## cr1814 ## Source details **Canonical URL:** [cr1814](https://www.imf.org/-/media/files/publications/cr/2018/cr1814.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr1814.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr1814.pdf.json) --- ### Recent developments and program performance - Inflation peaked at 35 percent in July 2017 and was 30.8 percent year-on-year in October 2017; twelve-month core inflation declined from 35.3 percent to 30.5 percent. - Inflation expected to decline to around 12 percent by June 2018 and to single digits by 2019; CPI inflation (end of period) projections: 2017/18: 11.9; 2018/19: 15.2; 2019/20: 8.3; 2020/21: 7.2; 2021/22: 7.0. - Real GDP growth accelerated to 2.2 percent (quarter-on-quarter, final quarter 2016/17); GDP expanded by 4.2 percent in 2016/17 (above program projection of 3.5 percent). - Growth projections (Real GDP, market prices): 2016/17: 4.8; 2017/18: 5.3; 2018/19: 5.5; 2019/20: 5.8; 2020/21: 6.0; 2021/22: 6.0. Staff projects growth to strengthen to 4.8 percent in 2017/18 and to about 6 percent in the medium term. - With the floating of the exchange rate: - the parallel market disappeared; - capital inflows increased (portfolio inflows since the float through November 2017: about $18.5 billion; table indicates portfolio investments reached $16 billion in another excerpt); - international reserves reached $36 billion in October 2017 (around six months of prospective imports); gross international reserves (end-period, US$ billions) projections: 2016/17: 30.7; 2017/18: 34.5; 2018/19: 33.0. - Current account deficit: about 6 percent of GDP in 2016/17; projected to narrow to about 4.5 percent of GDP in 2017/18 and to about 3.5 percent of GDP by 2021/22. - Primary fiscal outcomes and projections: - Primary fiscal deficit narrowed from 3.5 percent of GDP in 2015/16 to 1.8 percent of GDP in 2016/17. - Projected primary fiscal surplus of 0.2 percent of GDP in 2017/18 (programmed improvement of the primary balance by a cumulative 5.5 percent of GDP is considered attainable). - Primary balance projections (percent of GDP): 2016/17: -1.8; 2017/18: 0.4; 2018/19: 2.1; 2019/20: 2.1; 2020/21: 2.2; 2021/22: 2.2. - Program performance to end-June 2017: - performance criteria on net international reserves (NIR) and net domestic assets (NDA) of the CBE were met; - indicative target on reserve money missed by a small margin; - all continuous performance criteria met; - most structural benchmarks met; implementation of three benchmarks delayed. - Financing gap: about $3 billion for the next 12 months after Fund disbursements (another excerpt shows financing gap for remaining program period about $1.5 billion and other financing items); expected to be met with bilateral, gross reserves, and commercial financing. ### Outlook and risks - Outlook highlights: - Growth expected to gain momentum in 2017/18 driven by recovery in consumption, private investment, and continued positive contribution from net exports. - Inflation expected to continue to decline from its July peak; average CPI inflation projections (2016/17–2021/22): 2016/17: 23.5; 2017/18: 21.0; 2018/19: 13.7; 2019/20: 10.0; 2020/21: 7.2; 2021/22: 7.1. - Government debt ratio projected to decline markedly in response to fiscal consolidation and high nominal GDP growth; gross general government debt (percent of GDP): 2016/17: 103.3; 2017/18: 91.3; 2018/19: 86.7; 2019/20: 80.8; 2020/21: 77.1; 2021/22: 72.3. - Reserves in months of next year's imports: 2016/17: 5.5; 2017/18: 5.7; 2018/19: 5.2. - Key risks: - Domestic: pressures to expand spending beyond budgetary allocations; premature easing of monetary policy before inflation expectations are anchored; opposition to reforms by vested interests; realization of state guarantees to SOEs; pre-election spending pressures. - External: worsening security that could slow tourism recovery; sustained rise in global oil prices; lower growth in trading partners; unexpected tightening of global financial conditions (noted relative likelihood = High for tighter global financial conditions). - Risk mitigants: authorities’ strong program ownership and record of implementation. ### Executive Board assessment and IMF recommendations - Directors commended: - ongoing recovery in GDP growth; - gradual moderation of inflation; - significant fiscal adjustment; - resilience of the banking system; - strengthening of market confidence. - Directors urged steadfast implementation of policies and structural reforms to solidify macroeconomic stability and advance structural reforms. - Key policy recommendations and priorities: - Make the private sector the primary engine of growth; state to provide stable macroeconomic environment, friendly business climate, and efficient delivery of public goods. - Raise potential output and promote inclusive growth to create jobs for Egypt’s young and growing population. - Strengthen social protection with greater reliance on targeted cash transfer programs rather than product subsidies. - Modernize regulatory framework to create a level playing field and enhance competition. - Support greater trade integration and removal of non-tariff barriers. - Improve access to finance and land; strengthen governance, transparency, and accountability of state owned enterprises. - Strengthen labor market and facilitate better integration of women and young people. - Carefully sequence and effectively communicate the reform agenda. ### Monetary policy and exchange rate guidance - Monetary policy guidance: - CBE commended for maintaining a prudent monetary policy stance; urged to remain vigilant. - Welcome intention to consider gradual easing of policy interest rates only once demand pressures and inflation expectations remain contained. - Move to inflation targeting in the medium term supported; preparatory work needed including reform of the central bank law and further reducing fiscal dominance. - Exchange rate guidance: - Directors endorsed commitment to a floating exchange rate regime. - CBE to refrain from interventions in the interbank market except to mitigate disorderly conditions. - CBE introduced a fee upon entry for the repatriation mechanism (mandatory fee of 100 basis points introduced effective December 3, 2017; fee of 50 basis points for buying FX from the CBE at exit to remain) to enhance pound flexibility and strengthen monetary transmission. - CBE increased banks’ long net open position (NOP) limit to 10 percent from the previous 1 percent. ### Fiscal policy guidance and public debt - Fiscal anchor: place public debt on a clearly downward path. - Authorities’ fiscal consolidation path aims to improve the primary balance by about 4 percent of GDP over the next two years. - Combined with strong nominal GDP growth, general government debt projected to decline from 103 percent of GDP in 2016/17 to 87 percent of GDP in 2018/19 (Annex baseline); baseline projects further decline to about 68 percent of GDP by 2022/23. - Directors stressed need to reduce fiscal deficit and public debt; welcomed commitment to achieve primary surpluses of about 2 percent of GDP in the medium term. - Urged implementation of automatic fuel price adjustment mechanism and phasing out most fuel subsidies by the end of the Fund-supported program. - Emphasized tax policy reforms to broaden tax base and modernize tax and customs administration; protect fiscal space for infrastructure, human capital, and social safety net. ### Structural reforms, business environment, and labor market - Structural priorities to support private sector-led growth: - Modernize regulatory framework; enhance competition in input and product markets. - Support greater trade integration and removal of non-tariff barriers. - Improve access to finance and land. - Strengthen governance, transparency, and accountability of SOEs. - Labor market reforms to increase participation of women and youth. - Findings on constraints to private sector development: - Real GDP growth averaged 4.2 percent per year over 1990–2017; per capita GDP growth averaged 2 percent. - National poverty rate: 27.8 percent in 2015/16. - Only 12 percent of Egyptian firms have a bank loan or a line of credit. - Land allocation to private sector limited and inefficient. - Women and youth: - Female labor force participation: 23 percent. - About one-third of young Egyptians in the labor force are unemployed. - More than ¾ of women are outside the labor force. - One in two young women is not in either education, the labor force, or training. - World Bank (2014) estimates overall wage gap between women and men at about 12 percent; rises to 40 percent in the private sector. - Social protection and incidence of reforms: - Welfare loss from recent energy price increase around 5½ percent of household expenditure on average before mitigating measures. - Monthly food subsidies increased from EGP21 to EG50 per beneficiary in 2017/18. - Targeted cash transfers Takafol and Karama coverage: expanded from 160,000 households in 2015 to 1.7 million households in mid-2017; expected to cover 2 million households by December 2018. - Additional measures: tax credits for low incomes; public sector wage bonuses of 7–10 percent; social insurance pensions increased by 15 percent. ### Banking sector, financial stability, and safeguards - Banking sector health: - Aggregate capital adequacy ratio (CAR): improved from 14.1 percent (Dec 2016) to 14.5 percent (June 2017). - NPL ratio improved to 5.5 percent as of June 2017; stock of NPLs increased by 2.3 percent in first half of 2017. - Bank profitability as of June 2017: return on equity 30.9 percent; return on assets 2 percent. - Loan-loss provisioning coverage: 91.1 percent (Dec 2016 figure). - Credit and liquidity: - Local currency credit to private sector expanded by 25.5 percent in 2016/17; real credit growth negative since December 2016. - CBE raised reserve requirements on local currency deposits from 10 to 14 percent in October (2017). - Supervisory and resolution reforms: - CBE developing regulation to differentiate early intervention and resolution triggers and to incorporate Financial Stability Board’s Key Attributes. - Staff recommended a rules-based emergency liquidity assistance (ELA) framework with penal rates, secured basis, and explicit collateral haircuts. - Use of public funds for systemic bank resolutions and public bank recapitalization should be transferred from the CBE to the MoF as budget strengthens. - Safeguards and capacity to repay: - CBE adopted a new policy on selection and appointment of the external auditor (effective with 2018 audit). - CBE to phase out FX deposits in foreign branches of Egyptian banks (targets: $4 billion by end-December; $3 billion by end-June 2018; eliminate by end-June 2019). - Fund credit outstanding as share of gross reserves projected to peak at 39 percent by 2019/20; debt service to the Fund as ratio of exports of goods and services would reach 0.6 percent in 2019/20. ### Debt sustainability and Annex I DSA highlights - Summary: debt is sustainable under the baseline but subject to significant risks. - Baseline projections: - General government debt projected to decline to 87 percent of GDP in 2018/19 and to about 68 percent of GDP by 2022/23 (other table shows 72.3 percent for 2021/22). - Gross financing needs remain large (average 35 percent of GDP during projection period versus 15 percent benchmark). - Alternative and stress scenarios: - Historical scenario (growth and primary balance at ten-year averages): debt-to-GDP would decline only to 99 percent of GDP in 2022/23 from 103 percent in 2016/17. - Alternative scenario (weaker fiscal consolidation): if medium-term primary surplus of about 2 percent of GDP is revised to primary deficit of 0.4 percent of GDP, debt-to-GDP in 2022/23 would be 80 percent versus 68 percent baseline. - Stress tests: real interest rate shock (+500 basis points) raises debt by ~5 percent of GDP; 100 percent real depreciation increases debt by 6 percent of GDP in the same year; combined shocks can raise debt to 95–106 percent of GDP in severe scenarios. - Key baseline indicators (selected): - Gross general government debt (percent of GDP): 2016/17: 103.3; 2017/18: 91.3; 2018/19: 86.7; 2019/20: 80.8; 2020/21: 77.1; 2021/22: 72.3. - Public gross financing needs (percent of GDP): 2016: 20.6; 2017: 45.2; 2018: 38.4; 2019: 35.6; 2020: 29.1. ### External sector, capital flows, and reserves - External outcomes: - Current account deficit remained about 6 percent of GDP in 2016/17 (or 6.1 percent in some excerpts); current account narrowed by $4.3 billion or 21 percent in recent period. - Non-oil exports increased by $2.1 billion in 2016/17; non-oil imports declined by $2.2 billion. - Tourism receipts rose by nearly 16 percent; FDI increased by 14 percent to $7.7 billion. - Portfolio inflows attracted since the float: about $18.5 billion (through November 2017) in one excerpt; $15.7 billion net inflows in debt securities in 2016/17 (another table). - Reserve adequacy: - Official reserves reached $36 billion in October 2017; reserves equal about 150 percent of the Fund’s ARA metric for floating regimes (other figure: $30.7 billion at end-June 2016/17 or about 130 percent of ARA). - Reserves in months of next year's imports: 2016/17: 5.5; 2017/18: 5.7; 2018/19: 5.2; projected declines thereafter. - Exchange rate and repatriation mechanism: - CBE has not intervened directly in the interbank FX market; supplies FX to SOEs and portfolio investors via repatriation mechanism. - Repatriation mechanism fees: mandatory fee of 100 basis points for selling FX to the CBE at entry (effective December 3, 2017); fee of 50 basis points remains for buying FX from the CBE at exit. - Repatriation mechanism diverted FX liquidity from the interbank market; its orderly and gradual winding down recommended as convertibility risks dissipate. - Multiple currency practice (MCP) eliminated in November 2017. ### Energy sector reform and fiscal implications - Objectives: modernize petroleum, gas and electricity sectors; remove untargeted subsidies; enhance private participation; achieve cost recovery. - Price and subsidy actions: - Electricity tariffs raised by 30 percent in July 2016 and by 40 percent in July 2017; further increases planned in 2018/19 to achieve cost recovery. - Fuel price increases in June 2017: retail prices for gasoline and diesel raised by an average of 53 percent; LPG, kerosene and fuel oil prices raised by 100, 55 and 40 percent respectively. - Price-to-cost ratios at end-September 2017: 68 percent for gasoline and diesel (one excerpt gives 59 percent earlier for gasoline and diesel at end-June 2017). - Fuel subsidy bill: decreased from 5.9 percent of GDP in 2013/14 to 3.3 percent of GDP in 2016/17; expected to decline to 2.4 percent of GDP in 2017/18; authorities plan to eliminate all fuel subsidies (excluding LPG) by end of the program. - Automatic fuel price indexation mechanism: - To be implemented within the first half of FY 2018/2019; formula and rule to be discussed and approved by the Prime Minister by February 28, 2018 (structural benchmark); authorities committed to implement next fuel price increase and indexation mechanism by December 2018 (timing to be discussed at third review). - EGPC arrears and reform: - EGPC arrears exceeded $6 billion in 2014; declined to $3.6 billion at end-September 2016; cleared $1.3 billion in 2016/17 leaving $2.3 billion; EGPC will reduce arrears to about $1.2 billion in 2017/18 and fully eliminate by end-June 2019. ### Program financing, monitoring, and conditionality - Program financing commitments through December 2018 include: - $1 billion from the World Bank’s third DPF; - $500 million from the African Development Bank; - $425 million from the G7; - $1.1 billion from international banks. - Extended Arrangement totals: - Total scheduled purchases under the Extended Arrangement: 8,596.57 SDR (12,000 US$) (table entry). - Fund credit outstanding (Millions of US$ projected): 2016/17: 2,750; 2017/18: 8,000; 2018/19: 12,000; 2019/20: 12,000. - Monitoring framework: - Program monitored through prior actions, quantitative performance criteria, indicative targets and structural benchmarks with semi-annual reviews (December and June). - Technical Memorandum of Understanding (TMU) defines NIR, NDA, reserve money, primary balance, fuel subsidies, EGPC arrears, and reporting requirements. - Data reporting requirements: detailed Ministry of Finance and CBE reporting schedules with specified frequencies and submission lags (e.g., CBE program net international reserves monthly with 7 working days lag). - Requested modifications: - Authorities requested modification of performance criteria on the primary fiscal balance and NDA for December 2017 and June 2018; staff supports completion of second review and requested modifications. *International Monetary Fund — STAFF REPORT FOR THE 2017 ARTICLE IV CONSULTATION, SECOND REVIEW UNDER THE EXTENDED ARRANGEMENT UNDER THE EXTENDED FUND FACILITY, AND REQUEST FOR MODIFICATION OF PERFORMANCE CRITERIA* ### 4.8 percent in 2017/18 and to 6 percent in the medium term. In July 2017, inflation peaked at 35 ### cr1814 - 4.8 percent in 2017/18 and to 6 percent in the medium term. In July 2017, inflation peaked at 35 ### Recent developments and program performance - Inflation peaked at 35 percent in July 2017, reflecting pass-through from the devaluation of the pound and increases in energy prices and the VAT rate; tightening of the monetary policy stance has supported moderation since then. - Inflation is expected to decline to around 12 percent by June 2018 and to single digits by 2019. - The current account deficit remained unchanged at about 6 percent of GDP in 2016/17. - With improved external competitiveness, business environment reforms, and a recovery in tourism, the current account deficit is expected to narrow to about 4.5 percent of GDP in 2017/18 and to about 3.5 percent of GDP by 2021/22. - With the floating of the exchange rate: - the parallel market disappeared; - capital inflows increased; - international reserves reached 5 months of imports of goods and services. - The primary fiscal deficit narrowed from 3.5 percent of GDP in 2015/16 to 1.8 percent of GDP in 2016/17, and is projected to turn into a surplus of 0.2 percent of GDP in 2017/18. - Program performance to end-June 2017: - performance criteria on net international reserves (NIR) and net domestic assets (NDA) of the Central Bank of Egypt (CBE) were met; - the indicative target on reserve money was missed by a small margin; - all continuous performance criteria were met; - most structural benchmarks were met, but implementation of three benchmarks has been delayed. - The financing gap for the next 12 months is about $3 billion after Fund disbursements; it is expected to be met with bilateral, gross reserves, and commercial financing. ### Outlook and risks - Outlook: - Growth is expected to gain momentum in 2017/18, driven by a recovery in consumption and private investment and a continued positive contribution from net exports. - Inflation is expected to continue to decline from its July peak; second-round effects from the depreciation of the pound and fuel price and VAT rate hikes appear to be contained. - The government debt ratio is projected to decline markedly in response to fiscal consolidation and high nominal GDP growth. - The current account deficit is expected to narrow further as net exports strengthen. - Risks: - Pressures to expand spending beyond budgetary allocations could undermine stabilization. - Any premature easing of monetary policy before inflation expectations are fully anchored could pose risks. - Opposition to reforms by vested interests could undermine stabilization and growth prospects. - External risks include a worsening of the security situation that could slow the recovery of tourism, a sustained rise of global oil prices, lower growth in Egypt’s main trading partners, or any unexpected tightening of global financial conditions. - These risks are mitigated by the authorities’ strong program ownership and record of implementation. ### Executive Board assessment and IMF recommendations - Executive Directors commended the authorities’ strong ownership of the program and progress in stabilizing the Egyptian economy, noting: - ongoing recovery in GDP growth; - gradual moderation of inflation; - significant fiscal adjustment; - resilience of the banking system; - strengthening of market confidence. - Directors urged steadfast implementation of policies to solidify macroeconomic stability and advance structural reforms. - Key policy recommendations and priorities: - Make the private sector the primary engine of growth; the state should provide a stable macroeconomic environment, a friendly business climate, and efficient delivery of public goods. - Raise potential output and promote inclusive growth to create jobs for Egypt’s young and growing population. - Strengthen social protection to shield the most vulnerable, with greater reliance on targeted cash transfer programs rather than product subsidies. - Modernize the regulatory framework to create a level playing field for all. - Enhance competition in input and product markets. - Support greater trade integration and removal of non-tariff barriers. - Improve access to finance and land. - Strengthen governance, transparency, and accountability of state owned enterprises. - Strengthen the labor market and facilitate better integration of women and young people in the labor market. - Carefully sequence and effectively communicate the reform agenda. - Monetary policy and exchange rate guidance: - Directors commended the Central Bank of Egypt (CBE) for maintaining a prudent monetary policy stance and urged CBE to remain vigilant. - They welcomed the intention to consider a gradual easing of policy interest rates only once demand pressures and inflation expectations remain contained. - Directors noted the authorities’ intention to move to inflation targeting in the medium term and highlighted the need to complete preparatory work, including reform of the central bank law and further reducing fiscal dominance. - Directors endorsed the authorities’ commitment to a floating exchange rate regime and welcomed CBE’s intention to refrain from interventions in the interbank market except to mitigate disorderly conditions; they also welcomed CBE’s decision to introduce a fee upon entry for the repatriation mechanism to enhance pound flexibility and strengthen monetary transmission. - Fiscal policy guidance: - Directors stressed the need to reduce the fiscal deficit and public debt, welcoming the authorities’ commitment to achieve primary surpluses of about 2 percent of GDP in the medium term. - They urged implementation of the automatic fuel price adjustment mechanism as soon as possible and the phasing out of most fuel subsidies by the end of the Fund-supported program. - Directors underscored the need to implement tax policy reforms to broaden the tax base and modernize tax and customs administration. - They emphasized strengthening public finance management and guarding against increases in government debt originating from outside the budget sector. - Directors noted fiscal space is needed for spending on infrastructure, human capital, and the social safety net. ### Program focus and administrative details - Focus of the Article IV consultation: achieving sustained high and inclusive growth and creating employment opportunities for Egypt’s rapidly growing population through market-friendly reforms and deeper trade integration; modernizing public finance management and monetary policy frameworks; improving the business environment; strengthening transparency and governance; promoting greater inclusion of women in the labor force; and reducing distortions from the public sector’s large role. - Staff supports the authorities’ request for: - completion of the second review under the Extended Arrangement under the Extended Fund Facility (the EFF Arrangement); - modification of performance criteria on the primary fiscal balance and net domestic assets of the CBE for December 2017 and June 2018. - Administrative/data notes: - Discussions were held in Cairo during October 25–November 9. - The report date is December 11, 2017. *International Monetary Fund — STAFF REPORT FOR THE 2017 ARTICLE IV CONSULTATION, SECOND REVIEW UNDER THE EXTENDED ARRANGEMENT UNDER THE EXTENDED FUND FACILITY, AND REQUEST FOR MODIFICATION OF PERFORMANCE CRITERIA* ### 4. Growth is rebounding and inflation appears to have turned the corner. Growth ### 4. Growth is rebounding and inflation appears to have turned the corner. Growth ### Recent growth and inflation developments - Growth accelerated from seasonally adjusted 1.1 percent (quarter-on-quarter) in the first quarter of 2016/17 to 2.2 percent in the final quarter, driven by manufacturing, construction, real estate, natural gas, retail trade, transport and communication. - For the year, GDP expanded by 4.2 percent, above the program projection of 3.5 percent. - Month-on-month inflation rose to 3.2 percent in July, primarily reflecting higher fuel prices and the VAT rate hike. - Month-on-month inflation eased to 1.1 percent in October. - Year-on-year inflation declined from its July peak of 33 percent to 30.8 percent. - Twelve-month core inflation declined from 35.3 percent to 30.5 percent. ### Current account, external inflows, and reserves - The current account (CA) deficit remained unchanged at about 6 percent of GDP in 2016/17. - Liberalization of the exchange rate strengthened inflows from tourism, remittances, and the non-oil merchandise trade. - Dollar GDP declined in line with the depreciation of the pound, resulting in a higher CA ratio. - Portfolio inflows of about $18.5 billion have been attracted since the float through November 2017 due to the depreciation and interest rate differential. - Gross reserves increased from $16.4 billion before the launch of the program to around $30 billion in June and further to $36 billion in October (six months of prospective imports). ### Exchange rate and repatriation mechanism - The exchange rate remained broadly stable since March; since June, the Egyptian pound appreciated by 2 percent against the dollar. - The Central Bank of Egypt (CBE) has not intervened directly in the FX market but has supplied foreign exchange at market exchange rates to state-owned enterprises (SOEs) and portfolio investors through the repatriation mechanism. - The repatriation mechanism guarantees the availability of FX for repatriation to investors that choose to sell FX to the CBE at the time of entry at prevailing exchange rates. - There is no evidence of foreign exchange shortages, but the repatriation mechanism diverted FX liquidity from the interbank market and prevented appreciation of the currency in response to portfolio inflows. - The updated external sector assessment suggests the external position in 2016/17, adjusted for the policy shift mid-year, was moderately weaker than the level consistent with fundamentals and desirable policies. ### Fiscal outturn and government debt - The primary deficit of the budget sector was 1.8 percent of GDP, as expected at the time of the first review. - Budget sector debt was 4 percent of GDP higher than projected, at 108 percent of GDP, because of on-lending and direct borrowing from the treasury single account by economic authorities, a discrepancy between accrual and cash accounting of bonds, and a higher interest bill. - The wage bill and fuel subsidies were in line with program objectives. - (From the budget sector debt table) Budget Sector Debt First Review: 3,623 EGP billion, 104.2 Percent of GDP; Budget Sector Debt Second Review: 3,773 EGP billion, 108.5 Percent of GDP. - Components contributing to the change included: Lending to other entities 782.2 EGP billion; Onlending to government entities 601.7 EGP billion; Economic Authorities Borrowing from TSA 180.5 EGP billion; Discrepancy due to accrual vs cash accounting 290.8 EGP billion; Stock adjustment of previous year 240.7 EGP billion; Difference in overall balance 140.4 EGP billion; Valuation effects 40.1 EGP billion; Other 20.0 EGP billion. ### Monetary policy, credit, and central bank actions - The CBE tightened monetary policy, raising policy rates in May and July by a cumulative 400 basis points. - Transmission to T-bill rates was dampened by large portfolio inflows through the repatriation mechanism. - Central bank credit to the government and commercial banks for subsidized lending and social housing programs was contained within program ceilings. - Local currency credit to the private sector expanded by 25.5 percent in 2016/17, but monthly credit growth declined and turned negative in July 2017. - Real credit growth has been negative since December 2016. - The CBE raised reserve requirements on local currency deposits from 10 to 14 percent in October. ### Program implementation and structural measures - The program is broadly on track. - Remaining end-June quantitative performance criteria (PCs) for net international reserves (NIR) and net domestic assets (NDA), and the indicative target on EGPC arrears were met. - The end-June indicative target (IT) on reserve money was missed by a small margin. - All continuous PCs were met. - The end-June IT on tax revenues was missed because of a brief delay in issuing VAT executive regulations. - Partial progress on structural benchmarks: EGP250 million was spent on nurseries to enhance women’s labor force participation; CBE developed a plan to gradually reduce its FX deposits in foreign branches of Egyptian banks; CBE adopted a new policy on selection and appointment of an external auditor; the 2016 financial stability report was published in September. - The end-September structural benchmarks on developing a system to evaluate and decide on new state guarantees was missed; a guidance note on broad principles was issued in October. - The automatic fuel price indexation mechanism (end-September SB) was submitted to the Prime Minister in October but lacked sufficient operational detail. - The fiscal strategy paper is expected to be implemented with a short delay in December instead of November. ### Data adequacy - Data provision is broadly adequate for surveillance for monetary, banking, balance of payments, and the budget sector. - Egypt would benefit from improving timeliness and accuracy of national accounts, and the quality and coverage of general government accounts. ### Outlook and projections - Growth is projected to strengthen to 4.8 percent in 2017/18 and rise further to around 6 percent in the medium term. - Inflation is expected to decline to around 12 percent by June and to single digits in 2020. - The CA deficit is projected to narrow to about 4.5 percent of GDP in 2017/18 and to about 3.5 percent of GDP by 2021/22. - In 2017/2018, a primary fiscal surplus of 0.2 percent of GDP is projected, driven mainly by the full year impact of the VAT increase, and lower wages and fuel subsidies. - The programmed improvement of the primary balance by a cumulative 5.5 percent of GDP is considered attainable. - General government debt is projected to decline by about 17 percent of GDP by the end of the program. ### Risks to the outlook - Main risks arise from any slowdown or reversal of reforms, including reform fatigue or opposition by vested interests that could weaken credibility and hurt investment and growth. - A premature easing of monetary policy could adversely affect inflation expectations. - Pressures to increase spending on wages or expand social programs beyond budgeted amounts, and realization of state guarantees to SOEs, could undermine fiscal goals. - External risks: an increase in global oil prices (weakening the current account and increasing the fuel subsidy bill), worsening regional security (weakening tourism), lower growth in trading partners (reducing exports demand), and an unexpected tightening of global financial conditions (weakening appetite for Egyptian Eurobonds and reversing portfolio flows). - These risks are mitigated by the authorities’ commitment to sound policies and strong ownership of the program. ### Authorities’ views - The authorities shared staff’s view of a favorable macroeconomic outlook and cited a strong track record in policy implementation since the program start and political support at the highest level. - They believed the risk of policy slippages and a slowdown of reform momentum was not a serious concern, while acknowledging external vulnerabilities, especially higher global oil prices, and expressed readiness to use all necessary policy instruments if risks materialize. ### Policy discussions and reform priorities - Medium-term objective: raise potential output and promote inclusive growth to create jobs for the growing population. - Macroeconomic stability to be preserved by: a modernized monetary policy framework grounded in the flexible exchange rate regime aimed at low and stable inflation; a stable financial sector; fiscal consolidation underpinned by strengthened tax and PFM frameworks; and a better targeted social safety net. - Structural reforms to improve the business climate, increase financial inclusion, and reorient and streamline the role of the state to support private investment, productivity, and exports. - Increase labor force participation, especially by women and youth, to enhance growth potential. - Reforms should be properly paced and sequenced. ### Legacy issues, inefficiencies, and governance - The past development model featured an expansive welfare system and a large public sector workforce, with consumption rising to over 90 percent of GDP. - Economic self-reliance, industrial and import substitution policies, and fuel subsidies led to over-investment in inefficient, capital-intensive industries with low employment growth. - Inward-looking policies, weak competition, and poorly-defined property rights dis-incentivized productivity growth and weakened external competitiveness. - The state remains a prominent economic actor: public sector share of total employment estimated close to 30 percent, almost twice formal private sector employment (ELMPS, 2012). - The state provides extensive subsidies, owns many public enterprises across banking, energy, manufacturing, agriculture, transport, tourism, and services, and controls most land for investment—limiting private sector access and fiscal space. - The CBE assumed fiscal functions beyond its mandate, including direct lending to meet budget financing needs, subsidized lending to SMEs and mortgages, and financing bank recapitalization and resolution—leading to competing objectives for the central bank. ### Need for a new growth paradigm and specific reform actions - A new paradigm needs private sector-led investment and employment to create around 700,000 jobs annually and sustainably lift living standards. - Reorientation required: market mechanisms for resource allocation, hard budget constraints for the public sector, transparency and accountability, and separation of fiscal and monetary functions. - A limited set of reforms with high short-term potential includes: - Modernized regulatory framework to create a level playing field. - Enhanced competition in input and product markets. - Greater trade integration and removal of non-tariff barriers. - Improved access to finance and land. - Strengthened governance, transparency, and accountability of SOEs. - Labor market reforms. - Progress in these areas could unlock higher growth and generate positive spillovers for the region. ### Corruption and its economic impact - Corruption is perceived as high and widespread in Egypt compared to most regional peers and other emerging market economies. - Literature suggests strong economic effects from reduced perceived corruption: Ugur and Dasgupta (2011) find a one-unit improvement in perceived corruption is associated with an increase of 0.59–0.86 percentage point in per capita GDP growth. - Perception of corruption may have mitigated the impact of past reforms on growth. *IMF staff report (excerpt).* ### 21. The authorities broadly shared the mission’s view of the medium-term objectives. They ### cr1814 - 21. The authorities broadly shared the mission’s view of the medium-term objectives. They ### Authorities' stance on medium-term objectives - Agreed that the private sector needs to be the primary engine of growth and job creation. - Concurred with the key reform areas proposed by staff, while stressing that a proper pacing of reforms is essential to build domestic consensus and generate buy-in from all stakeholders, given the extensive reforms already undertaken and the sacrifices already made by the population in the context of the reform program. - Considered the private sector in Egypt to be still insufficiently dynamic with a large level of informality; the state may need to provide guidance and occasional support until it matures. - Noted a role for the state to overcome market failures, especially when important macroeconomic policy changes are being introduced; cited interventions during occasional shortages of food and other essential goods last year. ### Constraints to growth and private sector development (Box 1 — key findings) - Real GDP growth averaged 4.2 percent per year over 1990-2017; per capita GDP growth averaged 2 percent annually over the same period. - National poverty rate was 27.8 percent in 2015/16. - Growth model since mid-2000s driven mainly by capital deepening; contributions of TFP and labor utilization have been small or negative. - Egypt was unable to create enough jobs for its growing population. - Major obstacles to firms’ development and productivity improvement: - Lack of competition, corruption, poor access to finance and land, and inadequate infrastructure. - Uneven playing field; time and cost of starting and operating businesses cited by investors as key constraints. - Energy subsidies benefit better connected firms and favor capital-intensive industries. - Only 12 percent of Egyptian firms have a bank loan or a line of credit. - Land allocation to the private sector is limited and inefficient (on a first-come-first-serve basis). - Lack of integrated multi-modal logistics constrains investment and trade. - Regulatory bottlenecks and pervasive non-trade barriers, including burdensome customs procedures, increase time and cost of trading across borders. ### Better integrating youth and women into the labor market - Unemployment and labor force participation: - About one-third of young Egyptians in the labor force are unemployed. - More than ¾ of women are outside the labor force. - Skills mismatches identified as key obstacles for youth finding jobs. - Barriers for women entering the job market include inadequate working arrangements in private sector, safety of transportation, and inflexible working conditions. - Targeted reforms recommended to raise growth potential: - For youth: improving the quality of education to equip new entrants with knowledge and skills demanded by employers. - For women: improving the safety of public transportation; improving the availability of childcare; adopting more flexible policies for maternity leave, and parental services; promoting entrepreneurship among women; and improving access to finance. Box 2 — Women’s participation (key statistics and findings) - Female labor force participation: 23 percent of Egyptian women in the active labor force. - Women are nearly three times less likely to be in the labor force, and more than twice as likely to be unemployed than men. - One in two young women is not in either education, the labor force, or training; about half of unemployed young women have tertiary education. - Women’s labor force participation drops as they get married. - Mobility constraints, lack of connections, high wage gaps with men, and lack of child care services are important factors behind low participation and high unemployment, especially in the private sector. - World Bank (2014) estimates overall wage gap between women and men at about 12 percent; rises to 40 percent in the private sector. - 30 percent of working women took more than a year to find a job against 12 percent for men. ### Creating fiscal space and tax reform recommendations - Medium-term spending priorities: upgrading infrastructure, investing in health and education, building a sustainable social safety net. - Egypt’s tax revenue is under 13 percent of GDP. - Staff analysis suggests Egypt could raise revenue by about 4 percent of GDP through tax policy reforms and improving revenue administration. - Staff recommendations: - Broadening the VAT base by reducing exemptions. - Increasing progressivity of the personal income tax and strengthening compliance through administrative reforms, especially for professionals (lawyers, doctors, accountants). - Improving corporate income tax performance by addressing base erosion and profit shifting, and reviewing tax incentive schemes for FDI and free economic zones (see Box 3). - Simplifying the tax regime for small and micro enterprises. - Streamlining the tariff structure and removing discretionary exemptions in customs duties. - Modernizing tax and customs administration by integrating direct and indirect tax management, creating a large and medium taxpayers’ unit, rationalizing staff accordingly, and building risk-assessment programs by segment. - Authorities welcomed staff’s recommendations and closer cooperation with the Fund on these issues. Box 3 — Strengthening international tax rules (key points) - Evidence suggests a 1 percentage point higher effective tax rate on companies reduces FDI on average by 3 percent. - Corporate rate is 22.5 percent; several tax incentives and a wide network of double tax treaties (DTTs) exist. - Corporate tax revenue has been declining sharply in recent years, in part due to lower revenue from the petroleum sector. - Recommended reforms to improve revenue performance without adverse effects on investment: - Phasing out the use of tax incentives in free zones. - Adopting more effective anti-avoidance measures (e.g., strengthen rules on interest deductibility and enforcement of transfer pricing rules). - Reconsidering DTTs that limit the right to levy withholding taxes and open opportunities for treaty shopping. ### Fiscal incidence of reforms and social protection - World Bank poverty impact analysis: welfare loss from recent energy price increase is around 5½ percent of household expenditure on average before any mitigating measures. - Poorest households particularly impacted by increase in LPG prices. - Monthly food subsidies were more than doubled in 2017/18 from EGP21 to EG50 per beneficiary; given their almost universal coverage this broadly compensates losses for the bottom 40 percent, and half of the losses for the third and fourth quintiles. - Expanded targeted cash transfers Takafol and Karama: - Coverage expanded from 160,000 households in 2015 to 1.7 million households in mid-2017. - Expected to cover 2 million households by December 2018. - Additional mitigating measures: raising tax credits for low incomes; granting wage bonuses of 7–10 percent to public sector employees; increasing social insurance pensions by 15 percent. - Food subsidy program remains poorly targeted and inefficient; improving targeting could free up resources and reduce poverty among low and middle income groups. ### Moving to inflation targeting (IT) and monetary policy framework - Authorities plan to adopt inflation targeting in the medium term to achieve low and stable inflation and safeguard the central bank from assuming responsibilities outside its mandate. - Key institutional pre-requisites identified: 1. Defining price stability as the primary objective of monetary policy. 2. Enhancing flexibility of the exchange rate. 3. Strengthening autonomy of the central bank. 4. Strengthening the financial stability framework consistent with independent monetary policy. - Transition conditions: agreed that transition should take place after macroeconomic stabilization is entrenched and inflation is durably reduced to single digits. - CBE efforts to focus on: - Building analytical capacity to forecast inflation. - Strengthening the liquidity management framework. - Developing money markets to improve monetary transmission. - Developing an efficient communications strategy. - Box 4 — Building blocks for modernizing the monetary policy framework (high-level elements): - Price stability defined in the law as the primary objective. - De-jure and de-facto independence of the central bank with matching levels of transparency and accountability. - Clear separation between monetary and fiscal policies; curtail fiscal dominance and monetary financing of the fiscal deficit. - A flexible exchange rate regime. - Stable, sound, and deep financial sector. - Effective liquidity management, strong forecasting and policy analysis systems, well-defined organizational structure, and efficient communication. ### Program discussions — monetary and exchange rate policies - Current monetary policy stance geared to reducing inflation. - Policy rates should not react to favorable base effects; CBE should focus on seasonally-adjusted monthly inflation trends and consider gradual monetary easing only if inflation expectations and key macroeconomic indicators consistently point to absence of demand pressures and second-round effects (MEFP ¶5). - CBE to strengthen communication, continue publishing monetary policy reports. - Reserve money targeting under the program will rely on active liquidity management: - Use interest rate corridor and open market operations using deposit auctions to contain banks’ excess reserves. - Establish a joint Cash Coordination Committee by end-March 2018 to improve collaboration between the CBE and the Ministry of Finance and develop a comprehensive liquidity forecasting framework. - Government overdrafts will be contained to the legal limits. - CBE lending to banks to serve short-term liquidity management needs; subsidized lending programs capped at EGP45 billion for SMEs and EGP20 billion for social housing and will not be expanded. - MoF and CBE will explore options for funding SME and social housing initiatives from the budget and develop microfinance to support lending to SMEs (MEFP ¶9). - Exchange rate policy: - Authorities will maintain and further enhance flexibility of the exchange rate. - Floating of the pound in November 2016 was a critical step in resolving FX shortages, preserving competitiveness, and serving as a buffer against external shocks. - CBE plans to refrain from interventions in the interbank FX market except to mitigate disorderly conditions. - Repatriation mechanism discussed: early role as cushion for short-term capital flows but impedes deepening of the interbank FX market, injects liquidity, and weakens monetary transmission. - Effective December 3, 2017 the CBE introduced a mandatory fee of 100 basis points for investors who still wish to use the repatriation mechanism as insurance against convertibility risk; the fee of 50 basis points for exercising the option of buying FX from the CBE at exit will remain in place. - CBE increased banks’ long net open position (NOP) limit to 10 percent from the previous 1 percent to allow deepening of the interbank market. - CBE will monitor market developments and make further modifications to the repatriation mechanism, as needed. *Source: cr1814 - 21. The authorities broadly shared the mission’s view of the medium-term objectives. They* ### 30. The CBE’s international reserves are adequate to support macroeconomic stability, and ### 30. The CBE’s international reserves are adequate to support macroeconomic stability, and ### International reserves and program NIR targets - The CBE’s official reserves reached $36 billion in October. - Reserves equal about 150 percent of the Fund’s ARA metric for floating regimes. - The CBE also has about $8.5 billion in deposits with local banks. - To align reserve allocation with new investment guidelines, the CBE will reduce its FX deposits in foreign branches of the Egyptian banks to $4 billion by end-December, and to $3 billion by end-June 2018 (structural benchmark). - These deposits will be eliminated by end-June 2019 (MEFP ¶10). ### Central bank law and monetary framework - Authorities are undertaking a comprehensive review of the Law of the Central Bank and the Banking System to align banking legislation with a medium-term objective of a forward-looking monetary policy framework with inflation as a nominal anchor. - Authorities intend to request Fund technical assistance. - Given broader amendments, they request to modify the end-December structural benchmark and delay submission of the draft law to Cabinet to end-June 2018 (structural benchmark). The mission supported this request (MEFP ¶12). ### Banking sector performance (capital, asset quality, profitability) - Aggregate capital adequacy ratio (CAR) improved from 14.1 percent in December 2016 to 14.5 in June 2017, helped by CBE decision to allow banks to include current-year profits in the CAR calculation and prohibit dividend payments for all banks. - The stock of nonperforming loans (NPLs) increased by only 2.3 percent in the first half of 2017. - NPL ratio improved to 5.5 percent due to strong credit growth during this period. - As of June 2017, bank profitability: return on equity at 30.9 percent and return on assets at 2 percent. - Pre-provision income supported by fees and commissions and higher loan volumes despite a small decline in banks’ high net interest margin. ### Loan quality outlook and banking sector resilience - Loan quality is expected to remain sound in the absence of new shocks due to: - CBE restrictions on FX lending to borrowers without sufficient FX revenues; - Cash collateral requirement for import-related trade finance loans in the same currency; - Banks’ focus on multinational corporates, local blue chips, and wealthy retail clients; - Relatively low debt levels of Egyptian corporates and households; - Resilient revenues of large corporate borrowers in most sectors; - Generally favorable growth outlook. - Bank-by-bank assessment: capital and operating profits are sufficient to absorb possible loan impairments. - Banks maintain solid liquidity buffers and execute active balance sheet management to mitigate interest rate and liquidity risks from large holdings of government securities. - Several smaller banks with capital adequacy, asset quality, and profitability below sector averages remain vulnerable; solvency pressures often explained by CBE’s stringent capital requirements for excessive loan concentrations. - CBE supervision closely monitors remediation plans; small-market-share banks do not pose significant risks to financial stability. - CBE will continue to enhance systemic risk oversight and prudential supervision. ### Early intervention, resolution, and ELA framework - CBE is developing a new regulation differentiating early intervention and resolution triggers, matrix of enforcement actions, and provisions of the Financial Stability Board’s Key Attributes of Effective Resolution Regimes for Financial Institutions (Key Attributes). - Implementation of the resolution framework requires incorporation of the Key Attributes in the Law of the Central Bank and the Banking System. - Use of public funds for systemic bank resolutions and public bank recapitalization should be transferred from the CBE to the MoF once the budget gains further strength. - Staff recommended a clearly articulated and rules-based emergency liquidity assistance (ELA) framework consistent with independent monetary policy: - CBE should have full discretion over ELA provision to solvent and viable banks. - ELA should be provided at penal rates on a secured basis, with pre-defined ‘haircuts’ for eligible collateral classes. - CBE could only provide ELA to a systemic bank against the government guarantee when solvency, viability, or collateral quality are in doubt. - ELA provision should be accompanied by enhanced supervisory oversight and early intervention measures, if necessary. - Staff recommended developing clear operational structures and workflows to avoid conflicts of interest for ELA provision and offered Fund technical assistance for operationalizing the ELA framework. ### Fiscal policy, debt dynamics, and consolidation targets - Program fiscal anchor: place public debt on a clearly downward path. - Authorities’ fiscal consolidation path aims to improve the primary balance by about 4 percent of GDP over the next two years. - Combined with strong nominal GDP growth, general government debt projected to decline from 103 percent of GDP in 2016/17 to 87 percent of GDP in 2018/19. - Beyond program period, authorities intend to maintain primary surpluses of about 2 percent of GDP to bring debt to about 72 percent of GDP by 2021/22. - Updated DSA suggests public debt is sustainable under program policies but subject to significant risks (policy slippages, reform slowdown, realization of contingent liabilities). - To limit unanticipated increases in government debt from outside the budget sector, an indicative target on budget sector debt is proposed going forward. ### 2017/18 budget risks and adjustments - Shortfalls in the CBE profit transfer and dividends from public banks, net of compensatory measures, estimated at 0.2 percent of GDP. - Mission supports authorities’ request to modify primary surplus target from 0.4 percent of GDP to 0.2 percent of GDP. - Additional risks: higher oil prices, possible revenue shortfalls, and spending pressures in the run-up to elections. - Increase in food subsidies in 2017/18 of about 0.5 percent of GDP will be covered from the contingency reserve in the budget. - Interest bill higher than budgeted by about 0.5 percent of GDP due to rise in interest rates. - Overall fiscal deficit of the budget sector projected at 9 percent of GDP; this is slightly weaker than programmed but constitutes a consolidation of 1.7 percent of GDP compared to 2016/17 (MEFP ¶14). - Projections for the wage bill and fuel subsidies remain consistent with the program. ### Energy subsidy reform and fuel price indexation - Fuel subsidy bill decreased from a peak of 5.9 percent of GDP in 2013/14 to 3.3 percent of GDP in 2016/17. - Expected to decline further to 2.4 percent of GDP in 2017/18. - Price-to-cost ratios as of end-June 2017: 59 percent for gasoline and diesel, and 64 percent for other products. - Authorities plan to eliminate all fuel subsidies (excluding LPG) by the end of the program. - Ministry of Petroleum and the MoF planning follow-up recommendations for automatic fuel price indexation: specification of a fuel product price formula, a rule determining frequency and magnitude of price changes (such as caps or smoothing mechanism), and the institutional framework of price setting. - Mechanism to be discussed with Fund staff and approved by the Prime Minister by end-February 2018 (structural benchmark). - Authorities committed to implement the next fuel price increase and the indexation mechanism by December 2018; exact timing to be discussed at the third program review. - Authorities have started to publish costs of fiscal subsidies in fuel products regularly (MEFP ¶18). ### Public financial management and state-owned enterprises - With Fund TA, authorities plan to submit their first Fiscal Strategy Paper in December, outlining medium-term fiscal objectives and expenditure ceilings. - Fiscal Strategy Paper to guide Budget Circular preparation for next fiscal year, including entity-specific spending limits and key budgeting assumptions. - Fiscal risks statement and guidance on principles governing issuance of new state guarantees to help manage contingent liabilities. - Authorities intend to prepare and publish by end-December, 2018 a comprehensive report on public enterprises including: full list of companies owned by the government broken down by industry, policy objectives, ownership structure; financial statements and indicators of financial performance; governance structure; and impact on government finances (MEFP ¶16). ### Structural reforms to support private sector-led growth - Strengthening competition and addressing corruption are priorities. - Work advancing on modifying the Public Procurement law to ensure transparency; new law is in Parliament and expected to be approved by end-November 2018. - A dedicated online portal for government procurement will be launched by December 2018. - By end-June 2018 authorities plan to create an independent regulator for public transportation (structural benchmark; MEFP ¶26). - Access to land: current fixed-price, ‘first-come-first serve’ allocation results in misallocation and foregone state revenue; authorities and staff agreed to review practice and explore policy recommendations to improve allocational efficiency (MEFP ¶26). - Measures to integrate women in the labor force: - Budget allocation for public nurseries and other facilities doubled from EGP250 million in 2016/17 to EGP500 million in 2017/18 (structural benchmark). - Exploring simplification of registration of home nurseries, expansion of job opportunities for women, and child care for working mothers. - Women’s council working to identify measures to address barriers to women’s participation; authorities engaged with UN Women to develop and implement gender budgeting (MEFP ¶26). - Five-year divestment program to sell minority shares in select state-owned enterprises to attract private investment and reduce state role: - Initial step: sell shares in five or six viable state companies in banking and financial services, oil and gas, petrochemicals, building materials, and real estate. - Divestment plan to be announced in January 2018 (structural benchmark) and shares to be brought to market by end-June 2019 (MEFP ¶26). ### Financing and program implementation issues - Program financed through December 2018 with commitments including: - $1 billion from the World Bank’s third DPF, - $500 million from the African Development Bank, - $425 million from the G7, - $1.1 billion from international banks. - Financing gap for the remaining period of the program is about $1.5 billion, expected to be covered from bilateral, gross reserves, and commercial sources. - Authorities request modifications of quantitative performance criteria for the primary fiscal balance and NDA: - Marginal reduction in primary fiscal balance reflects a shortfall in CBE profit transfer due to higher sterilization costs and does not materially affect program objectives. - Change in NDA results from reclassification of 7-day deposits from reserve money to NDA and has no policy implication; reflected in definitions of NDA and reserve money in the TMU. - Multiple currency practice (MCP) maintained for non-BoP reasons was eliminated: - MCP arose from multiple price auction system where exchange rates for spot transactions could differ by more than two percent. - MCP was temporarily approved by the Fund until November 2017. - In November 2017, the CBE introduced a mechanism eliminating this MCP. - The multiple-price auction remains in place and the authorities have not used it since November 2016. ### Capacity to repay and safeguards - Fund credit outstanding as a share of gross reserves projected to peak at 39 percent by 2019/20. - Debt service to the Fund as a ratio of exports of goods and services would reach 0.6 percent in 2019/20 (Table 11). - CBE’s reserve position strong, fiscal balances improving, and memorandum of understanding between the CBE and MoF on respective responsibilities for servicing Fund credit should ensure uninterrupted repayments. - Authorities addressing key recommendations of the safeguards assessment: - CBE adopted a new policy on selection and appointment of the central bank’s external auditor, effective starting with the 2018 audit. - CBE will gradually phase out its FX deposits in foreign branches of the Egyptian banks over the program period. - CBE is undertaking a review of the CBE Law. - Staff closely monitoring implementation of other recommendations from the 2017 safeguards assessment. ### Staff appraisal (key judgments) - Authorities’ reform program is a turning point for the Egyptian economy; bold measures since November 2016 are increasingly yielding results. - GDP growth has picked up and inflation is moderating; capital inflows have risen and foreign exchange reserves reached the highest level since 2011. - Outlook is favorable provided prudent policies are sustained and the reform effort is broadened to facilitate private sector growth and investment. - Higher growth and employment require reorientation towards private sector and export-led growth, guided by principles of market-based resource allocation and hard budget constraints across public sector entities, supported by prudent fiscal and monetary policies and a transparent, predictable, and non-intrusive regulatory framework. - Egypt needs to create fiscal space for infrastructure, health, education, and social protection without compromising debt sustainability through continued tax policy and tax administration reforms: - Make tax system less complex and more equitable by streamlining multiple tax rates, broadening the VAT base, increasing coverage and progressivity of the personal income tax, improving corporate income tax performance by addressing base erosion and profit shifting, and strengthening compliance through administrative reforms. - Successful transition to a forward-looking monetary policy framework would help secure low and stable inflation; adoption of the flexible exchange rate regime was a critical step and ongoing efforts to develop institutional and operational structures supporting independence of monetary policy are important next steps. *IMF staff report (chapter content).* ### 54. Inflation remains high, and the CBE should maintain its restrictive monetary policy ### 54. Inflation remains high, and the CBE should maintain its restrictive monetary policy ### Monetary policy and inflation - Inflation remains high; the CBE should maintain its restrictive monetary policy stance until disinflation is well entrenched. - The CBE is expected to continue to carefully assess inflation expectations and would be advised to consider gradual monetary easing only if key macroeconomic indicators consistently point to: - the absence of demand pressures; and - the absence of second-round effects of devaluation and the increases in energy prices and the VAT. ### Exchange rate policy - Preserving and further enhancing exchange rate flexibility is critical to sustain gains in macroeconomic stabilization and improve competitiveness. - The CBE’s policy of refraining from interventions in the interbank market, except to potentially mitigate disorderly conditions, is an important element of its policy framework. - As the new exchange rate regime has gained credibility and the convertibility risks have dissipated: - the usefulness of the repatriation mechanism appears to have run its course; and - its orderly and gradual winding down would affirm the strength and credibility of the new monetary policy framework. ### Banking sector resilience and supervision - The banking sector is broadly healthy and resilient to moderate shocks. - Capital and operating profits are sufficient to absorb possible loan impairments. - Several smaller banks, whose capital adequacy, asset quality, and profitability are below sector averages, remain vulnerable and should be closely monitored. - Recommendation: develop a clearly articulated and rules-based ELA framework. ### Central bank and banking law reforms - Authorities’ goal to bring the Law of the Central Bank and the Banking System in line with best international practices is welcome. - Caveat: amendments need to be carefully considered as they could have profound implications for monetary policy and the banking system. - The authorities’ request for Fund technical assistance is welcome. ### Fiscal consolidation and public debt - Placing government debt on a clearly downward path remains the program’s fiscal anchor. - The programmed fiscal consolidation aims to improve the primary balance by nearly 4 percent of GDP in 2017/18 and 2018/19 cumulatively. - Authorities’ primary surplus targets: - 0.2 percent of GDP in 2017/18; and - about 2 percent of GDP thereafter in the medium term. - The 2017/18 budget faces considerable risks, including from higher oil prices and possible revenue shortfalls and spending pressures in the run up to the elections. - Recommendation: authorities should steadfastly guard against increases in government debt originating from outside the budget sector. - Authorities’ commitment to take necessary measures to achieve the fiscal target for this year is welcome. ### Energy subsidy reform - Ongoing energy subsidy reform is critical to support fiscal consolidation. - Recent actions to raise fuel prices and reduce subsidies that benefit the rich more than the poor were important steps. - The delay in proposing a specific fuel indexation mechanism underscores the urgency in moving forward on the relevant structural benchmark by end-February 2018, followed by plans for its implementation in 2018. - Authorities’ commitment to: - eliminate subsidies on most fuel products by the end of the program; and - implement the fuel price indexation mechanism in consultation with staff, is welcome. ### Structural reform agenda - Aim: remove structural impediments to growth by: - reforming regulatory frameworks to address market inefficiencies; - enhancing competition and removing non-tariff barriers; - improving access to finance and land; - strengthening governance, transparency, and accountability of SOEs; - addressing bottlenecks in the labor market. - Expected outcomes: attract investment, support exports, encourage innovation. - To raise growth potential, targeted reforms are needed to increase female and youth labor force participation. - Recommendation: move away from fuel and food subsidies toward better-targeted cash transfer programs to strengthen the social safety net. ### Risks to the program - Key risks: - premature easing of monetary policy; - pre-election pressure to increase spending; - slowdown in the reform momentum. - Potential consequences: damage confidence, hurt private investment and growth, undermine fiscal goals, and adversely affect inflation expectations. - External risks: - a sustained increase in global oil prices could significantly undermine fiscal consolidation goals and weaken the current account, requiring offsetting policy measures; and - an unexpected tightening of global financial conditions could temper market appetite for Egyptian government securities. ### Program review and support - Staff supports the authorities’ request for the completion of the second review under the Extended Arrangement. - Staff also supports the request for the modification of the performance criteria on the primary balance and NDA. *Source: 54. Inflation remains high, and the CBE should maintain its restrictive monetary policy* ### 63. Staff recommends that the next Article IV consultation with Egypt take place in ### cr1814 - 63. Staff recommends that the next Article IV consultation with Egypt take place in accordance with the 2010 Decision on consultation cycles. ### Recommendation - Staff recommends that the next Article IV consultation with Egypt take place in accordance with the 2010 Decision on consultation cycles. ### Macroeconomic outlook and key projections - Real GDP (market prices): 2016/17: 4.8; 2017/18: 5.3; 2018/19: 5.5; 2019/20: 5.8; 2020/21: 6.0; 2021/22: 6.0. - CPI inflation (end of period): 2016/17: 29.8; 2017/18: 11.9; 2018/19: 15.2; 2019/20: 8.3; 2020/21: 7.2; 2021/22: 7.0. - CPI inflation (average): 2016/17: 23.5; 2017/18: 21.0; 2018/19: 13.7; 2019/20: 10.0; 2020/21: 7.2; 2021/22: 7.1. - Unemployment rate (period average): 2016/17: 12.1; 2017/18: 11.2; 2018/19: 9.9; 2019/20: 8.3; 2020/21: 6.7; 2021/22: 4.9. ### Fiscal sector: balances, debt, and fiscal projections - Budget sector revenue and grants (percent of GDP): 2016/17: 19.0; 2017/18: 18.8; 2018/19: 18.7; 2019/20: 18.2; 2020/21: 18.2; 2021/22: 18.2. - Budget sector expenditure and NAFA (percent of GDP): 2016/17: 29.7; 2017/18: 28.0; 2018/19: 26.1; 2019/20: 24.1; 2020/21: 22.0; 2021/22: 21.6. - Overall budget balance (IMF staff definition, percent of GDP): 2016/17: -10.9; 2017/18: -9.2; 2018/19: -7.4; 2019/20: -6.4; 2020/21: -4.3; 2021/22: -3.8. - Primary balance (percent of GDP): 2016/17: -1.8; 2017/18: 0.4; 2018/19: 2.1; 2019/20: 2.1; 2020/21: 2.2; 2021/22: 2.2. - Gross general government debt (percent of GDP): 2016/17: 103.3; 2017/18: 91.3; 2018/19: 86.7; 2019/20: 80.8; 2020/21: 77.1; 2021/22: 72.3. - Gross budget sector debt (percent of GDP): 2016/17: 103.6; 2017/18: 108.5; 2018/19: 92.1; 2019/20: 95.9; 2020/21: 89.3; 2021/22: 91.1. ### External sector and balance of payments - Current account (percent of GDP): 2016/17: -6.1; 2017/18: -4.5; 2018/19: -4.0; 2019/20: -3.6; 2020/21: -3.5; 2021/22: -3.4. - Exports of goods and services (percent of GDP): 2016/17: 14.9; 2017/18: 17.0; 2018/19: 16.9; 2019/20: 17.4; 2020/21: 17.6; 2021/22: 17.7. - Imports of goods and services (percent of GDP): 2016/17: -26.1; 2017/18: -26.5; 2018/19: -26.6; 2019/20: -25.6; 2020/21: -25.6; 2021/22: -25.5. - Gross international reserves (end-period, in billions of US$): 2016/17: 30.7; 2017/18: 34.5; 2018/19: 33.0; 2019/20: 30.8; 2020/21: 34.2; 2021/22: 33.0. - Reserves in months of next year's imports of goods and services: 2016/17: 5.5; 2017/18: 5.7; 2018/19: 5.2; 2019/20: 4.5; 2020/21: 4.6; 2021/22: 4.1. - External debt (percent of GDP): 2016/17: 30.8; 2017/18: 34.6; 2018/19: 30.3; 2019/20: 27.7; 2020/21: 26.9; 2021/22: 25.7. ### Monetary and financial sector highlights - Broad money (M2) growth (annual percent change): 2016/17: 22.2; 2017/18: 20.4; 2018/19: 23.0; 2019/20: 19.7; 2020/21: 14.7; 2021/22: 13.9. - Reserve money growth: 2016/17: 24.5; 2017/18: 39.4; 2018/19: 22.1; 2019/20: 17.8; 2020/21: 13.9; 2021/22: 14.7. - Credit to the private sector (percent of GDP or growth): annual growth figures include 2016/17: 8.7; 2017/18: 10.5; 2018/19: 13.0; 2019/20: 16.1. - Interest rates (Treasury bill rate, 3 month average, in percent): 2016/17: 21.3; 2017/18: 17.4; 2018/19: 9.0; 2019/20: 8.8. - Financial soundness indicators (Dec 2016): Regulatory capital to RWA: 14.1; NPLs to total loans: 5.8; Loan provisions to non-performing loans: 99.1; Return on assets: 1.5; Return on average equity: 24.4. ### External financing, IMF program, and capacity to repay - Extended Arrangement: total scheduled purchases under the Extended Arrangement: 8,596.57 SDR (12,000 US$). - Fund repurchases and charges (Millions of SDRs): 2016/17: 22.6; 2017/18: 83.5; 2018/19: 184.3; 2019/20: 244.7; 2020/21: 408.0; 2021/22: 762.2. - Fund credit outstanding (Millions of SDRs): 2016/17: 1,970; 2017/18: 5,731; 2018/19: 8,597; 2019/20: 8,597; 2020/21: 8,432; 2021/22: 7,910. - Fund credit outstanding (Millions of US$): 2016/17: 2,750; 2017/18: 8,000; 2018/19: 12,000; 2019/20: 12,000; 2020/21: 11,771; 2021/22: 11,042. - Capacity indicators: Percent of exports of goods and nonfactor services (Fund credit outstanding): 2016/17: 7.2; 2017/18: 18.8; 2018/19: 25.2; 2019/20: 23.1; 2020/21: 20.7; 2021/22: 17.9. ### Risks and policy challenges (Risk Assessment Matrix summary) - Slowdown or reversal of reforms: Relative likelihood = Medium; Time horizon = ST, MT. - Policy slippages (monetary easing, non-transparent FX interventions, fiscal slippages): Relative likelihood = Medium; Time horizon = ST, MT. - Geopolitical uncertainties affecting tourism and growth: Relative likelihood = Medium; Time horizon = ST, MT. - Tighter global financial conditions (Fed normalization, ECB tapering): Relative likelihood = High; Time horizon = ST. - Significant slowdown in key advanced economies, China, or large EMs/frontier economies: Relative likelihood = Medium; Time horizon = ST, MT. - Significant increase in global oil prices, weakening current account and raising fuel subsidy bill: Relative likelihood = Medium; Time horizon = ST, MT. *International Monetary Fund staff compilation from the document.* ### Annex I. Public Debt Sustainability Analysis ### Annex I. Public Debt Sustainability Analysis ### Summary - Debt is sustainable but subject to significant risks. - Baseline projection: debt declines to 87 percent of GDP by the end of the program and 68 percent of GDP by 2022/23. - Main risks: weaker growth, less ambitious fiscal consolidation, contingent liabilities from state-owned enterprises and government guarantees. - Policy prescription: sustained fiscal consolidation combined with structural reforms to boost growth to place debt on a steady declining path. ### Baseline Scenario — assumptions and projections - Assumptions: - Recovery of growth from low levels since 2011 through mid-2016 and strong fiscal consolidation under the EFF arrangement. - Real GDP growth increases from the average growth rate of 3 percent in 2010/11–2015/16 to almost 5 percent in 2017/18 and to 6 percent over the medium term. - Recovery underpinned by an increase in private investment and a sustained positive contribution from net exports. - Average inflation projected to decline from its peak of 21 percent in 2017/18 to 7 percent in 2022/23. - Effective interest rates on general government debt projected to decline. - Primary balance projected to improve by about 4 percent of GDP in the next two years, driven by declining wage and energy subsidy bill, and higher revenue from VAT receipts, excises and fees on government services. - Projections: - General government debt projected to decline to 87 percent of GDP in 2018/19. - Debt-to-GDP ratio projected to reach about 68 percent of GDP in 2022/23. - Gross financing needs remain large during the projection period given high starting debt stock and large rollover needs. ### Debt profile, benchmarks, and risks in the baseline - Debt-to-GDP remains above the emerging market benchmark of 70 percent of GDP until 2022/23. - Gross financing needs average 35 percent of GDP during the projection period compared to the 15 percent benchmark. - Debt profile indicators: - “Market perception,” “change in the share of short term debt,” and “debt held by nonresidents” are below benchmark levels. - Share of foreign currency debt at 30 percent of total — characterized as moderate risk. - Large accumulated deposits of the general government of 11 percent of GDP by end-June 2017 expected to be a significant cushion. ### Realism of baseline assumptions and alternative scenarios - Historical forecast bias (2008–2016): - Median forecast error: -1.1 percent for growth, 1.2 percent for inflation, and -2.2 percent for the primary balance. - Last two years: forecast errors for GDP have narrowed. - Historical scenario: - With growth and primary balance at their last ten-year averages, debt-to-GDP would decline only to 99 percent of GDP in 2022/23 from 103 percent in 2016/17. - Gross financing needs would increase to about 60 percent of GDP. - Alternative scenario (unchanged growth but weaker fiscal consolidation): - If envisaged primary surpluses of about 2 percent of GDP in the medium term are revised to primary deficits of 0.4 percent of GDP, debt-to-GDP would be 80 percent in 2022/23 compared to 68 percent in the baseline. ### Stress tests — scenarios and impacts - Growth shock: - GDP growth 1½ percentage points lower and inflation 0.4 percentage point lower in 2018/19 and 2019/20 → debt declines to 71 percent of GDP over the medium term compared to 68 percent in the baseline. - Real interest rate shock: - Interest rate increase by 500 basis points over the projection period → increases debt by around 5 percent of GDP to 72 percent of GDP over the medium term compared to the baseline. - Real exchange rate shock: - 100 percent depreciation of the Egyptian pound → increases debt in the same year by 6 percent of GDP compared to baseline, and by 4 percent of GDP over the medium term. - Combined macro-fiscal shock: - Temporary growth shortfall of 1½ percentage points for two years, looser fiscal stance by 2 percentage points over four years, and 100 percent real exchange rate depreciation → increases debt to 95 percent of GDP in the same year compared to 87 percent under the baseline; over the medium term debt would remain about 13 percent of GDP higher than under the baseline. - Contingent liability shock: - Materialization of a contingent liability of 10 percent of GDP, causing deterioration of the primary balance, higher interest rates and temporary adverse macro impacts → increases debt-to-GDP ratio to 98 percent of GDP in 2018/19 compared to 87 percent in the baseline. - Most severe combined shock: - Macro-fiscal shock plus materialized contingent liability → debt-to-GDP increases in the same year to 106 percent of GDP; over the medium term debt would decline to around 90 percent of GDP and gross financing needs would be about 53 percent of GDP. ### Key statistics and indicator snapshots (as presented) - Nominal gross public debt: 76.3 (2016); 96.9 (2017); 103.3 (2018); 91.3 (2019); 86.7 (2020); 80.8 (2021); 77.1 (2022); 72.3 (2023); 67.7 (2023 listed again). - Public gross financing needs: 20.6 (2016); 45.2 (2017); 38.4 (2018); 35.6 (2019); 29.1 (2020); 33.8 (2021); 34.1 (2022); 37.7 (2023); 37.1 (2023 listed again). - Real GDP growth (percent): 4.3 (2016); 4.3 (2017); 4.2 (2018); 4.8 (2019); 5.5 (2020); 5.8 (2021); 6.0 (2022); 6.0 (2023); 6.0 (projection medium term). - Inflation (GDP deflator, percent): 11.1 (2016); 6.3 (2017); 23.2 (2018); 21.2 (2019); 13.5 (2020); 9.9 (2021); 7.1 (2022); 6.8 (2023); 6.8 (projection). - Nominal GDP growth (percent): 15.9 (2016); 10.8 (2017); 28.4 (2018); 27.0 (2019); 19.8 (2020); 16.2 (2021); 13.4 (2022); 13.1 (2023); 13.1 (projection). - Effective interest rate (percent): 8.6 (2016); 10.3 (2017); 11.7 (2018); 11.2 (2019); 10.6 (2020); 10.1 (2021); 7.9 (2022); 7.8 (2023); 8.1 (projection). - General government accumulated deposits: 11 percent of GDP by end-June 2017. *Source: IMF staff. As of November 13, 2017.* ### 1. Egypt’s external debt is sustainable under program assumptions and staff’s medium- ### Egypt’s external debt is sustainable under program assumptions and staff’s medium- ### External debt sustainability (summary findings) - External debt increased by 14 percentage points of GDP to 30.8 percent in 2016/17 amid large external borrowing by the public sector to finance the BOP need and the impact of the exchange rate depreciation on GDP. - Projected to increase further to about 34½ percent of GDP this year. - Projected to decline to about 25¾ percent of GDP in the medium term on the back of the projected improvement of the external position under program policies. - The non-interest current account deficit is projected to fall to about 2½ percent of GDP in the medium term, and will be lower than the 5½ percent of GDP deficit needed to stabilize external debt at 25¾ percent of GDP. - Under the 30 percent exchange rate shock, to which the external debt is most sensitive: - External debt will increase to about 50 percent of GDP in 2018/19. - External debt will decline to about 43 percent of GDP in the medium term. ### Projections and key statistics (selected rows from the DSA table) - Baseline: External debt (percent of GDP) - 2013: 15.1 - 2014: 15.1 - 2015: 14.5 - 2016: 16.8 - 2017: 30.8 - 2018: 34.6 - 2019: 30.3 - 2020: 27.7 - 2021: 26.9 - 2022: 25.7 - 2023: 25.7 - Change in external debt (percent of GDP) - 2013: 2.7 - 2014: -0.1 - 2015: -0.6 - 2016: 2.3 - 2017: 14.0 - 2018: 3.8 - 2019: -4.3 - 2020: -2.6 - 2021: -0.8 - 2022: -1.2 - 2023: 0.0 - Identified external debt-creating flows (4+8+9) (percent of GDP) - 2013: 0.8 - 2014: -1.5 - 2015: 0.5 - 2016: 3.9 - 2017: 7.8 - 2018: -0.6 - 2019: -1.5 - 2020: -2.1 - 2021: -2.2 - 2022: -2.3 - 2023: -2.4 - Current account deficit, excluding interest payments (percent of GDP) - 2013: 2.0 - 2014: 0.7 - 2015: 3.5 - 2016: 5.7 - 2017: 5.6 - 2018: 3.5 - 2019: 2.9 - 2020: 2.6 - 2021: 2.5 - 2022: 2.5 - 2023: 2.5 - Net non-debt creating capital inflows (negative) (percent of GDP) - 2013: -1.0 - 2014: -1.4 - 2015: -2.0 - 2016: -2.1 - 2017: -3.2 - 2018: -3.6 - 2019: -3.8 - 2020: -4.0 - 2021: -4.1 - 2022: -4.3 - 2023: -4.4 - Automatic debt dynamics 1/ (percent of GDP) - 2013: -0.2 - 2014: -0.8 - 2015: -1.0 - 2016: 0.2 - 2017: 5.4 - 2018: -0.5 - 2019: -0.6 - 2020: -0.6 - 2021: -0.6 - 2022: -0.6 - 2023: -0.5 - External debt-to-exports ratio (percent) - 2013: 88.2 - 2014: 105.9 - 2015: 109.1 - 2016: 160.3 - 2017: 206.4 - 2018: 204.8 - 2019: 178.8 - 2020: 159.0 - 2021: 152.9 - 2022: 145.1 - 2023: 144.2 - Gross external financing need (in billions of US dollars) - 2013: 11.3 - 2014: 11.9 - 2015: 18.1 - 2016: 25.2 - 2017: 25.3 - 2018: 25.9 - 2019: 23.8 - 2020: 22.5 - 2021: 22.6 - 2022: 25.0 - 2023: 26.9 - Gross external financing need (in percent of GDP) - 2013: 4.0 - 2014: 3.9 - 2015: 5.4 - 2016: 7.6 - 2017: 9.9 ### External sector assessment — NIIP and balance-sheet dynamics - NIIP increased by 14 percentage points of GDP to -52.3 percent at end-2016/17, driven primarily by FDI liabilities and public sector external borrowing. - External sector sustainability is not currently a major concern because FDI liabilities constitute the largest share of the NIIP and the current account balance is projected to improve in the medium term. - The External Sustainability method shows that the projected medium-term current account deficit, about 3½ percent of GDP, is consistent with stabilizing NIIP at about -60 percent of GDP. - External debt amortization requirements of the public sector for the next two years are very large but will be met by expected disbursements under Fund program and drawing down of international reserves. - Near-term rollover risks are limited as a large share of the debt due in the next two years is owed to official creditors. ### Current account, exchange rate, and competitiveness - Current account developments: - Current account deteriorated to a deficit of 6 percent of GDP in recent years but showed improvement after FX liberalization. - Current account deficit narrowed to about 4¾ percent of GDP in Q4 2016/17, from 7½ percent in Q2 and 6½ percent a year earlier, on account of improvements in remittances and tourism. - Current account deficit projected to narrow further over the medium term, reflecting new gas production (replacing imports), recovery in tourism, and expected improvements in non-traditional exports. - EBA-lite assessments: - Cyclically adjusted current account norm: about -3½ percent of GDP. - Current account gap: about -2½ percent of GDP; narrows to -1 percent of GDP when adjusted for estimated distortions and overvalued exchange rate in the first half of the year. - Staff assesses that about 7 percent real effective exchange rate depreciation would be needed to correct the estimated current account gap of about -1 percent (paragraph summary). - EBA-lite adjusted estimate: about 7¼ percent REER depreciation would have been needed to correct the current account gap after adjustment for overvaluation in first half of the year. - REER model shows a negative REER gap, indicating REER was undervalued by about 6¾ percent in 2016/17; EBA-Lite REER model may be less relevant where public sector plays predominant role. ### Capital flows and foreign exchange operations - Financing composition: - Recent current account deficits financed mostly by debt-creating flows, although equity flows are increasing steadily. - Prior to 2016/17, debt-creating flows were mostly accumulation of financial liabilities by the central bank. After program launch, large share of debt-creating flows have been portfolio flows to the local debt market and medium- and long-term loans. - Net inflows in debt securities in 2016/17 amounted to $15.7 billion, about $9 billion of which was attracted to locally issued government securities (mostly T-bills). - Portfolio flows to the local capital market continued at a steady pace, amounting to $7.4 billion during July-October (year not specified in extract). - Central Bank of Egypt FX operations: - CBE has not directly intervened in the interbank FX market since liberalization in November 2016, except supplying FX to the public sector at market-determined rates. - Central bank purchases and sells FX to non-resident portfolio investors under the repatriation mechanism; a large share of FX purchased under this mechanism is deposited in local banks and does not affect reserves, though the central bank sometimes transfers FX purchased to its foreign assets. ### Reserves and reserve adequacy - Gross international reserves: - At end-June 2016/17: $30.7 billion, or about 130 percent of the Fund’s ARA metric (within suggested adequacy range). - Increased to $36 billion (or close to 150 percent of the ARA metric) as of end-October (year implied in text). ### Policy implications and program context (selected points from Letter of Intent / MEFP) - Program objective: strengthen macroeconomic stability by reducing inflation and public debt, promote inclusive growth, employment creation and private sector development, and protect the poor and vulnerable. - End-June 2017 quantitative performance criteria on central bank’s net international reserves (NIR) and net domestic assets (NDA) have been met and most structural benchmarks were implemented on time. - Request for completion of the second review of the extended arrangement under the IMF's Extended Fund Facility and disbursement of the third tranche equivalent to SDR 1,432.76 million (70.3 percent of quota and about $2 billion). - Request modification of the performance criteria on primary fiscal balance and NDA for December 2017 and June 2018. - IMF resources to be used for budget support and will be maintained in government accounts at the CBE. - Timing: third review expected to be completed on or after March 15, 2018 and the fourth review on or after November 11, 2018. *Source: IMF staff report excerpts (cr1814).* ### 30.5 percent in October 2017. The current account deficit narrowed by $4.3 billion or 21 percent, but ### cr1814 - 30.5 percent in October 2017. The current account deficit narrowed by $4.3 billion or 21 percent, but ### External sector and macroeconomic outcomes - Current account deficit narrowed by $4.3 billion or 21 percent. - As a share of GDP the current account increased from 6 percent in 2015/16 to 6.1 percent in 2016/17 due to the reduction in dollar GDP following the pound devaluation. - Non-oil exports increased by $2.1 billion during 2016/2017. - Non-oil imports declined by $2.2 billion during 2016/2017. - Tourism receipts rose by nearly 16 percent. - Portfolio investments reached $16 billion. - FDI increased by 14 percent to $7.7 billion. - Gross General Government debt reached 103 percent of GDP at end-June, reflecting the deficit overrun and a weaker-than-expected exchange rate. - At end-October, gross international reserves reached $36 billion. ### 2016/17 budget outcome and public finances - Primary deficit was 1.8 percent of GDP (as expected). - Overall deficit exceeded projections by 0.4 percent of GDP and reached 10.9 percent of GDP because of higher interest rates. - Spending on energy subsidies was 4.1 percent of GDP. - Spending on wages was 6.5 percent of GDP. ### Program performance and structural implementation - Performance criteria met: CBE’s net international reserves and net domestic assets (end-June). - Indicative target (IT) met: accumulation of EGPC arrears. - Missed ITs: reserve money (missed by a small margin due to higher-than-projected currency in circulation) and tax revenue (missed because of delay in implementing executive regulations for the VAT). - Most structural benchmarks implemented on time. - Specific actions taken: - EGP 250 million spent on nurseries and other facilities to enhance female labor force participation. - By end-September, CBE developed a plan to gradually divest its FX deposits in foreign branches of Egyptian banks, published the 2016 Financial Stability Report, and adopted a new policy on selection and appointment of an external auditor to be implemented next year. - MoF to submit the fiscal strategy paper to Cabinet with a short delay in December (end-November SB). - Automatic fuel price indexation mechanism submitted to the Prime Minister in October but lacked sufficient operational details to meet the benchmark. - End-September structural benchmark on developing a system to evaluate and decide on new state guarantees missed; Prime Minister issued a decree clarifying that public entities must inform the MoF earlier of borrowing needs that require guarantees and MoF developed and circulated a guidance note on broad principles. ### Monetary and exchange policies - Main CBE goal: reduce inflation to single digits over the medium term to support real incomes and external competitiveness. - Inflation peaked at 33 percent in July, and declined to 30.8 percent in October. - Projection: average inflation expected to decline to 13 percent in the quarter ending December 2018, reaching the mid-point of the CBE’s target range. - Policy stance: consider measured easing of monetary stance as inflationary pressures subside; CBE will delay easing or tighten if pressures emerge. - Exchange rate regime: preserve floating exchange rate; maintain adequate official reserves; gross international reserves to remain closer to the upper bound of the Fund's reserve adequacy range. - CBE operations: - Continue to supply FX to the government for servicing foreign debt; no longer sell to public enterprises as of October 2017. - Will not intervene in the interbank FX market; market-determined exchange rate in open and transparent trading. - Will stand ready to make FX sales or purchases in exceptional cases with transparent objectives and communication. - Raised limit on long net open FX position from 1 percent to 10 percent. - $50,000 cash deposit cap for non-priority goods removed in November 2017. - Repatriation mechanism adjustments: - Investors pay a fee of 50 basis points to buy FX from the CBE at exit. - On November 29 a mandatory fee of 100 basis points was introduced to sell FX to the CBE at entry. - The mechanism will be monitored and reviewed; changes do not apply to balances already entered via the mechanism. - Monetary policy framework during program: - Remain based on money targeting; reserve money an indicative target reflecting market liquidity projections. - IMF TA mission confirmed CBE follows good practices in liquidity management and forecasting. - Establish a joint Cash Coordination Committee by end-March 2018 to improve CBE–MoF information flow and liquidity forecasting. - Monetary operations to rely on indirect policy instruments such as deposit auctions and standing facilities. - Cap overdraft account at EGP53.8 billion in 2017/18 (equivalent to 10 percent of the previous three years’ revenues as per CBE law); overdrafts to remain below 10 percent of the previous three years’ average revenues thereafter. - CBE lending to commercial banks limited to the standing facility (interest rate at the upper bound of the interest rate corridor). - SME and mortgage subsidized lending limits: - Medium-sized firms: capital expenditure and working capital capped system-wide at cumulative EGP5 billion and EGP10 billion respectively. - Social housing finance program limited to EGP20 billion. - Cumulative system-wide limit of EGP30 billion on loans to small and certain segments for agricultural micro enterprises issued after January 1, 2018 (allows commercial banks to reduce required reserves by loan amounts); beyond this limit subsidies financed from state budget. - Support development of microfinance institutions. - CBE divestment of FX deposits in foreign branches of domestic banks: - Deposits amounted to $4.929 billion on September 30. - Targets: reduce to $4 billion by end-December (structural benchmark), $3 billion by end-June 2018 (structural benchmark), and eliminate by end-June 2019. - Medium-term intent: adopt a forward-looking, interest rate-based monetary policy with inflation as nominal anchor; strengthen analytical and liquidity management capacity, develop money markets, improve communications, and publish monetary policy and inflation reports and financial stability reports. - Banking law revisions objectives (selected): 1) Define price stability as the primary objective of monetary policy; 2) Strengthen the CBE’s operational autonomy; 3) Limit monetary financing of the deficit; 4) Ensure CBE lending to banks is only for short-term liquidity support and phase out any development lending by the CBE; 5) Ensure CBE law prevails against contradicting provisions in other laws; 6) Clarify Board appointment terms and provide non-executive majority; 7) Include a double veto procedure and objective dismissal grounds for all board members; 8) Strengthen Board oversight over CBE management and ensure clear division of labor; 9) Strengthen rules related to CBE recapitalization and distribution of unrealized profits; 10) Include mechanisms for CBE recapitalization, if required, financed by the government; 11) Clarify CBE’s role and framework in providing emergency liquidity assistance to solvent and viable banks and work toward a framework where solvency support to state-owned banks and use of public funds for resolution funding will primarily be covered by budgetary outlays; 12) Require publication of audited financial statements of the CBE; 13) Further define supervisory framework for early intervention and resolution of banks. - In view of a more comprehensive review of the law than initially envisaged, the end-December structural benchmark will be modified and submission of the draft law to Cabinet delayed to end-June 2018 (structural benchmark). Technical assistance from the IMF is being considered. - Multiple currency practice (MCP) and exchange restrictions: - MCP arose from multiple price auction system; auctions not used since move to flexible exchange rate. - On November 11, 2016 IMF Executive Board temporarily approved measures that give rise to MCP for one year. - On November 10, 2017, MCP was eliminated. ### Fiscal policy objectives and measures - Objective: place general government debt on a clearly declining path to sustainable levels. - Revised debt path targets: - Reduce general government debt to about 91 percent of GDP in 2017/18. - Reduce to 77 percent by 2020/21. - Maintain cumulative fiscal consolidation of 5.5 percent of GDP in primary balance as committed in the program. - Target a primary surplus of around 2 percent of GDP in 2018/19, broadly maintained through 2020/21. - Target a primary surplus of 0.2 percent of GDP in 2017/2018 — a fiscal adjustment of 2 percent of GDP compared to previous year and consolidation worth 3.8 percent of GDP (70 percent of the program target) since FY 2015/2016. - Planned fiscal adjustment contributors in 2017/18: 1) Tax revenues to increase by around 0.4 percent of GDP due to full-year impact of prior reforms (VAT rate increase from 13 percent to 14 percent starting July 1; increased excises on tobacco as of end-November 2017; stamp duty on stock market transactions starting July 2017; revised and increased stamp duty on licenses and government services; revising and raising fees on free zones; comprehensive program to improve revenue administration). 2) Energy subsidies reduced by 1 percent of GDP. 3) Wage bill to decline by 0.9 percent of GDP via tight control of bonuses and allowances, hiring controls, and modernization under the new civil service law (passed August 2016). 4) Public investment (including self-financed projects) to increase by 0.1 percent of GDP; other expenditure reduced by 0.1 percent of GDP. 5) Contingency fund (0.1 percent of GDP) and savings from energy reforms channeled toward financing the social welfare package. - Commitment to delay lower priority expenditure, including investments, if needed to meet primary surplus target, and to save any revenue overperformance. ### Public financial management and transparency - Continue strengthening public financial management; comprehensive statement of fiscal risks developed. - Fiscal strategy paper to be submitted to Cabinet in December 2017. - Guidance note issued on broad principles governing issuance of state guarantees; comprehensive system to evaluate and decide on new state guarantees to be developed by June 2018 (structural benchmark). - Economic authorities: - Review operational performance and finances to ensure correct classification per international standards. - Where authorities provide general government functions, proposals will be made by December 2018 to rationalize and incorporate them in the state budget. - Seek IMF and development partner technical assistance. - Publish by January 2018 main economic authorities’ final accounts for FY 2016/2017. - State-owned enterprises (SOEs): - Strengthen monitoring; prepare a comprehensive annual report comprising: sector overview and financial performance; full list of companies owned by government broken down by industry, policy objectives, and type of ownership; overview of government ownership policy; impact on government finances; information on individual companies including abridged financial statements, indicators of financial performance, list of board members, management, auditors, and amount of subsidies received. - First report to be published by December 31, 2018 (structural benchmark). - Social Insurance Fund (SIF): - Comprehensive reform to ensure long-term financial sustainability and ability to pay adequate and equitable pensions. - Seek technical assistance and develop a clear road map of pension reform by June 2018. - Medium-term budgeting: - Introduce a medium-term expenditure framework setting multi-year expenditure ceilings by major spending categories. - Give greater prominence to functional classification of spending in budget discussions and documentation. - Continue presenting a pre-budget statement to Parliament with every budget. - Update state budget's chart of accounts in line with the Government Finance Statistics Manual if needed. *International Monetary Fund — Arab Republic of Egypt program document excerpt* ### 17. We are continuing a comprehensive reform program for the energy sector, which ### 17. We are continuing a comprehensive reform program for the energy sector, which ### Energy sector reform objectives and governance - Reform comprises petroleum, gas and electricity and aims to improve the financial position of the sector and raise its efficiency. - Current below-the-cost pricing in all three areas (except natural gas) is described as economically inefficient and not well-targeted; it: - encourages excessive energy consumption; - favors capital-intensive rather than labor-intensive activities; - deters private investment in the sector; - results in a heavy fiscal burden. - Financial performance has been further undermined by weak governance and a high cost structure. - Objective: modernize the industry and put it on a sound financial footing to ensure uninterrupted and efficient supply of energy products to businesses and households. - Policy direction: - Gradual removal of untargeted subsidies and enhancement of private sector participation. - Medium-term strategy for energy sector reforms approved by the Minister of Petroleum on March 30; strategy benefited from a diagnostic study by external consultants. - New Gas law approved by Parliament in July 2017 to promote competition by allowing private sector participation in downstream activities and establish an independent regulator to develop a transparent pricing mechanism to ensure cost recovery while protecting consumers. - Executive regulations for the Gas law to be published by January 2018. ### Energy subsidy reforms, price adjustments and indexation - Commitment to achieve liberalization of energy prices by the end of the program. - Electricity tariff changes: - Raised by an average of 30 percent in July 2016. - Raised by another 40 percent in July 2017. - Electricity tariffs will increase further in 2018/19 as planned and announced back in 2014 to achieve cost recovery in the coming years. - Fuel price changes in June 2017: - Retail prices for gasoline and diesel raised by an average of 53 percent. - Prices of LPG, kerosene and fuel oil raised by 100, 55 and 40 percent respectively. - Price-to-cost ratios: - Pre-tax price-to-cost ratios at end-September 2017 reached 68 percent for gasoline and diesel. - Cost recovery target: - Objective of 100 percent cost recovery by the end of 2018/19 (excluding LPG); further increases in average fuel prices will be made as needed during 2018/19. - Automatic fuel price indexation mechanism: - To be implemented within the first half of FY 2018/2019. - Will adjust fuel prices (diesel, gasoline, kerosene, and fuel oil) to changes in the exchange rate, global oil prices, and the share of imported fuel products in the consumption basket to help maintain the cost recovery ratios (structural benchmark). - Exact timing to be agreed with Fund staff at the time of the third review under the EFF arrangement. - Indexation mechanism formula expected to be discussed and approved by the Prime Minister by February, 2018. - Design elements to be consulted closely with IMF staff, including specification of price formula, rule determining frequency and magnitude of price changes such as any caps, and the institutional framework for price setting (structural benchmark). - Communication and transparency measures: - Developing a communication strategy to prepare the population and the markets for flexible fuel price adjustments. - In December 2017, began publishing bi-weekly information on the evolution of fuel products unit costs and subsidies and the impact on the overall subsidy bill for the budget. - Plan to publish product cost data more frequently (on a weekly basis) as institutional setup develops. - Contingency: In the event of major changes in the oil price or the exchange rate from the projected levels, prepared to take measures as needed to achieve the primary balance target. ### Egyptian General Petroleum Company (EGPC) financial restoration plan - EGPC financial deterioration since the 2011 revolution; revenues from sale of fuel products continued to fall short of costs despite decline in international oil prices, necessitating budget subsidies and expensive borrowing. - Arrears to international oil companies: - Exceeded $6 billion in 2014. - Declined to $3.6 billion at end-September 2016. - Actions and plan: - Developed and implementing a plan (drawing on external consultant recommendations) to place EGPC on a financially sustainable footing. - Plan complements ongoing fuel subsidy reform and proposes measures to strengthen corporate governance and optimize operating costs. - Intention to offer minority shares in several state-owned energy companies to encourage private sector participation. - Strategy to gradually settle outstanding arrears. - Arrears reduction progress and targets: - In 2016/17, EGPC cleared $1.3 billion of arrears, which then stood at $2.3 billion. - EGPC will further reduce the arrears to about $1.2 billion in 2017/18. - EGPC will fully eliminate arrears by end-June 2019. ### Natural gas potential and production outlook - Historical production decline: from 7 billion cubic feet (bcf) in 2010 to about 4 bcf in 2015/16. - Recent developments: - Several new fields discovered in the Nile delta and Egypt's territorial waters in the Mediterranean, with the Zohr field identified as the most promising. - Signed 76 new upstream exploration agreements with investment commitments in excess of $15 billion. - Fast-tracked regulatory and legislative process supported rapid development; gas production increased in 2016/17 and reached 4.5 bcf by June 2017. - Production projection: - Over the next three years, gas production from these fields is projected to increase to 7.7 bcf per day, which exceeds Egypt's domestic need (currently 5.2 bcf per day). - Excess production offers opportunity to export gas to other countries in the region and elsewhere. - Further upside: - Ongoing offshore explorations suggest larger deposits are highly likely, which if confirmed would further boost Egypt's gas potential. - Negotiations with international gas exploration companies on development and production sharing agreements are at an advanced stage. - Expected effects: - Enhanced and higher domestic production of oil and gas combined with more efficient electricity plants and higher reliance on renewables would bring down cost per unit of various fuel products and contribute to limiting fiscal burden. ### Financial sector policies and stability measures - Banking system indicators as of June 2017: - Average capital adequacy ratio: 14.5 percent (above Basel-recommended floor of 9.25 percent and CBE-mandated 11.25 percent). - Return on equity: 30.9 percent. - Share of non-performing loans in total loans: 5.5 percent. - Specific loan-loss provisioning coverage: 91.1 percent. - Policy objectives: preserve and further strengthen health and resilience of Egypt's financial system; infuse public confidence; ensure banking sector efficiently channels savings into productive investments. - Focus areas: - a) strengthen the regulatory and supervisory framework, including consolidated supervision; - b) phase in the capital conservation buffer in line with the Basel timelines; - c) promote competition to enhance efficiency in delivery of financial services; - d) strengthen the crisis management and resolution framework to mitigate potential systemic risks; - e) promote financial inclusion without compromising credit quality. - Monitoring and stress testing: - Continue monitoring banks’ ability to withstand exchange rate and interest rate shocks. - CBE's Banking Supervision department to continue rigorous bank-by-bank stress tests based on adverse macroeconomic scenarios. - Continue monitoring currency mismatches on balance sheets of large corporations and state-owned enterprises to mitigate possible credit risks. - Strengthening supervision and governance measures already taken: - Implementation of the Internal Capital Adequacy Assessment Process (ICAAP) in the banking sector. - Strengthening the supervisory early warning system. - Implementation of higher capital requirements for domestic systemically important banks. - Actions to strengthen governance and accountability of bank management. - Crisis preparedness: - Plan to implement new emergency liquidity assistance and bank resolution frameworks in line with best international practices. - MoF and CBE will develop clear rules on deploying public funds to maintain financial stability. ### Business environment and other structural reforms - Objective: unlock Egypt's growth potential through growth-enhancing and market-friendly reforms to attract investments, raise productivity, and support exports and competitiveness with the goal of creating enough jobs for a rapidly growing population. - Legislative progress: - Parliament passed the new investment law and the industrial licensing law. - Key measures and timelines: - SME tax regime: - Develop a modern and effective tax regime for SMEs in 2017/2018 where small taxpayers would pay a reduced flat tax rate on annual recorded turnover levels. - Egyptian Electricity Holding Company restructuring: - Compiling a plan to financially restructure the company to improve financial soundness and enable it to engage in commercial transactions without Government guarantee and/or support. - Plan to be jointly announced by the Ministries of Finance and Electricity by March 2018. - Transportation sector regulatory reform: - Separate the regulatory authority for public transportation from the Ministry of Transportation. - Plan to announce creation of the independent regulatory authority by June 2018 (structural benchmark). - Public procurement reform: - Modify public procurement law in line with best international practices to introduce procurement methods aligned with market practice, regulate subcontracting, and strengthen transparency and complaint mechanisms. - Work on issuance of the new law by the Parliament by end-November 2018. - Establish a single portal dedicated for government Procurement where all relevant materials are publicly accessible online by December 2018. - Introduce a code of Integrity for Government Procurement staff by June 2019. - Competition authority assessment: - Analyze functioning of the Egyptian Competition Authority to determine if measures are needed to strengthen its mandate, independence and operational capacity. - Industrial land allocation: - Review current industrial land allocation mechanism to increase availability of industrial land, improve land allocation transparency and explore introducing competitive bidding processes; adequate progress on this front will be a key focus for the next review. - Trade regime and non-oil export promotion: - Egypt's non-oil exports of goods were 6.4 percent of GDP in 2016/17. - By end-March 2018, analyze main constraints to trade, including license requirements, customs procedures and other regulations, and identify specific measures to address non-tariff barriers to incentivize domestic producers to improve productivity and innovate. - Reducing unemployment and supporting women’s labor participation: - In 2016/17 budgeted and spent EGP250 million to improve availability of public nurseries and other facilities to enhance women’s ability to seek jobs. - In 2017/18 such spending is budgeted at EGP500 million on nurseries for 0 to 4-year old children (structural benchmark). - In April 2017, a joint committee including Ministry of Labor, Ministry of Social Solidarity, Ministry of Finance, Ministry of Trade and Industry, representatives of the Women's council, academia and business community was established. - Working with UN Women to introduce and effectively implement gender budgeting starting FY 2018/2019. - Working to simplify rules and facilitate registration of home based nurseries to expand job opportunities for women and childcare for working mothers; aim to increase coverage of registered nurseries from current low level. - Privatization and divestment program: - Announced five-year program to attract private investment in public enterprises to reduce role of state, widen ownership base, enhance transparency and corporate governance, improve financial management, diversify investment sources, and attract investment to enhance market capitalization. - Consultations underway with investment banks and legal consulting firms to prepare list of potential companies and a detailed plan including timing and valuation. - Initial focus sectors: banking and financial services, oil and gas, petrochemicals, building materials, and real estate development. - IPO inter-ministerial committee created by Prime Minister decree as of end October 2017. - Committee will approve and announce a plan by January 2018 to divest stake in at least 5–6 public entities by end of June 2019 (structural benchmark). ### Financing and program monitoring - Program financing status: - Program is financed for the next 12 months. - Financing gap for 2017/18 identified during the first review was filled with $1 billion from the World Bank, $500 million from the AfDB; and $425 million from G7. - Projected gap for July – December 2018 is about $1.1 billion and will be financed from international banks. - Projected gap for the rest of the program period is about $1.5 billion and will be financed with a new Eurobond, additional bilateral support, or from gross reserves. - Performance criteria modifications requested: - Requesting modifications for the performance criteria on the primary fiscal balance and NDA of the central bank for December 2017 and June 2018. - Rationale: primary fiscal balance will be slightly lower because of shortfall in the CBE profit transfer due to high sterilization costs. - Revision to NDA reflects reclassification of 7-day deposits from excess reserves to NDA; corresponding revision of the indicative target for reserves. - TMU adjusted accordingly. - To better control public debt, proposing a new indicative target on accumulation of gross debt of the budget sector. *IMF Staff Report excerpt.* ### 29. The program will be monitored through prior actions, quantitative performance ### 29. The program will be monitored through prior actions, quantitative performance criteria, indicative targets and structural benchmarks ### Monitoring framework and instruments - The program is monitored through prior actions, quantitative performance criteria (PC), indicative targets (IT), and structural benchmarks. - Semi-annual program reviews are based on December and June test dates. - All quantitative PCs and ITs are listed in Table 1. Prior actions and structural benchmarks are set out in Table 2. - A Technical Memorandum of Understanding (TMU) describes definitions of quantitative PCs and ITs, the consultation clause, and data provision requirements. ### Key quantitative targets and memo items (from Table 1) - Program disbursements ($ million; cumulative): 16,300; 24,881; 2,450; 2,450; 5,950; 5,950. - External budget support loans ($ million; cumulative): 7,450; 12,432; 3,350; 3,350; 8,350; 8,350. - Project loans ($ million, cumulative): 0; 100; 0; 0; 0; 0. - (Table 1 contains additional PCs and ITs, including net international reserves, net domestic assets, fuel subsidies, primary fiscal balance of the budget sector, accumulation of external debt payment arrears, EGPC arrears, average reserve money, and accumulation of gross debt of the budget sector.) ### Selected outcomes and met/not-met flags (from Table 1 and Table 2) - Net international reserves of the CBE ($ million; cumulative change, floor): Program Adjusted 4,175; Actual 12,756; Met? Yes. - Net domestic assets of the CBE (at program rates; ceiling): Program Adjusted 204; Actual 160; Met? Yes. - Fuel subsidies (cumulative, ceiling): Program Adjusted 62.2; Actual 62.2; Program Proposed 115.0; Met? No. - Primary fiscal balance of the budget sector (cumulative, floor): Program Adjusted -29.0; Actual -29.9; Program Proposed -63.5; Met? No. - Waivers: Waivers of non-observance for end-June 2017 PCs were approved by the IMF Board at the time of the first review. ### Prior actions and structural benchmarks (selected items from Table 2) - Spend EGP 250 million to improve the availability of public nurseries and other facilities that can enhance the ability of women to actively seek jobs. Objective: Improve labor force participation for women. Timing: June 30, 2017. Status: Met. - Submit to Cabinet draft amendments to the CBE law consistent with MEFP ¶11. Objective: Strengthen and modernize the legislative framework governing the central bank. Timing: December 31, 2017. Status: Reset to June 30, 2018. - Develop a medium-term plan to divest CBE FX deposits at foreign branches of the Egyptian banks. Do not place any new funds in these branches, and keep total deposits below the end-April level of $5.4 billion. Objective: Strengthen foreign reserve management. Timing: September 30, 2017. Status: Met. - Adopt new policy for selection and appointment of an external auditor with strengthened criteria on professional experience, capacity, and international affiliations. MEFP ¶11. Objective: Improve transparency and accountability of the central bank. Timing: September 30, 2017. Status: Met. - Publish 2016 financial stability report. MEFP ¶10. Objective: Increase transparency. Timing: September 30, 2017. Status: Met. - Based on the findings of the report on state guarantees, develop a system to evaluate and decide on new guarantees and set a plan to limit new guarantees. MEFP ¶16. Objective: Improve debt management. Timing: September 30, 2017. Status: Not met. Reset to June 30, 2018. - Provide Cabinet with a fiscal strategy paper including medium-term fiscal objectives and overview of the 2018/19 budget within defined expenditure ceilings. MEFP ¶17. Objective: Improve budget planning. Timing: November 30, 2017. Status: Not met. - The Minister of Petroleum to submit by end-September 2017 a proposed automatic fuel price indexation mechanism to adjust fuel prices (diesel, gasoline, kerosene, fuel oil) to changes in the exchange rate, global oil prices, and the share of imported fuel products in the consumption basket to help maintain the targeted cost recovery ratios. MEFP ¶18. Objective: Strengthen energy subsidy reform. Timing: September 30, 2017. Status: Not met. - Spend EGP500 million to improve the availability of public nurseries for 0 to 4-year old children and other facilities that can enhance the ability of women to actively seek jobs. MEFP ¶26. Objective: Improve labor force participation for women. Timing: June 30, 2018. Status: Modified to make the condition specific by adding “for 0 to 4-year old children”. - New measure: The Prime Minister to approve the fuel price indexation mechanism designed in consultation with Fund staff and including (i) specification of a fuel product price formula, (ii) a rule determining the frequency and magnitude of price changes such as any caps, and (iii) the institutional framework of price setting. MEFP ¶18. Objective: Strengthen energy subsidy reform. Timing: February 28, 2018. - CBE FX deposits at foreign branches of the Egyptian banks not to exceed $4 billion. MEFP ¶10. Objective: Improve foreign exchange reserve management. Timing: December 31, 2017. - CBE FX deposits at foreign branches of the Egyptian banks not to exceed $3 billion. MEFP ¶10. Objective: Improve foreign exchange reserve management. Timing: June 30, 2018. - Separate the regulatory authority for public transportation from the Ministry of Transportation by establishing the independent regulatory authority for transport. Objective: Improve competition. Timing: June 30, 2018. - Publish a report on all state-owned enterprises with elements including overview of the sector during 2017/18, full list of companies owned by the state, overview of ownership policy and governance, impact on government finances, and information on individual companies (abridged financial statements, board members, management, auditors, subsidies received). MEFP ¶16. Objective: Improve transparency and accountability of public enterprises. Timing: December 31, 2018. - Publish FY2018/19 plan to raise equity from private sources in public enterprises through listing of shares or other means. MEFP ¶26. Objective: Develop capital markets and reduce the role of the state. Timing: January 31, 2018. ### Selected TMU definitions and operational details (Attachment II, TMU) - Program exchange rates are those prevailing on June 30, 2016. As of June 30, 2016 Currency Unit per US$: SDR 0.7056; Euro 0.9019; British Pound 0.7462; Japanese Yen 102.7004; Saudi Riyal 3.7506; Chinese Yuan 6.6480. - For all other foreign currencies, current exchange rates to the U.S. dollar will be used. Monetary gold is valued at $1,258.65 per troy ounce. - The program exchange rate of the pound against the US dollar is 8.77 for FY2016/17 and 18.0251 (the actual exchange rate on May 31, 2017) for FY 2017/18. A. Floor on Net International Reserves (PC) - NIR defined as difference between foreign reserve assets and reserve-related liabilities. Targets the cumulative change since the beginning of the fiscal year. NIR is monitored in US$; assets/liabilities in other currencies converted using program exchange rates. - Foreign reserve assets include CBE holdings of monetary gold, SDRs, foreign currency cash, foreign currency securities, deposits abroad, the country’s reserve position at the Fund and other official reserve assets; exclude frozen/pledged/collateralized/encumbered assets, assets from short-term swaps (<360 days), claims on residents, precious metals other than gold, assets in nonconvertible currencies, and illiquid assets. - As of September 30, 2017, foreign reserve assets thus defined amounted to $35,879 million. - Foreign reserve-related liabilities defined as all short-term foreign exchange liabilities of the CBE with original maturity of less than 360 days, including government’s foreign currency deposits with original maturity of less than 360 days, banks’ required reserves in foreign currency, and all credit outstanding from the Fund on the balance sheet of the CBE. - As of September 30, 2017, foreign reserve-related liabilities thus defined amounted to $8,431 million. - Adjustors: NIR floor adjusted by cumulative excess (shortfalls) in program disbursements relative to Table 1 projections. Starting on November 1, 2017, the NIR floor also adjusted by cumulative gross foreign reserve assets acquired through the repatriation mechanism relative to Table 1 projections. - Program disbursements defined as external disbursements of loans (including IMF disbursements), grants and deposits for budget support, 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. Excludes project loans and grants. B. Ceiling on Average Reserve Money (IT) - Reserve money (RM) for December 2017 and June 2018 defined as sum of currency in circulation outside the CBE (includes cash in vaults), balances on commercial banks’ overnight deposits, and banks’ correspondent accounts (includes required reserves in local currency at the CBE). Excludes balances in deposit auctions and 7-day deposits at the CBE. - For each semester, average RM is calculated from daily balance sheets of the CBE as the average for the last month of the semester. - For December 2016, average RM amounted to EGP541.47 billion. - For the second semester of 2015/16, average RM amounted to EGP460.67 billion. - Adjustor formula in the event of a change in reserve requirement ratio (rr): Revised RM ceiling = Program RM ceiling + banks’ correspondent accounts in local currency x (new rr/old rr - 1). - Assumptions for banks’ correspondent accounts: December 2017: EGP165 billion; June 2018: EGP182 billion. C. Ceiling on Net Domestic Assets of the CBE (PC) - NDA defined as sum of net credit of the government, net credit to public economic authorities, credit to banks, and open market operations, excluding overnight deposits of commercial banks at the CBE and foreign currency components such as loans and deposits of the government, public economic authorities and banks. - As of December 29, 2016, NDA thus defined amounted to EGP573.76 billion. - For June 2017, NDA defined as above but including overnight. As of June 30, 2016, NDA thus defined amounted to EGP626.37 billion. - Program targets the cumulative change in NDA since the beginning of the fiscal year. - Adjustors: - NDA targets adjusted down (up) by full amount of cumulative excess (shortfall) in external budget support loans and grants (U.S. dollar) relative to Table 1 baseline projections (project loans and grants excluded). U.S. dollar amounts converted to EGP using program EGP/$ exchange rates. - In event of change in reserve requirement ratio (rr), Revised NDA ceiling = Program NDA ceiling + banks’ correspondent accounts in local currency x (new rr/old rr -1). D. Floor on Primary Fiscal Balance of the Budget Sector (PC) - General government comprises the budget sector, the Social Insurance Funds and the National Investment Bank (NIB). Budget sector comprises central government (administration), governorates (local administration) and public service authorities, including the General Authority for Government Services, other regulatory authorities and supervisory agencies, funds, universities and hospitals. - Primary balance of the budget sector defined as the overall balance plus total interest payments of the budget sector. Overall balance = total revenue minus total expenditure and net acquisition of financial assets. Measured cumulatively from beginning of fiscal year. - For the fiscal year 2015/16 the primary balance of the budget sector was EGP-95.9 billion. - (A subsequent paragraph repeats the primary balance definition and states: For the fiscal year 2015/16 the primary balance of the budget sector was EGP-91.9 billion.) - Off-budget funds: Authorities will inform IMF staff immediately of creation of any new off-budgetary funds or programs that carry out operations of a fiscal nature as defined in the IMF’s Manual on Government Finance Statistics 2001. - Adjustor: Primary balance target adjusted up (down) by full amount of the shortfall (excess) in disbursement of external project loans. U.S. dollar amounts converted into EGP using 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 defined as total amount of subsidies paid by the budget sector for gasoline, diesel, kerosene, LPG and fuel oil. Measured in domestic currency on a cumulative basis from the beginning of the fiscal year. G. EGPC Arrears (IT) - EGPC arrears ceiling applies to accumulation of EGPC arrears to foreign creditors (international oil companies) on a net basis, reflecting common industry practice of attributing payments to the most overdue receivables. Measured in $. - As of September 30, 2016, the stock of EGPC arrears amounted to $3.6 billion. H. Debt of the Budget Sector (IT) - Debt of the budget sector defined as outstanding stock of debt issued by the budget sector. U.S. dollar amounts converted into EGP using program EGP/$ exchange rates. - Program target is the cumulative change in debt of the budget sector from the beginning of the fiscal year. - As of June 30, 2017, the stock of debt of the budget sector amounted to EGP3,722 billion. I. Continuous Performance Criteria - Non-accumulation of external debt payments (principal and interest) arrears by the general government (as defined in paragraph 12). No new external debt payments (including on long-term leases) arrears will be accumulated during the program period. - External debt payment arrear defined as an amount of payment obligation (principal 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. This performance criterion applies on a continuous basis throughout the arrangement. *Source: Attachment II. Technical Memorandum of Understanding, December 10, 2017, and Tables 1–2 (Program documentation).* ### 21. Standard continuous performance criteria include: (1) prohibition on the imposition or ### cr1814 - 21. Standard continuous performance criteria include: (1) prohibition on the imposition or ### Standard continuous performance criteria - (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. ### J. 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 the following: - (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. ### K. Monitoring and Reporting Requirements - (No substantive text provided in the source for this subsection.) *https://www.imf.org/-/media/files/publications/cr/2018/cr1814.pdf* ### 24. Performance under the program will be monitored using data supplied to the IMF by ### cr1814 - 24. Performance under the program will be monitored using data supplied to the IMF by ### L. Data reporting — overview - 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. The authorities will transmit promptly to the IMF staff any data revisions. ### Table 3A — Ministry of Finance (selected reporting requirements) - Overall deficit of the budget sector: Frequency = M; Submission lag = 30 calendar days - Overall deficit of the general government, NIB and SIFs: Frequency = M; Submission lag = 45 calendar days - Summary of budget sector accounts (revenues, expenditures and net acquisition of financial assets on a cash basis, consistent with IMF GFS 2001 Manual): Frequency = M; Submission lag = 30 calendar days - Summary accounts of NIB and SIFs, consistent with presentation of general government accounts: Frequency = M; Submission lag = 45 calendar days - Program disbursements and project loans to the general government: Frequency = W and M; Submission lag = 30 calendar days - Domestic debt stock and debt service costs of the general government and budget sector, including interest payments and amortization: Frequency = M; Submission lag = 30 calendar days (45 days for the general government) - Debt of the budget sector at actual and program exchange rates: Frequency = M; Submission lag = 30 calendar days - Debt guarantees issued by General Government and the CBE: Frequency = Q; Submission lag = 45 calendar days - Stock of bonds issued by the government to Social Insurance Fund: Frequency = Q; Submission lag = 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): Frequency = W and M; Submission lag = 30 calendar days (45 days for the general government) - Auctions of t-bills and t-bonds via primary dealers (number and value of submitted and accepted bids, minimum, maximum and weighted average interest rates and maturity dates): Frequency = W; Submission lag = 7 working days - Gross transfers to EGPC: Frequency = Q; Submission lag = 90 calendar days - Fuel subsidies to EGPC: Frequency = Q; Submission lag = 90 calendar days - Stock of EGPC arrears to foreign creditors: Frequency = Q; Submission lag = 90 calendar days - Use of overdraft facility at the CBE (end of period stock): Frequency = W; Submission lag = 15 calendar days - Stock of outstanding domestic arrears by creditor: Frequency = M; Submission lag = 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 (from Ministry of Petroleum): Frequency = Q; Submission lag = 90 calendar days - Components of foreign direct investment (investments and capital repatriation) to the petroleum sector (from Ministry of Petroleum): Frequency = Q; Submission lag = 60 calendar days - Note: M = Monthly; W = Weekly ### Table 3B — Central Bank of Egypt (selected reporting requirements) - Program net international reserves and its components (foreign reserve assets and foreign reserve-related liabilities) of the CBE at program and current exchange rates: Frequency = M; Submission lag = 7 working days - Program disbursements and its breakdown by components: Frequency = M; Submission lag = 7 working days - Breakdown of gross foreign assets and liabilities of the CBE by currency at actual and program exchange rates: Frequency = M; Submission lag = 15 calendar days - Breakdown of foreign reserve-related liabilities of the CBE by original maturity at actual and program exchange rates: Frequency = M; Submission lag = 15 calendar days - Program NDA of the CBE and its components: Frequency = M; Submission lag = 15 calendar days - Stock of outstanding external debt payment arrears of the general government (if any) by creditor: Frequency = M; Submission lag = 30 calendar days - Projections for external debt payments falling due in the next four quarters, interest and amortization: Frequency = Q; Submission lag = 30 calendar days - Monthly cash flow table based on the agreed template, both past outcomes and projections for 12 months: Frequency = M; Submission lag = 15 calendar days - Balance of payments data in electronic format: Frequency = Q; Submission lag = 90 calendar days - CBE foreign exchange deposits held at commercial banks headquartered in Egypt: Frequency = W; Submission lag = 5 working days - Commercial banks (foreign exchange and Egyptian pound) deposits by sector (household, corporate, public): Frequency = M; Submission lag = 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: Frequency = M; Submission lag = 30 calendar days - Commercial banks core FSI indicators by peer group (i) Capital adequacy ratio; (ii) Regulatory capital; (iii) Nonperforming loans as a share of total loans; and (iv) Provisions as a share of NPLs: Frequency = Q; Submission lag = 75 calendar days - Commercial bank-by-bank data (balance sheets by currency; income statements; FSI indicators; profitability indicators): Frequency = Q; Submission lag = 75 calendar days - Other depository corporations (commercial banks) balance sheet information in SRF (preliminary): Frequency = M; Submission lag = 30 calendar days - Central bank balance sheet in SRF (preliminary): Frequency = M; Submission lag = 15 calendar days - Central bank’s weekly analytical balance sheet (preliminary data to be submitted once a week for the previous week): Frequency = W; Submission lag = 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): Frequency = W; Submission lag = 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: Frequency = W; Submission lag = 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): Frequency = W; Submission lag = 5 working days after the end of the week - Daily interbank turnover in the FX spot market: Frequency = M; Submission lag = 15 working days - Note: Q = Quarterly; M = Monthly; W = Weekly ### Key findings, targets, and policy measures from the staff report (selected) - Growth and labor market - Real GDP growth reached 5.2 percent in July-September 2017 (year-on-year). - Unemployment has declined (no numeric value given in the excerpt). - External sector - Current account deficit for July-September 2017 was $1.6 billion compared to $4.8 billion for July-September 2016. - Official reserves have strengthened and are approaching the upper bound of the Fund’s reserve adequacy range. - Monetary policy and inflation - The CBE announced an inflation target of 13 percent for end-2018. - Interest rates were raised by a total of 700 bp between November 2016 and July 2017 and were subsequently kept on hold. - The CBE intends to adopt full-fledged inflation targeting (FFIT) once conditions are in place. - Fiscal policy and public debt - Authorities aim to reduce general government debt to 87 percent of GDP by 2018/19 (adjusted in view of exchange rate valuation revision). - The authorities aim for a cumulative fiscal consolidation of 5½ percent of GDP by 2018/19. - The authorities target a primary fiscal surplus of 2 percent of GDP in 2018/19. - For the fiscal year ending June 2018, the authorities aim at a primary deficit of 0.2 percent of GDP (constituting a fiscal adjustment of 2 percent of GDP compared to the previous year and 3.8 percent of GDP compared to 2015/16). - Revenue measures include increases in excises on tobacco products, the VAT rate, duties and fees, and a new stamp duty on stock market transactions. - Most adjustment expected from expenditure reductions, primarily energy subsidies and the wage bill (each to decline by around 1 percent of GDP). - Financial sector soundness - Nonperforming loans remain stable at 5.5 percent of total loans. - Loan loss provisioning covers 91 percent. - Egypt’s financial system described as profitable, liquid, and well capitalized, well above Basel III requirements. - Structural and sectoral reforms - Energy sector: domestic gas prices already cover costs; electricity prices raised; fuel price adjustments brought the price-to-cost ratio (gasoline and diesel) to 68 percent by September 2017. - From December 2017, authorities began publishing information on fuel product unit costs as a first step toward an automatic fuel price adjustment mechanism. - New Electricity Law (2015) enabled private investment (noted: US$1.8 billion in renewable energies through the Feed-in Tariff program). - New Gas Law passed in July 2017 to allow private sector involvement in downstream activities. - Investment climate: new investment law and industrial land and licensing law passed in 2017; access to industrial land increased (nearly 17 million sqm of land provided in 2016/17 compared to 9.5 mn for 2007–15). - Export/import paperwork reduced in 2017: number of documents to export reduced from 9 to 5; to import from 11 to 6; target to reduce time to export to 2 days in 2018. - Infrastructure and entrepreneurship - Power capacity increased by over 50 percent (period described as past three years). - Suez Canal was expanded within one year to more than double its capacity. - As of April 2017, new roads extended representing 44 percent of planned new roads and a 15 percent increase over existing roads. - Startups: Egypt highlighted as fastest growing location for startups with growth of over 100 percent in the last year, reaching over 500 registered startups. - Institutional and programmatic policies - CBE removed remaining FX restrictions and introduced a fee of 100 basis points for investors using the repatriation mechanism at entry and a fee of 50 basis points for buying FX from the CBE at exit (introduced December 2017). - Lending to finance the public deficit capped through a limit on the overdraft account at below 10 percent of the previous three years’ average tax revenues. - Authorities plan to introduce a medium-term expenditure framework and have completed a fiscal strategy paper; principles for state guarantees were recently issued. - Plans to publish financial accounts of economic authorities for FY 2016/17 in early 2018. - CBE prepared amendments to the banking law to enhance governance and independence, and to modernize in line with domestic needs and global best practices. *Prepared by the Middle East and Central Asia Department (source document: staff report excerpts, tables of reporting requirements, December 11, 2017).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr1814.pdf_