes provisions to cover medical insurance for Social Solidarity Pension beneficiaries. - Food subsidies: - Under food subsidies, beneficiaries entitled to up to five loaves of subsidized bread per day and ration cards for certain food. - Monthly allowance per ration card increased from EGP 15 to EGP 21 in 2016, and will increase to EGP 50 in 2017 for about 69 million beneficiaries. - Additional measures: - Tax credits and an increased minimum personal income tax threshold to enhance tax relief at the lower income level. - Extensive VAT exemptions continue to support the poor. ### Public financial management (PFM) and fiscal institutions - PFM reforms will focus on strengthening fiscal risk management and enhancing top-down expenditure restraint. - Institutional changes: - Establish an interagency technical committee comprising representatives of relevant ministries and agencies to coordinate macroeconomic forecasts and produce official projections for budget preparation. - MoF to prepare and submit to Cabinet by end-November 2017 a fiscal strategy paper outlining medium-term fiscal objectives and approach to setting expenditure ceilings (structural benchmark). - Budget Circular for the next cycle will be guided by the Fiscal Strategy Paper and provide aggregate and entity-specific expenditure ceilings and assumptions for budget preparation. ### Financial stability and banking sector assessment - Banks weathered transition to a floating regime well. - Aggregate capital adequacy at 14.9 in March 2017. - NPLs remain low at 5.7 percent of gross loans. - Specific provisioning at 91.5 percent. - Banking sector resilience: - Sector generally healthy and resilient to moderate shocks; capital and liquidity buffers considered sufficient. - Vulnerabilities identified in a few smaller banks (capital adequacy, asset quality, profitability below sector averages); under close monitoring by CBE. - CBE supervisory framework and plans: - Core elements of Basel II and Basel III are part of the CBE’s prudential framework. - Implementation of Basel III liquidity coverage and net stable funding ratios planned. - CBE will strengthen emergency liquidity assistance and bank resolution frameworks; this will require amendments to the CBE law and bank resolution laws. - MoF and CBE will develop clear rules on deploying public funds to maintain financial stability. ### Structural reforms for growth and employment - Governance and business climate reforms to continue; issues include excessive regulations, lack of transparency, heavy licensing requirements, punitive insolvency regime, involvement of entities under the Ministry of Defense in commerce. - April 2017 Industrial Licensing Law: - Eliminates pre-approval requirements and establishes simplified procedures. - Expected to reduce time to start a business from more than 600 days to under 30 days. - Revised draft insolvency law: - De-criminalizes insolvency, aligns with international standards, allows restructuring or settlement under conditions, strengthens sanctions for financial fraud. - Support for female employment: - 2016/17 budget allocated EGP 250 million for improving availability of public nurseries. - 2017/18 allocation to increase funding for public nurseries to EGP 500 million and resources for improving safety of public transportation. ### Financing, safeguards, and program definitions - Program financing 2017/18: - Financing gap projected at about $2 billion. - Secured financing: $1 billion from the World Bank, $350 million from the African Development Bank, and $600 million from G7 countries. - Financing gap for 2018/19 slightly larger; expected to be covered with multilateral support, rollovers of some maturing liabilities, and market financing. - Safeguards assessment (April 2017): - CBE maintained a strong control framework; capacity constraints identified in external audit and financial reporting. - Recommendations included strengthening CBE Law; developing medium-term plan to unwind FX deposits at foreign branches of state-owned banks; adoption of robust external auditor selection policy. - Revisions to program definitions: - Reclassify highly liquid overnight and 7-day deposits at the CBE from NDA to reserve money. - Primary deficit to be measured more accurately from above-the-line given accounting difficulties for valuation changes of FX-denominated deposits. - Quantitative targets for end-December 2017 and beyond based on these definitions. - Repayment capacity and Fund exposure: - By end of arrangement in 2018/19, Fund credit outstanding as a share of gross reserves projected to peak at 39 percent, then decline. - Debt service to the Fund as a ratio of exports of goods and services would reach 0.5 percent in the same year. - CBE and MoF signed a memorandum of understanding on respective responsibilities for servicing Fund credit. ### Staff appraisal, priorities, and risks - Staff view: - Authorities made a strong start to the program; crucial early weeks of the move to a flexible exchange rate went smoothly. - MoF has contained discretionary expenditure and exercised restraint in wage policies. - Social safety net strengthening and structural reform efforts underway. - Key priorities: - Top priority to bring inflation under firm control; headline rates rose above 30 percent. - Continued fiscal adjustment important to remove root causes of high inflation. - Energy subsidy reforms remain critical but delayed; commitment to eliminate subsidies for most fuel products by June 2019. - Importance of implementing automatic fuel price adjustment mechanism and readiness to adjust fuel prices as needed. - Risks and challenges: - Weaker pound helps external sector but led to higher energy subsidies and undermined fiscal consolidation. - Pause in significant fuel price increases until 2018/19 carries risk of slippage related to global oil prices and exchange rate. - Need to ensure foreign exchange market functions well and monetary policy gains credibility under new exchange rate regime. - Worsening of the security situation could undermine adjustment efforts, impede growth and worsen living standards. *Source: ARAB REPUBLIC OF EGYPT, INTERNATIONAL MONETARY FUND.* ### 40. The staff supports the authorities’ request for the completion of the first review under ### cr17290 - 40. The staff supports the authorities’ request for the completion of the first review under ### Staff assessment and Board-requested waivers - The staff supports the authorities’ request for the completion of the first review under the EFF arrangement. - The staff supports: - requests for waivers of applicability of end-June performance criteria for NDA and net international reserves; - requests for waivers of nonobservance of end-June performance criteria for the primary fiscal balance and the fuel subsidy bill; - on the grounds that the authorities’ proposed policy adjustment is strong enough to keep the program objectives intact. ### Real and external sector developments (figures and charts) - The report presents a suite of graphical indicators under "Figure 1. Egypt: Real and External Sector Developments" including: - Manufacturing index (2002=100) and Number of tourist arrivals (millions, rhs). - Contributions to Real GDP Growth (Percent) by public demand, net exports, private investment, private consumption, and Real GDP growth. - Exports of Goods: Non-Oil (Value) and Current Account Balance (Percent of GDP). - Financial Account components (Direct investment (Net), Portfolio investment (Net), Commercial banks' NFA) as a percent of GDP. - Effective Exchange Rates (NEER, REER; Index, 2010=100). - Consumer Price Index Inflation (Y-o-y, in percent) for Food, Retail, Regulated items, Services, Headline CPI - all items. ### Fiscal sector developments (figures and charts) - "Figure 2. Egypt: Fiscal Sector Developments" displays: - Budget Sector Revenue composition (Grants; Non-tax revenue; Tax revenue) in percent of GDP across years. - Budget Sector Expenditure composition (Other, Investment, Subsidies, Interest, Wages) in percent of GDP across years. - Primary balance and Interest payments components of the Budget Sector Balance (Percent of GDP). - General Government Debt (External, Domestic) as percent of GDP and Net Claims on Government by Commercial banks and Central bank (Percent of GDP). - Budget Sector Primary Balance Components over recent periods. ### Monetary sector developments (figures and charts) - "Figure 3. Egypt: Monetary Sector Developments" presents: - Growth rates (Y-o-y, in percent) of Broad money (M2) and Reserve money. - Net Foreign Assets of Banks (In billions of U.S. dollars) split into Foreign Assets and Foreign Liabilities. - Loan and Deposit Dollarization (Percent of total deposit or loan). - Credit to the Economy (Percent of GDP) including Net Claims on Government and Claims on Private Sector. - Interest Rates: Interbank overnight rate and 12-month T-bill interest rate (Percent). - Gross Official Reserves (Billions of U.S. dollars). ### Selected program indicators and tables (high-level) - The chapter contains extensive tabular data and projections (Tables 1–13) covering: - Selected macroeconomic indicators and projections (real GDP, consumer prices, public finances, monetary aggregates, external sector metrics). - Balance of Payments (levels and percent of GDP) through 2021/22, with detailed goods, services, transfers, capital and financial account components. - Budget sector and general government operations (in both levels and percent of GDP), with line items for revenue, tax subcomponents, nontax revenue, grants, expenditure categories, subsidies (including fuel subsidy and food subsidies), transfers to SIF, investment, and financing composition. - Central Bank Accounts and Monetary Survey items, including Net foreign assets, Net domestic assets, Reserve money, Broad money (M2), credit to private sector, and dollarization metrics. - National accounts summary and medium-term macroeconomic framework (growth, inflation, unemployment, savings-investment balance, fiscal aggregates, external debt, and official reserve projections). - Financial soundness indicators of the banking system and an assessment of capacity to repay the Fund. - External financing requirements and sources, gross financing requirements, and a proposed schedule of purchases under the Extended Arrangement (Table 13). ### Key policy implication (from staff position) - The staff’s endorsement of the waivers and completion of the first review reflects confidence that the authorities’ policy adjustments preserve the program’s objectives despite deviations from end-June performance criteria for NDA, net international reserves, the primary fiscal balance, and the fuel subsidy bill. *International Monetary Fund staff report excerpt (cr17290).* ### Annex I. Public Debt Sustainability Analysis ### Annex I. Public Debt Sustainability Analysis ### Summary assessment - Egypt’s public debt is sustainable, but risks are significant. - Under program assumptions, general government debt is projected to fall from 98 percent of GDP this year to 73 percent of GDP in 2021/22. - The projected debt decline is underpinned by significant improvements in the primary balance and broader macroeconomic reform; implementation risk—especially for growth-enabling reforms—is highlighted as the main downside risk. - Mitigating factors include a large captive domestic investor base, limited growth in short-term financing, moderate external debt levels, and government deposits that average around 10 percent of GDP. ### Drivers of recent debt dynamics (2016/17) - Main driver of the increase in debt stock in 2016/17: larger-than-anticipated depreciation in the exchange rate. - Foreign debt increased from 13 percent of GDP in 2015/16 to 22 percent of GDP in 2016/17 (revaluation of FX-denominated debt and foreign financing), more than offsetting the reduction in domestic debt from 84 percent to 76 percent. - Total debt stock for 2016/17 is expected to increase to 98 percent from 97 percent last year. ### Baseline assumptions and medium-term projections - Real GDP growth: forecast to increase from 3.5 percent in 16/17 to 6 percent over the medium term. Growth recovery driven by rising investment and exports due to free float of the exchange rate and structural reforms; investment boost includes public investment, weaker exchange rate–induced private investment, large investments in the energy sector, and discovery of a major gas field. - Inflation (GDP deflator): estimated to increase from around 6.3 percent in 2015/16 to 24.8 percent in 2016/17, then decline to around 7 percent over the medium term. - Primary balance (general government): projected to switch from deficits to surpluses from 2017/18 under the program. - Expenditure measures: (i) controlling the public sector wage bill; (ii) implementing the next phase of energy subsidy reform; (iii) improving targeting of social transfers. - Revenue measures: (i) increase in VAT rate from current 13 percent to 14 percent in the next fiscal year; (ii) improvements in tax administration; (iii) continued increases in excise taxes. ### Risk assessment and sensitivity analysis - Projections for growth, primary balance, and inflation are characterized as optimistic; median forecast errors for these indicators highlight economic and policy-related risks. - The projected fiscal adjustment in the cyclically-adjusted primary balance is large relative to benchmark countries. - Effect of fiscal adjustment and favorable interest rate–growth differential contribute to the projected unambiguous decline in the debt stock despite exchange-rate-driven increases in foreign debt value. Stress test scenarios and outcomes: - Growth shock: - A decline in growth by one standard deviation for 2017/18 and 2018/19 results in the debt-to-GDP ratio falling to 78 percent by 2021/22. - An alternative growth shock (two standard deviations) results in the debt stock and financing requirement being broadly unchanged by 2018/19. - Macro-fiscal (combined) shock: - With simultaneous shocks to growth, interest rate, and primary balance, the debt-to-GDP ratio remains broadly unchanged until 2018/19, declining to around 89 percent in 2021/22. - Contingent liability shock: - A standardized shock of 10 percent of banking assets (hypothetical realization of contingent liabilities) yields a debt-to-GDP ratio of 95 percent by 2018/19 and 81 percent in 2021/22. - Fan charts: - The symmetric fan chart width is around 25 percent of GDP, illustrating substantial equal-probability upside and downside uncertainty. - The asymmetric fan chart constrains upside shocks to growth and the primary balance to zero, producing a less downward-sloping debt path and reflecting risks skewed to the downside. ### Debt profile and vulnerabilities - Debt structure: - Public debt in foreign currency and the change in short-term debt as a share of total financing are both below the lower risk-assessment benchmark. - Market perceptions, external financing needs, and the percentage of public debt held by non-residents are above the lower risk-assessment benchmark but comfortably below the upper risk-assessment benchmark. - Identified mitigating factors: - Investor base: debt is largely held by domestic financial institutions, including the CBE, creating a captive investor base and reducing near-term rollover risks. - Buffers: government deposits average around 10 percent of GDP, implying a markedly lower public debt-to-GDP ratio on a net basis and providing some liquidity cushion to cover financing needs for a few months. ### External Debt Sustainability (summary points) - Baseline external debt (selected values from Table 1): - External debt: 2016 = 31.2 percent of GDP; 2017 = 28.0 percent; 2018 = 26.3 percent; 2019 = 23.4 percent; 2020 = 21.5 percent. - Change in external debt: 2016 = 14.3; 2017 = -3.1; 2018 = -1.7; 2019 = -2.9; 2020 = -2.0 (in percent of GDP). - Identified external debt-creating flows (2016) = 1.0 percent of GDP. - Current account deficit, excluding interest payments (2016) = 5.3 percent of GDP; projected 2017 = 3.9 percent; 2018 = 3.1 percent; 2019 = 2.9 percent; 2020 = 3.0 percent. - External ratios and financing needs: - External debt-to-exports ratio: 2016 = 188.2 percent; 2017 = 163.6 percent; 2018 = 153.3 percent; 2019 = 134.1 percent; 2020 = 121.4 percent. - Gross external financing need (in billions of US dollars): 2016 = 25.2; 2017 = 25.8; 2018 = 23.8; 2019 = 17.0; 2020 = 18.0; 2021 = 21.2. - Key macro assumptions underlying the external baseline (selected): - Real GDP growth: 2016 = 3.5 percent; 2017 = 4.5 percent; 2018 = 5.3 percent; 2019 = 5.8 percent; 2020 = 6.0 percent. - Nominal external interest rate (in percent): historical and projected series shown; selected projections include 2017 = 1.8; 2018 = 1.9; 2019 = 2.3; 2020 = 2.5. - Bound tests and shock scenarios (Figure 1 highlights): - Individual permanent one-half standard deviation shocks applied in bound tests; combined shocks and a one-time real depreciation scenario are used to assess resilience of external debt/GDP. *Source: IMF staff.* ### Appendix I. Letter of Intent ### Appendix I. Letter of Intent ### Program request and procedural items - Request completion of the first review of the extended arrangement under the IMF's Extended Fund Facility and disbursement of the second tranche in the amount equivalent to SDR 895.48 million (44 percent of quota and about $1.25 billion). - Request waivers of nonobservance for end-June quantitative performance criteria on fuel subsidies and the primary balance due to larger-than-expected depreciation of the pound. - Request waivers of applicability for net international reserves and net domestic assets of the CBE because end-June data are not yet available. - Second review expected to be completed on or after November 11, 2017; third review on or after March15, 2018. - Consent to publication of this letter, the MEFP including Tables 1 and 2, the TMU and the related staff report. ### Recent economic developments and program performance - Growth and sectoral developments: - Economic growth began to pick up in Q2 2016/17. - Non-petroleum manufacturing recorded year-on-year growth of 9 percent in the last quarter of 2016. - Natural gas output posted real growth of 4.9 percent compared to a contraction of 12 percent during the same quarter last year. - Initial recovery in tourism and resilient real estate performance noted. - Inflation: - CPI inflation rose to 30 percent in May 2017. - Core inflation (excluding volatile food items and regulated prices) was 31 percent in May 2017. - Monthly headline inflation declined to 1.7 percent in May from an average of 4 percent between November 2016 and January 2017. - Exchange rate and reserves: - With the November float, the pound depreciated from the pre-float official rate of EGP/$8.8 to almost EGP/$19 in January 2017, then stabilized around EGP/$18 since mid-March. - The CBE has not sold foreign exchange in the interbank market except for the $100 million auctioned on the day of the float and has been supplying FX to SOEs to finance critical imports as envisaged in the program. - Gross international reserves reached $30.4 billion at end-May, exceeding the programmed June target of $22 billion. - External sector and capital flows: - Real effective depreciation of the pound by 26.8 percent (year-on-year) supported an increase in non-oil exports. - Workers' remittances increased by 13 percent, reaching about $8.0 billion since the float. - Holdings of Egyptian Treasury bills by non-residents rose to about $5.8 billion by April 2017 compared with $40.6 million a year ago. - Total FDI inflows climbed to $4.0 billion in Q2 2016/17 (highest since Q1 2015). - Program performance: - All five quantitative performance criteria and two out of three indicative targets for December have been met. - The indicative target for tax revenues was missed due to delay in preparing and passing executive regulations for the VAT. - Most structural benchmarks were implemented; some were implemented with short delays and others are on track. ### Monetary and exchange rate policies - Objective: - Monetary policy aims to control and gradually reduce inflation to single digits over the medium term. - Recent policy actions: - Monetary stance tightened since mid-May by reducing balances on overnight and 7-day deposits to below EGP30 billion. - CBE raised policy rates by 200 basis points in May and another 200 basis points in July. - Exchange rate regime and reserves target: - Commitment to maintain a floating exchange rate regime and maintain adequate official reserves. - Aim to raise gross international reserves to $31 billion in 2018/19, equivalent to 120 percent of the Fund's reserve adequacy metric for flexible exchange rate regimes. - CBE will generally not intervene in the interbank FX market but will stand ready to make FX sales or purchases in exceptional cases; FX sales will be transparent and objectives communicated. - Monetary framework and liquidity management: - Monetary policy framework remains based on money targeting; reserve money is an indicative target. - Strengthen liquidity management, forecasting, and collaboration between CBE and MoF to incorporate public sector flows. - Monetary operations will rely primarily on indirect policy instruments (deposit auctions and standing facilities); reserve requirements may be adjusted when structural liquidity issues arise. - Cap on government overdrafts: EGP47.5 billion in 2016/17 and EGP52.9 billion in 2017/18; thereafter overdrafts to remain below 10 percent of the previous three years’ average tax revenues as mandated by CBE law. - CBE may lend to commercial banks in support of SME and mortgage programs up to EGP 31 billion in 2017/18; beyond this, lending mainly limited to the standing facility. - Reserve management and reporting: - Complete set of investment guidelines for reserve management approved by the CBE board in May 2017 (objectives, accountability, governance, risk management, currency distribution and exposure limits). - CBE developing a medium-term plan to divest FX deposits at foreign branches of Egyptian banks to be submitted by end-September 2017; meanwhile no new funds will be placed in these branches and total deposits will be kept below the end-April level of $5.4 billion (structural benchmark). - CBE strengthened communication: published 2014 financial stability report and first quarterly monetary policy and inflation report in March 2017; finalizing 2016 financial stability report for publication once approved by CBE board (structural benchmark). - Legal and governance reforms for CBE: - Amendments to the CBE Law to be submitted to Cabinet by end-December 2017 (structural benchmark). Proposed provisions include: - CBE law prevails against contradicting provisions in other laws. - Clarify terms of Board appointment and provide for a non-executive majority. - Include a double veto procedure and objective dismissal grounds for all board members. - Strengthen Board oversight over CBE management and ensure clear division of labor. - Strengthen rules related to CBE recapitalization and distribution of unrealized profits. - Limit monetary financing and provide specific recapitalization mechanisms financed by the government. - Clarify CBE’s role and framework in providing emergency liquidity assistance to solvent but illiquid banks; solvency support and resolution funding primarily government role. - Require publication of the audited financial statements of the CBE. - Strengthen financial reporting practices following move to accounting standards in line with IFRS and modify external auditor selection and appointment policy for the central bank (structural benchmark). - Capital flow and payments liberalization: - In June, CBE eliminated the restriction on resident individuals transferring abroad no more than $100,000 annually without an underlying commercial transaction. - Transfers by resident corporations for bona fide current transactions, and by non-residents, remain unrestricted. - By December 2017 the government will remove the $50,000 cash deposit cap for non-priority goods. ### Fiscal policy, energy subsidies, and consolidation measures - Fiscal pressures and outlook: - 2016/17 budget under additional pressure due to larger-than-expected depreciation of the pound and higher global oil prices. - Spending on energy subsidies and selected other expenditure with large import content increased considerably, rendering the fuel subsidies and primary balance targets unreachable without unreasonable cuts to growth-friendly spending and social programs. - Revised estimates and consolidation: - Projected fuel subsidies for 2016/17: EGP101.2 billion. - Projected primary deficit for 2016/17: EGP62.2 billion, or 1.8 percent of GDP. - This represents fiscal consolidation of 1.6 percent of GDP compared to 2015/16. - Full year estimate of the fiscal effort in 2016/2017 is around 4.5 percent of GDP compared to the baseline outcome (without any fiscal consolidation measures or fiscal tightening), when including additional savings achieved in government spending compared to budget targets. - Offsetting savings and price adjustments: - Identified additional savings: about EGP6 billion in the wage bill and EGP3 billion in goods and services. - Raised prices for gasoline, diesel, LPG, kerosene and fuel oil; electricity tariffs will also be increased in July, 2017 as planned. *Letter of Intent and attached Memorandum of Economic and Financial Policies (MEFP) and Technical Memorandum of Understanding dated July 6, 2017.* ### 14. Fiscal policy in 2017/18 aims to place public debt on a clearly declining path to ### 14. Fiscal policy in 2017/18 aims to place public debt on a clearly declining path to ### Fiscal targets and consolidation - Debt: - Debt is estimated to reach 98.4 percent of GDP by end-June 2017. - Objective: reduce debt to about 87.8 percent of GDP in 2017/18 and to 78 percent by 2020/21. - Fiscal stance: - Maintain the same cumulative fiscal consolidation of 5.5 percent of GDP as committed in the program. - Reach a surplus of around 2.1 percent of GDP in 2018/19, broadly maintained through 2020/21. - Achieve a primary surplus of 0.4 percent of GDP in 2017/18 (first time in years). - Fiscal adjustment in 2017/18 constitutes 2.2 percent of GDP compared to previously programmed 1.9 percent. - External support and budget law: - If external budget support (program disbursements) exceed programmed levels, part of the excess may be used for public investment projects with high social and/or economic returns, subject to seeking modification to performance criteria on the primary fiscal deficit and net international reserves in the next program review. - As required by the budget law, approval from Parliament will be requested for any changes in expenditure required to implement the program budget. ### Revenue-enhancing and expenditure-optimization measures (2017/18) - Expected contributors to planned fiscal adjustment: 1. Tax revenues: increase by around 0.7 percent of GDP due to: - Full year impact of previously implemented tax reforms. - Increasing the VAT rate from 13 percent to 14 percent starting July 1. - Increasing excise collections from tobacco sales by revising the tax structure. - Introduction of a stamp duty on stock market transactions. - Revising and increasing stamp duty on various licenses and government services. - Raising fees on free zones. - A comprehensive program to improve revenue administration. 2. Energy subsidies: reduction by 0.8 percent of GDP. 3. Wage bill: decline by 1 percent of GDP due to elimination of indexation of bonuses and allowances in the budget law, strict control on hiring, and modernization of the public employment framework in line with the new civil service law passed in August 2016. 4. Public investment: increase by 0.4 percent of GDP (including self-financed projects) to improve infrastructure and support private sector-led growth. 5. Other expenditure: reduction by 0.9 percent of GDP. 6. Female labor force participation measures: allocation of 0.2 percent of GDP to improve public transportation and enhance availability and quality of childcare. - Contingency and expenditure reprioritization: - Contingency fund of 0.1 percent of GDP to preserve the deficit target against revenue or expenditure slippages. - Preparedness to delay lower priority expenditure, including investments, if needed. ### Public financial management and transparency - Fiscal risks statement: - April 2017: finalized a comprehensive statement of fiscal risks covering macroeconomic risks, public debt management, policy, budget execution and resource mobilization risks, contingent liabilities of the budget sector and wider public sector including public enterprises, and pensions. - Statement includes assessment of outstanding state guarantees as of March 2017. - Guarantees oversight: - Established a committee headed by the Minister of Finance to evaluate requests for new guarantees, assess motivation and risks, and recommend whether to grant guarantees. - Structural benchmark: by September 30, 2017 the committee will develop a plan to control issuance of new guarantees. - Additional measures: - Economic authorities: plan to review operational performance and finances to ensure correct classification in accordance with international standards; where providing general government functions, proposals to rationalize and incorporate them in the state budget; IMF and development partner technical assistance will be sought. - Social Insurance Fund (SIF): comprehensive reform to ensure long-term financial sustainability and ability to pay adequate and equitable pensions; technical assistance from development partners and a road map of pension reform by December 2017. - Medium-term budgeting: introduce medium-term expenditure framework with multi-year expenditure ceilings by major spending categories; give greater prominence to functional classification; continue presenting a pre-budget statement to Parliament with every budget; update state budget chart of accounts in line with the Government Finance Statistics Manual if needed. - Macro-Fiscal Framework: establish an interagency technical committee by September 30, 2017 (representatives of Ministry of Finance Macro-Fiscal Policy Unit, Ministry of Planning, CBE, Ministry of Trade and Industry, CAPMAS, and others) to improve national accounts and macroeconomic forecast reliability; structural benchmark: provide Cabinet with a fiscal strategy paper before December 31, 2017 that includes medium-term fiscal objectives and an overview of approach to the 2018/19 budget within defined expenditure ceilings. ### Energy sector policies and subsidy reform - Rationale and objectives: - Comprehensive reform program across petroleum, gas and electricity to improve sector financial position, raise efficiency, remove untargeted subsidies, and enhance private sector participation. - Medium-term strategy for energy sector reforms approved by the Minister of Petroleum on March 30; new Gas law approved by Parliament in July (establishes independent regulator and promotes private downstream participation). - Electricity: - After an average 40 percent electricity tariff increase last July, further increases in July 2017 to ensure budget allocation to the electricity subsidy bill of 0.7 percent of GDP is achieved. - Electricity tariffs will increase further in 2018/19 as planned, aiming for cost recovery in the coming years. - Fuels: - Retail prices raised in June: gasoline and diesel by an average of 53 percent; LPG by 100 percent; kerosene by 55 percent; fuel oil by 40 percent. - End-of-period pre-tax price-to-cost ratios at end of 2016/17: 58 percent for all fuel products and 55 percent for gasoline and diesel. - Objective: achieve 100 percent cost recovery in 2018/19, excluding LPG. - Ministry of Petroleum to submit to the Prime Minister by end-September 2017 a proposed automatic fuel price indexation mechanism to adjust diesel, gasoline, kerosene, fuel oil to exchange rate, global oil prices, and share of imported fuel products (structural benchmark). - Additional increases in average fuel prices may be made during 2018/19 to achieve full cost recovery, excluding LPG. - Prices for other fuel products will be increased commensurately to eliminate subsidies by end-2018/19, excluding LPG. - In the event of major changes in oil price or exchange rate from projected levels, prepared to take measures as needed to achieve the primary balance target; progress assessed at each program review. ### Egyptian General Petroleum Company (EGPC) - Financial distress and arrears: - Arrears exceeded $6 billion in 2014; declined to $3.6 billion at end-September 2016. - In 2016/17, EGPC cleared $1.3 billion of arrears; arrears now stand at $2.3 billion. - Target: reduce arrears to about $1.1 billion in 2017/18 and fully eliminate them by end-June 2019. - Restructuring plan: - Developed and started implementation based on recommendations of an external consultant presented by March 31, 2017. - Measures include strengthening corporate governance, optimizing operating costs, encouraging private sector participation through offering minority shares in state-owned energy companies via Initial Public Offerings, and a strategy to gradually settle outstanding arrears. ### Natural gas production potential - Historical and projected production: - Daily output fell from 7 billion cubic feet (bcf) in 2010 to about 4 bcf in 2015/16. - Production increased during 2016/17 and set to reach 4.5 bcf by June 2017. - Over the next three years, production from new fields projected to increase to 7.7 bcf per day. - Current domestic need is 5.2 bcf per day. - Upstream investment and exploration: - Signed 76 new upstream exploration agreements with investment commitments in excess of $15 billion. - Zohr field highlighted as most promising; ongoing offshore explorations suggest likely larger deposits. - Negotiations with international gas exploration companies on development and production sharing agreements are at an advanced stage. - Implications: - Projected production exceeding domestic need offers opportunity to save excess quantities and/or export gas. - Enhanced domestic production, more efficient electricity plants, and higher reliance on renewables would reduce unit costs of fuel products and limit fiscal burden. ### Financial sector policies and bank resilience - Banking sector performance (based on March 2017 data and 2016 results): - Aggregate banking system profits in 2016: EGP62 billion. - Average capital adequacy ratio: 14.9 percent (above Basel-recommended floor of 8.625 percent and CBE-mandated 11.25 percent). - Return on equity: 24.4 percent. - Non-performing loans share: 5.7 percent. - Specific loan-loss provisioning coverage: 91.5 percent. - Net open FX positions: very small. - Policy priorities to strengthen resilience: - Strengthen regulatory and supervisory framework. - Phase in the capital conservation buffer in line with Basel timelines. - Promote competition to enhance efficiency in delivery of financial services. - Strengthen crisis management and resolution framework to mitigate systemic risks. - Promote financial inclusion without compromising credit quality. - Supervisory and crisis-preparedness actions: - CBE Banking Supervision to continue rigorous bank-by-bank stress tests based on adverse macroeconomic scenarios. - Monitor currency mismatches on balance sheets of large corporations and state-owned enterprises. - Implement Internal Capital Adequacy Assessment Process (ICAAP) in banking sector. - Strengthen supervisory early warning system. - Implement higher capital requirements for domestic systemically important banks. - Strengthen governance and accountability of bank management. - Develop new emergency liquidity assistance and bank resolution frameworks; MoF and CBE to develop clear rules on deploying public funds to maintain financial stability. ### Business environment and other structural reforms - Objectives: unlock growth potential, increase exports and industrial production, create adequate and well-paid jobs, improve Doing Business and Global Competitiveness rankings. - Key measures: - Industrial Licensing law (April 2017): - Existing licenses automatically renewed annually instead of temporary permits for 3-5 years. - Elimination of cumbersome pre-approvals (including Civil Defense and Fire safety). - Expected reduction in wait time for new licenses to 30 days from an average of 634 days before. - Guarantees to investors receiving a license if complying with health, safety and environmental regulations; exceptions for industries affecting vital public interests. - Industrial register to be used for statistical purposes only. - Revised insolvency law submitted to Parliament: - Governs liquidation and restructuring; allows companies under certain conditions to restructure or choose settlement instead of bankruptcy. - Special bankruptcy divisions of economic courts to handle mediation, restructuring and settlements; filings can be by debtor, creditor, or Prosecutor General. - Adequate sanctions for fraudulent bookkeeping, concealing financial records and accounting negligence. - Export promotion and non-oil exports: - Non-oil exports of goods are 6.8 percent of GDP. - Reforming export promotion regime to support small and new exporters and targeting reduction of non-tariff barriers. - Labor market and women’s participation: - High priority on reducing unemployment, especially among women and youth. - Enhance active labor market policies, develop specialized training programs for youth, and job intermediation schemes. - 2016/17: budgeted and spent EGP 250 million to improve public nurseries and facilities to enhance women's job-seeking ability. - 2017/18: increase such spending to EGP500 million (structural benchmark). - April 2017: joint committee established (Ministry of Labor, Ministry of Social Solidarity, Ministry of Finance, Ministry of Trade and Industry, Women's council, academia, business community) to prepare measures to improve women's participation rate; seek support under the Women’s Empowerment Project from the World Bank. - IPO program: - Announced five-year IPO program to unlock public asset potential, widen ownership, enhance transparency and corporate governance, diversify investment sources, and attract investment. - Consultations with investment banks and legal firms underway to list potential companies and detailed plans. - Initial focus sectors: banking and financial services, oil and gas, petrochemicals, building materials, real estate development. - First offering expected in the last quarter of 2017. *ARAB REPUBLIC OF EGYPT — INTERNATIONAL MONETARY FUND* ### 27. In support of this program, we will mobilize funds from international capital markets ### 27. In support of this program, we will mobilize funds from international capital markets ### Financing plan for 2017/18 - The remaining financing gap for 2017/18 is $1.9 billion after accounting for the $4 billion from the IMF. - Expected sources to close the $1.9 billion gap: - $1 billion from the World Bank - $350 million from the AfDB - $600 million from G7 ### Program monitoring framework - The program will be monitored through prior actions, quantitative performance criteria (PCs), indicative targets (ITs), and structural benchmarks. - Semi-annual program reviews will be based on December and June test dates. - All quantitative PCs and ITs are listed in Table 1; prior actions and structural benchmarks are set out in Table 2. - The Technical Memorandum of Understanding (TMU) describes definitions of quantitative PCs, consultation and data provision requirements. ### Key quantitative aggregates and program figures (as defined in TMU) - Foreign reserve assets (as of June 30, 2016): $17,097 million. - Reserve-related liabilities (as of June 30, 2016): $9,144 million. - Monetary gold valuation: $1,258.65 per troy ounce. - Program exchange rates (as of June 30, 2016): - SDR 0.7056 per US$ - Euro 0.9019 per US$ - British Pound 0.7462 per US$ - Japanese Jen 102.7004 per US$ - Saudi Riyal 3.7506 per US$ - Chinese Yuan 6.6480 per US$ - Program exchange rate of the pound against the US dollar: - 8.77 for FY2016/17 - 18.05 (the actual exchange rate on May 31, 2017) for FY2017/18 - Average reserve money: - December 2016 (average reserve money thus defined): EGP611.1 billion - Second semester of 2015/16 (average reserve money thus defined): EGP460.67 billion - Net domestic assets (NDA) of the CBE: - As of December 29, 2016, NDA amounted to EGP648.76 billion - As of June 30, 2016, NDA amounted to EGP626.37 billion - Primary balance of the budget sector for fiscal year 2015/16: EGP-91.9 billion ### Definitions, adjustors, and measurement rules (high-level) - Net International Reserves (NIR) of the CBE: - Defined as foreign reserve assets minus reserve-related liabilities. - Program targets the cumulative change in NIR since the beginning of the fiscal year. - NIR is monitored in US$; assets and liabilities in other currencies are converted using program exchange rates. - Excluded from foreign reserve assets: assets that are frozen, pledged, used as collateral, or otherwise encumbered; assets acquired through short-term currency swaps (original maturity < 360 days); claims on residents; precious metals other than gold; assets in nonconvertible currencies; and illiquid assets. - 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 > 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. - Starting on July 1, 2017, program disbursements also include net issuance of government T-bills in foreign currency. - Program disbursements exclude project loans and grants. - The NIR floor will be adjusted up (down) by the full amount of cumulative excess (shortfalls) in program disbursements relative to the baseline projections shown under the memo items in Table 1. - Reserve money (RM) and adjustor: - RM for December 2017 and June 2018 is defined as the sum of currency in circulation outside the CBE and balances on commercial banks’ overnight deposits, 7-day deposits, correspondent accounts, and required reserves in local currency at the CBE (excluding balances in deposit auctions and in term deposits at the CBE). - Average reserve money for each semester is calculated from daily balance sheets of the CBE as the average for the last month of the semester. - Adjustor for a change in local-currency reserve requirement ratio (rr): - Revised RM ceiling = Program RM ceiling + banks’ correspondent accounts in local currency x (new rr/old rr) - Net Domestic Assets (NDA) adjustors: - NDA targets adjusted by the full amount of cumulative excess (shortfall) in external budget support loans and grants (U.S. dollars) from official multilateral creditors, official bilateral creditors, private creditors, and external bond placements (project loans and grants excluded); U.S. dollar amounts converted to Egyptian pounds using program EGP/$ exchange rates. - In the event of a change in reserve requirement ratio (rr) in local currency: - Revised NDA ceiling = Program NDA ceiling + banks’ correspondent accounts in local currency x (new rr/old rr) - Primary fiscal balance of the budget sector (PC): - The general government comprises the budget sector, the Social Insurance Funds and the National Investment Bank (NIB). - The primary balance is defined as the overall balance plus total interest payments of the budget sector, measured cumulatively from the beginning of the fiscal year. - Net domestic financing and net external financing are defined in detail for the measurement of the overall balance. - Net external financing is measured in domestic currency at the official exchange rate on the date of the transactions. ### Prior actions and structural benchmarks (selected highlights and status) - Monetary, exchange rate, and financial sector: - If FX sales in auctions or the interbank market are excessive, the CBE will tighten monetary policy (Continuous). Status: Met. - Reduce government overdrafts to EGP75 billion by converting EGP 250 billion into securities (December 31, 2016). Status: Met. - CBE 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 (December 31, 2016). Status: Not met, Implemented with delay in May 2017. Comment: Guidelines approved on December 30 by the CBE board, revised and approved in May 2017. - Publish quarterly monetary policy and/or inflation reviews and financial stability reports (March 31, 2017). Status: Met. Comment: Monetary policy report published on March 31, 2017; financial stability report for 2014 published on March 30, 2017; CBE preparing 2016 report. - Fiscal policy and public financial management: - Introduce capital gains tax or stamp tax on stock exchange transactions to be effective no later than 2017/18 (May 31, 2017). Status: Met. - Increase social spending on programs by at least EGP 25 billion (June 30, 2017). Objective: Strengthen social protections. Status: On track. - Prepare report on outstanding stock of state guarantees at end June 2016 (January 31, 2017). Status: Not met, Implemented with delay in April 2017. Comment: Coverage extended through March 2017. - Prepare a comprehensive statement of fiscal risks covering all key areas (March 31, 2017). Status: Not met, Implemented with delay in April 2017. Comment: Coverage extended through March 2017. - Energy sector reforms: - Government to adopt an energy sector reform strategy based on external consultant report (March 31, 2017). Status: Met. - Develop action plan to place EGPC on a financially sustainable footing (March 31, 2017). Status: Met. - Minister of Petroleum to submit proposed automatic fuel price indexation mechanism by end-September 2017 to adjust prices to exchange rate, global oil prices, and share of imported fuel products (September 30, 2017). Objective: Strengthen energy subsidy reform. - Business environment and labor: - Adopt new licensing law to abolish industrial licensing except for vital public interest industries and limit Civil Defense and Fire pre-approvals to high-risk facilities (March 31, 2017). Status: Met. - Spend EGP 250 million to improve availability of public nurseries and facilities to enhance women's ability to seek jobs (June 30, 2017). Status: On track. - Spend EGP 500 million to improve availability of public nurseries and other facilities to enhance women's ability to seek jobs (June 30, 2018). Objective: Improve labor force participation for women. *Attachment II. Technical Memorandum of Understanding — July 6, 2017* ### 14. Off-budget funds. The authorities will inform IMF staff of the creation of any new off- ### 14. Off-budget funds. The authorities will inform IMF staff of the creation of any new off- ### Off-budget funds - The authorities will inform IMF staff of the creation of any new off-budgetary funds or programs immediately. - This includes any new funds, or other special budgetary and extra-budgetary programs that may be created during the program period to carry out operations of a fiscal nature as defined in the IMF’s Manual on Government Finance Statistics 2001. ### Adjustor (primary balance target) - The target for the primary balance of the budget sector will be adjusted up (down) by the full amount of the shortfall (excess) in the disbursement of external project loans. - Disbursement shortfalls will reduce primary deficits and excesses will increase them. - U.S. dollar amounts will be converted into Egyptian pounds using the program EGP/$ exchange. ### 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 are defined as total amount of subsidies paid by the budget sector for gasoline, diesel, kerosene, LPG and fuel oil. - These subsidies are 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. - EGPC arrears will be 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. - Definition: an external debt payment arrear is an 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. - The performance criterion will apply on a continuous basis throughout the arrangement. - Standard continuous performance criteria include: - (1) prohibition on the imposition or intensification of restrictions on making of payments and transfers for current international transactions; - (2) prohibition on the introduction or modification of multiple currency practices; - (3) prohibition on the conclusion of bilateral payments agreements that is inconsistent with Article VIII; and - (4) prohibition on the 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 of foreign exchange by the CBE to the government other than for debt service and to SOEs such as EGPC, GASC, and other. - If foreign exchange sales to SOEs and the government, and commercial banks 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; and - (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. - The authorities will transmit promptly to the IMF staff any data revisions. ### K. Data Reporting — Selected items and lags (Ministry of Finance) - Overall deficit of the budget sector: M, 30 calendar days. - Overall deficit of the general government, NIB and SIFs: M, 45 calendar days. - Summary of budget sector accounts, including revenues, expenditures and net acquisition of financial assets on a cash basis, consistent with IMF GFS 2001 Manual: M, 30 calendar days. - Summary accounts of NIB and SIFs, consistent with presentation of general government accounts: M, 45 calendar days. - Program disbursements and project loans to the general government: W and M, 30 calendar days. - Domestic debt stock and debt service costs of the general government and budget sector, including interest payments and amortization: M, 30 calendar days (45 days for the general government). - Debt guarantees issued by General Government and the CBE: Q, 45 calendar days. - Stock of bonds issued by the government to Social Insurance Fund: Q, 30 calendar days. - Net domestic borrowing of the general government and budget sector, including net t-bill and t-bond issuance in local and foreign currency, separately for domestic and foreign investors, and issuance of other government debt instruments: W and M, 30 calendar days (45 days for the general government). - Auctions of t-bills and t-bonds via primary dealers, including number and value of submitted and accepted bids, minimum, maximum and weighted average interest rates and maturity dates: W, 7 working days. - Gross transfers to EGPC: Q, 90 calendar days. - Fuel subsidies to EGPC: Q, 90 calendar days. - Stock of EGPC arrears to foreign creditors: Q, 90 calendar days. - Use of overdraft facility at the CBE (end of period stock): W, 15 calendar days. - Stock of outstanding domestic arrears by creditor: M, 30 calendar days. - Value and volume of crude oil, oil product, liquid and natural gas, and bunker and jet fuel exports and imports, partner exports and excess cost recovery (separately for liquid and natural gas, and crude oil) (from Ministry of Petroleum): Q, 90 calendar days. - Components of foreign direct investment (investments and capital repatriation) to the petroleum sector (from Ministry of Petroleum): Q, 60 calendar days. - Note: M = Monthly; W = Weekly; Q = Quarterly. ### K. Data Reporting — Selected items and lags (Central Bank of Egypt) - Program net international reserves and its components (foreign reserve assets and foreign reserve-related liabilities) of the CBE at program and current exchange rates: M, 7 working days. - Program disbursements and its breakdown by components (as defined in paragraph 7 above): M, 7 working days. - Breakdown of gross foreign assets and liabilities (including foreign currency liabilities to residents) of the CBE by currency at actual and program exchange rates: M, 15 calendar days. - Breakdown of foreign reserve-related liabilities (including foreign currency liabilities to residents) of the CBE by original maturity at actual and program exchange rates: M, 15 calendar days. - Program NDA of the CBE and its components: M, 15 calendar days. - Stock of outstanding external debt payment arrears of the general government (if any) by creditor: M, 30 calendar days. - Projections for external debt payments falling due in the next four quarters, interest and amortization: Q, 30 calendar days. - Monthly cash flow table based on the agreed template, both past outcomes and projections for 12 months: M, 15 calendar days. - Balance of payments data in electronic format: Q, 90 calendar days. - CBE foreign exchange deposits held at commercial banks headquartered in Egypt: W, 5 working days. - Commercial banks (foreign exchange and Egyptian pound) deposits by sector (household, corporate, public): M, 30 calendar days. - Commercial banks core FSI indicators by peer group: i) Net open position and ii) Liquidity ratios: measured in both foreign currency and in Egyptian Pounds: M, 30 calendar days. - Commercial banks core FSI indicators by peer group: i) Capital adequacy ratio defined as regulatory capital as a share of risk weighted assets; ii) Regulatory capital; iii) Nonperforming loans as a share of total loans; and iv) Provisions as a share of NPLs: Q, 75 calendar days. - Commercial bank-by-bank data: i) balance sheets by currency (foreign exchange and Egyptian pound); ii) income statements; iii) FSI indicators; and iv) profitability indicators: Q, 75 calendar days. - Other depository corporations (commercial banks) balance sheet information in SRF (preliminary): M, 30 calendar days. - Central bank balance sheet in SRF (preliminary): M, 15 calendar days. - Central bank’s weekly analytical balance sheet (preliminary data to be submitted once a week for the previous week): W, 7 working days after the end of the week. - Daily official exchange rates EGP/$ (data to be submitted once a week for the previous week): W, 5 working 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 working days after the end of the week. - Daily average buy and sell exchange rates EGP/$ as quoted by foreign exchange bureaus and banks (data to be submitted once a week for the previous week): W, 5 working days after the end of the week. - Daily interbank turnover in the FX spot market: M, 15 working days. ### Statement by Hazem Beblawi and Wafa F. Abdelati (July 13, 2017) — Selected findings and projections - Reforms and recent measures: - The Egyptian pound was floated. - A VAT was introduced and its standard rate increased from 10 to 14 percent. - Second and third fuel price hikes were implemented by an average of 35 and 55 percent, respectively. - Electricity tariff increases were implemented of 40 and 37 percent, respectively, within a 9 month period. - Three large interest rate hikes amounting to 700 bps were undertaken since November 2016. - Recent developments: - Growth picked up in the first quarter of 2017 to 4.3 percent, with a strong contribution from net exports and to a lesser extent investment. - Tourism, natural gas, trade, construction and non-petroleum manufacturing were main drivers. - Net portfolio inflows exceeded $16 billion since the float. - The depreciation pushed inflation up beyond 30 percent, but monthly inflation slowed from 4 percent in January to 1.7 percent in April and May, and 0.8 percent in June. - The June 29 fuel price hikes will add inflationary pressure. - Gross official reserves increased from a low of $15.5 billion in July 2016 to $31.3 billion in June 2017, approaching its peak in 2011. - Fiscal policies and outcomes: - Aim: bring down fiscal deficits that have exceeded 10 percent of GDP annually from FY2011-2017 to 3.5 percent of GDP by 2022. - Deficit-reducing measures amounted to 3.9 percent of GDP in 2016/17 and an additional 3.4 percent of GDP in 2017/18. - Social spending will increase by 1 percent of GDP and is financed to safeguard fiscal targets. - Primary balance will turnaround by 3.8 percent of GDP in two years to register a surplus in 2017/18. - Wage bill reforms: wages as percent of GDP declined from 8.1 in 2014/15 to 5.4 in 2017/18. - With a targeted primary budget surplus in the budget sector of 0.4 percent of GDP in 2017/2018, debt will retreat from its peak of 98 percent of GDP in June 2017 to a projected 88 percent in June 2018. - Note: The primary surplus amounts to 1 percent for the general government as shown in Table 9. - External public debt doubled in the last year to reach 20 percent of GDP. - Domestic public debt was reduced from a peak of 89 percent in June 2016 to 78 percent of GDP in June 2017. - Interest cost will exceed 30 percent of total expenditure in 2016/2017. - Institutional reforms and administration: - A comprehensive statement of fiscal risks was prepared in April covering state guarantees and contingent liabilities; a new committee will develop a plan for approval of new guarantees. - Finances of the economic authorities are under review. - A road map for pension reform will be prepared by December 2017. - An interagency committee will be established to strengthen coordination of macroeconomic forecasts underlying the budget and multi-year fiscal objectives. - External sector and exchange rate developments: - Following the float on November 3, the Egyptian pound depreciated from the central bank rate of 8.8 to the dollar to peak at 19.6 in mid-December before stabilizing around 18 since March 2017. - CBE absorbed liquidity in long tenor deposit auctions amounting to EGP 474 billion between November 6 and July 10, and raised interest rates by a total of 700 bps since the floatation. - No intervention has taken place since the float; the parallel market was eliminated. - The pound steadily appreciated since June 22 due to improvements in banks’ net foreign asset positions, higher remittance receipts, deeper foreign currency interbank market, and confidence gains following approval of the budget and subsidy reduction. - The balance of payments showed immediate but modest adjustments; the current account balance is expected to narrow considerably in the coming years. *Statement by Hazem Beblawi, Executive Director for the Arab Republic of Egypt and Wafa F. Abdelati, Senior Advisor to the Executive Director — July 13, 2017* ### 11. A Fund Article VIII mission confirmed the absence of any new multiple ### 11. A Fund Article VIII mission confirmed the absence of any new multiple currency practice ### Article VIII mission findings - The mission confirmed the absence of any new multiple currency practice. - The temporary foreign exchange limit on bank transfers was removed. - The remaining deposit restriction will be phased out as planned. - The mission confirmed the smooth operation of the foreign exchange market without evidence of suasion or intervention. ### Monetary policies and inflation - Inflation developments: - Inflation ranged between 8-15 percent between 2011 and 2016 (average of 10 percent over that period). - Inflation rose to 22 percent in December 2016. - Inflation peaked at 31.5 percent in April 2017. - Central Bank of Egypt (CBE) actions: - CBE raised interest rates by 700 bps since November, in three stages, to reach policy rates in the range of 18.75-19.75. - Liquidity absorption operations withdrew EGP 474 billion, or 13.6 percent of GDP, from the banking system. - Banks’ deposits with CBE were shifted into longer term variable rate instruments. - CBE targets and communications: - CBE issued a statement on July 6 reporting an additional 200 bps rate increase by the Monetary Policy Committee. - CBE reiterated an inflation target of 13 percent by end-2018 and single digits thereafter. - Factors expected to contribute to disinflation: restrained public sector wage increases, modest private sector wage adjustments, fiscal consolidation without recourse to CBE financing, and possible continuation of recent exchange rate appreciation. - CBE issued its first quarterly Monetary Policy Report in March 2017; the June report is forthcoming. ### Financial stability - Banking sector assessment: - Banking sector indicators remain strong. - Fund experts confirmed high caliber of banking regulation and supervisory capacity. - Banks are well capitalized, well above prudential norms (in many instances exceeding Basel III requirements), highly profitable, and compliant with best practice regulations. - Reports and frameworks: - Authorities published their first Financial Stability Report in March 2017; a second report is forthcoming. - Emergency liquidity assistance and the bank resolution framework will be further strengthened; these were previously tested and proved effective under the 2004 banking reforms. - Authorities welcome staff’s objective and thorough assessment as allaying financial stability concerns. ### Structural policies and energy sector reforms - Energy sector strategy and outcomes: - Government adopted an energy sector reform strategy in March 2017 and developed an action plan to place the Egyptian General Petroleum Corporation (EGPC) on a sound financial basis and improve operational efficiency. - Recent fuel and electricity price increases aim to improve cost recovery ratios and will translate into improving EGPC finances. - Authorities committed to eliminate subsidies on most fuel products by June 2019. - Authorities are studying an automatic price indexation mechanism to adjust fuel prices periodically. - Gas production and FDI: - After six years of contraction, gas production will expand in 2017 with the start of production of BP’s West Nile Delta project and Eni’s Zohr field—both ahead of schedule. - Recent gas discoveries are enhancing FDI and reducing energy imports, suggesting Egypt will soon be a major supplier of natural gas beyond domestic consumption needs. ### Other structural reforms to improve business climate - Legal and regulatory reforms: - A new investment law was passed; implementing regulations to be introduced in August (expected to improve investor sentiment in 2017/18). - A new industrial licensing law was introduced to streamline and expedite the process; expected to reduce the time it takes to start a new business by twentyfold. - A long-awaited insolvency law is with Parliament; it will decriminalize insolvency in line with international standards and strengthen sanctions for financial fraud, concealing transactions, and accounting negligence; expected to be passed in 2017/18. - A new labor law is expected to diminish dramatically the state’s role in labor affairs. - A new natural gas law will allow contractors and third parties access to the distribution grid, thereby diversifying supply to the domestic market. ### Labor market, unemployment, and social measures - Unemployment: - Unemployment has declined from peak levels, but reducing youth and female unemployment remains a key priority. - Policy responses: - Specialized training programs and job intermediation schemes are being developed. - The 2017/18 budget includes allocations for these initiatives and for increasing public child care facilities to facilitate female labor force participation. ### Government priorities and program ownership - Government priorities since the float: - Ensuring sufficient and adequate availability of basic and critical commodities to the public. - Addressing monopolistic and unfair trade practices. - Authorities’ requests and acknowledgments: - Authorities and the office team thank Directors for accepting a shorter circulation period. - Authorities thank staff, staff reviewers, and management for engagement on Egypt. - Authorities look forward to continued close dialogue and request more careful Fund public communications to avoid disruptive market influences and to safeguard strong ownership of the program. *IMF staff summary as presented in the content unit* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17290.pdf_