## cr18213 ## Source details **Canonical URL:** [cr18213](https://www.imf.org/-/media/files/publications/cr/2018/cr18213.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr18213.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr18213.pdf.json) --- ### Real and external sector developments — recent outcomes and program performance - Growth and labor market: - Real GDP growth accelerated from 4.2 percent in 2016/17 to 5.3 percent over the first three quarters of 2017/18; alternative series: 5.2 percent in the first half of 2017/18 (market prices). - Unemployment declined to 10.6 percent (lowest since 2011); period-average unemployment figures: 2016/17 = 12.2; 2017/18 Revised Proj. = 11.1; 2018/19 Proj. = 9.9; 2018/19 Revised Proj. = 9.7. - External sector and reserves: - Current account deficit narrowed sharply: 6 percent in 2016/17 to 2.6 percent of GDP in 2018/19 projection (medium term 2 percent of GDP). - Gross international reserves: reached $43 billion at end-May (also reported as $43.4 billion in May); gross international reserves (end-period, US$) series: 2016/17 = 30.7; 2017/18 Revised Proj. = 44.4; 2018/19 Revised Proj. = 44.8. - Portfolio investments reached $8 billion; net FDI flows fell by 12 percent to $3.8 billion (first half 2017/18). - Inflation: - Annual headline inflation declined from a peak of 33 percent in July 2017 to 11.4 percent in May 2018. - Core inflation fell from 35.3 percent to 11.1 percent in May. - Program performance (end-December): - All end-December quantitative targets met except the performance criterion (PC) on the primary fiscal balance, missed by EGP0.1 billion (EGP100 million). - Indicative target on EGPC arrears missed by $200 million (target $400 million; cleared $200 million instead). - Two of three structural benchmarks were met with delay: 2018/19 divestment plan announced in March (end-January SB); fuel price indexation mechanism approved in June (end-February SB). - Most end-June PCs appear within reach, but the fuel subsidy bill likely to exceed the target due to higher-than-programmed oil prices; authorities request modification of this PC. ### Outlook, projections, and key macro figures (preserved exactly) - Growth and inflation: - Real GDP growth projected: 2018/19 = 5.5 percent; medium-term target = 6 percent. - Average inflation expected to rise to 14.4 percent next year before declining to single digits in mid-2020. - Debt and fiscal: - Gross general government debt expected to decline from 103 percent of GDP in 2016/17 to 86 percent in 2018/19, and to around 74 percent by 2022/23. - 2018/19 budget targets a primary surplus of 2 percent of GDP; overall deficit targeted to decline to 8.1 percent of GDP. - Selected table values (preserved exactly as in source): - Real GDP (market prices): 2016/17 = 4.2; 2017/18 Revised Proj. = 5.2; 2018/19 Proj. = 5.5. - Consumer prices (end of period): 2016/17 = 29.8; 2017/18 Revised Proj. = 12.6; 2018/19 Proj. = 15.2; period average 2018/19 = 13.1. - Gross debt (general government): 2016/17 = 103.0 percent of GDP; 2018/19 Proj. = 86.7 percent of GDP; medium-term projections 2019/20–2022/23 = 83.5, 81.0, 78.0, 74.2 percent of GDP respectively. - Fuel subsidy (budget sector, in billions of Egyptian pounds): 2016/17 = 51.0; 2017/18 Revised Proj. = 108.0; 2018/19 Proj. = 120.9. - Current account (percent of GDP): 2016/17 = -6.0; 2017/18 Revised Proj. = -4.5; 2018/19 Proj. = -2.8. - Gross international reserves (end-period, in billions of US$): 2016/17 = 30.7; 2017/18 Revised Proj. = 44.4; 2018/19 Revised Proj. = 44.8. - Exports of goods and services (in millions of US$): 2016/17 = 37,585; 2017/18 = 45,781; 2018/19 = 53,061. - Public gross financing needs (in percent of GDP): 2016 = 20.6; 2017 = 46.8; 2018 = 38.2; 2019 = 34.9. ### Risks, vulnerabilities, and mitigating factors - External and domestic risks: - Shift to capital outflows amid tightening global financial conditions and investor pullback from emerging markets. - A further increase in global oil prices would put pressure on the budget and require larger domestic fuel price adjustments. - Security deterioration disrupting tourism recovery; adjustment fatigue weakening reform momentum. - Mitigating factors: - Comfortable foreign reserve levels (reserve coverage described as about 7 months of prospective imports). - Authorities’ strong reform record and sound macroeconomic policy framework. - Need to broaden and accelerate structural reforms to sustain private sector-led growth and absorb a rapidly growing labor force. ### Monetary and exchange rate policies - Monetary stance and framework: - Current framework based on money targeting with reserve money growth aligned with the IT for December 2017. - CBE reduced overnight deposit rate by a cumulative 200 basis points in February and March to 16.75 percent. - Staff and authorities agree monetary policy should remain cautious to contain second-round effects from higher energy prices and target further reduction in inflation to single digits over the medium term. - Medium-term plan to adopt a forward-looking, interest rate-based monetary policy framework with inflation as nominal anchor. - Exchange rate and reserves: - Authorities committed to a flexible exchange rate; CBE has not intervened in the FX market or supplied foreign currency to SOEs. - Pound broadly stable over the past year with modest recent depreciation tied to emerging market volatility. - CBE’s gross international reserves projected at 143 percent of the Fund’s ARA metric at end-June. - Program floor on accumulation of net international reserves (flow) set at -$1.5 billion for July-December 2018. - FX deposits divestment (structural benchmarks): - Reduced to under $4 billion by end-December 2017. - Reduce to $3 billion by end-June 2018 (SB). - $1.5 billion by end-December 2018 (SB). - Eliminated by June 15, 2019 (SB). ### Financial sector policies and resilience - Banking sector indicators: - Aggregate capital adequacy ratio: 14 percent in December 2016 to 15.2 percent in December 2017. - Leverage ratio improved from 4.8 to 6 percent. - NPL ratio improved from 6 percent to 4.9 percent. - Specific loan-loss provisioning coverage: 90.5 percent (December 2017); NPL provisioning virtually full at 99 percent in one statement. - Return on equity: 30.9 percent (FY ending 2016). - Vulnerabilities and policy actions: - Two largest public banks have capital above prudential requirements but may need additional capital to support lending growth and IT upgrades. - Issuance of high-interest certificates of deposit in 2017 adversely affected profitability for some public banks. - CBE enforces strict dividend payment policy and restrictions on large lending transactions to preserve capital. - Amendments to the CBE Law to establish emergency liquidity assistance and bank resolution frameworks (MEFP ¶24). - Ministry of Finance and CBE to develop clear rules on deploying public funds for financial stability; funding of bank resolution and recapitalization of public banks to be primarily the responsibility of the government. ### Fiscal policy, consolidation, and public financial management - 2017/18 outcomes: - Egypt on track for a primary surplus of 0.2 percent of GDP in 2017/18 (excluding a capital transfer of EGP6 billion for CBE recapitalization). - Fuel subsidy bill expected to reach EGP121 billion, above program target of EGP108 billion; authorities request modification of the PC. - Overall deficit projected at 9.8 percent of GDP versus 9.2 percent previously projected. - 2018/19 budget and medium-term consolidation: - 2018/19 budget targets: primary surplus of 2 percent of GDP; overall deficit to 8.1 percent of GDP. - Planned three-year cumulative fiscal consolidation of 5.5 percent of GDP. - Budget measures include revenue increase of 0.4 percent of GDP, wage bill reduction of 0.5 percent of GDP, energy subsidies decrease by 1.3 percent of GDP, and increased social spending by 0.3 percent of GDP. - Authorities to delay lower priority expenditures as buffer against revenue underperformance (MEFP ¶12). - Program fiscal consolidation contributions (Change in percent of GDP — preserved exactly): - Total revenue and grants: 0.9 (2016/17), -0.8 (2017/18), 0.4 (2018/19), cumulative 0.5. - o.w. Tax revenue: 0.3 (2016/17), 0.8 (2017/18), 0.4 (2018/19), cumulative 1.5. - Primary expenditure: -0.9 (2016/17), -2.7 (2017/18), -1.5 (2018/19), cumulative -5.1. - o.w. Wages: -1.4 (2016/17), -1.1 (2017/18), -0.4 (2018/19), cumulative -2.9. - Energy subsidies: 1.1 (2016/17), -0.7 (2017/18), -1.3 (2018/19), cumulative -0.8. - Primary balance: 1.7 (2016/17), 1.9 (2017/18), 1.9 (2018/19), cumulative 5.5. - Interest: 1.1 (2016/17), 0.1 (2017/18), 0.6 (2018/19), cumulative 1.1. - Overall balance: 1.6 (2016/17), 1.2 (2017/18), 1.6 (2018/19), cumulative 4.4. - Public financial management reforms and transparency: - Fiscal strategy paper submitted to Cabinet in December 2017. - Updated fiscal risks statement and system to assess new state guarantees to be finalized by end-June 2018. - Consolidated fiscal accounts, SOE monitoring, and publication timetable for SOE reports (first part by end-June 2018; second part by end-December 2018). - Roadmap for pension reform and review of PFM law to introduce medium-term budget framework. ### Energy subsidy reform and EGPC restoration - Energy subsidy reforms and price adjustments: - Fuel price increases: average increases of 53 percent in June 2017 for gasoline and diesel; LPG, kerosene and fuel oil raised by 100, 55 and 40 percent respectively in June 2017; further average 44 percent increase in June 2018. - After June 2018 increases, pre-tax price-to-cost ratios for gasoline, diesel, kerosene and fuel oil were about 73 percent. - Electricity tariff increases: 30 percent (July 2016), 40 percent (July 2017), 26 percent (starting July 1, 2018). - Policy target: achieve 100 percent cost recovery by June 15, 2019 (excluding LPG and fuel oil used for electricity generation and bakeries). - Automatic fuel price indexation mechanism approved in June 2018 to be implemented by end-December 2018 (exceptional early application possible for Gasoline 95). - EGPC arrears and financial restoration: - EGPC arrears: exceeded $6 billion in 2014; $2.4 billion at end-June 2017. - EGPC cleared $200 million between end-June 2017 and end-December 2017 instead of planned $400 million (IT missed). - Planned reduction of arrears to about $1.9 billion by end-June 2018 and commitment to fully eliminate arrears by end-June 2019; request to modify end-June 2018 IT on arrears clearance from $1.1 billion to $500 million. ### Structural reforms to support private sector-led growth - Tax administration modernization: - Develop a fully integrated and segment-based structure supported by reformed IT systems and processes; administer income taxes and VAT in a single integrated organizational structure (MEFP ¶14). - Strengthen staff capacity and address noncompliance; consolidate into a Medium-term Revenue Strategy (MTRS). - Industrial land allocation and procurement: - Move to transparent, competitive, and market-based industrial land allocation; working group by end-June 2018 to prepare reform plan by end-December 2018 (SB); new guidelines to be approved and published by March 31, 2019 (SB). - Public procurement: new Government Procurement Law approved in June; executive regulations to be approved by end-March 2019 (SB); e-Procurement portal operational by end-May 2019 (SB). - Competition, SOE divestment, and labor participation: - Strengthen Egyptian Competition Authority; draft law to Parliament by October 30, 2018 (SB). - Divest stakes in at least 23 SOEs over 24–30 months; detailed plan announced April 2018 with 4 entities to be completed in 2018/19 (SB). - Women’s labor force integration: nursery expenditures EGP250 million (2016/17) → EGP500 million (2017/18) → EGP600 million (2018/19). ### Financing, program monitoring, and modifications - Program financing and gap: - Program financed through June 2019. - Financing gap for 2018/19 estimated at $1.1 billion to be financed with Eurobond issuance and/or gross reserves. - Program definition change request: - Proposed modification to exclude any recapitalization of the CBE from the program definition of the primary fiscal balance; staff supports this modification. - Program monitoring: - Monitored through prior actions, quantitative PCs, indicative targets (ITs), and structural benchmarks (SBs); semi-annual reviews on December and June test dates. - Key quantitative targets include NIR floors, NDA ceilings, fuel subsidies ceilings, and primary fiscal balance cumulative floors (table excerpts preserved). ### Debt sustainability, Annex I highlights, and stress tests - Baseline public debt indicators (preserved exactly): - Nominal gross public debt (percent of GDP): 2016 = 76.3; 2017 = 96.8; 2018 = 103.0; 2019 = 92.4; 2020 = 86.2; 2021 = 83.5; 2022 = 81.0; 2023 = 78.0; alternate 2023 = 74.2. - Public gross financing needs (percent of GDP): 2016 = 20.6; 2017 = 46.8; 2018 = 38.2; 2019 = 34.9; 2020 = 31.1; 2021 = 36.9; 2022 = 35.7; 2023 = 41.9; alternate 2023 = 40.4. - Effective interest rate series: 2016 = 8.6; 2017 = 10.4; 2018 = 10.9; 2019 = 11.1; 2020 = 12.0; 2021 = 11.1; 2022 = 9.1; 2023 = 8.4; alternate 2023 = 8.8. - Baseline macro assumptions: - Real GDP growth (percent): 2016 = 4.3; 2017 = 4.3; 2018 = 4.2; 2019 = 5.2; 2020 = 5.5; 2021 = 5.9; 2022 = 6.0; 2023 = 6.0. - Primary balance (percent of GDP): 2018 = -0.8; 2019 = 1.3; 2020 = 1.7; 2021 = 1.9; 2022 = 1.9; 2023 = 1.8. - Stress tests and scenarios (selected outcomes preserved): - Historical scenario, Primary Balance scenario, Constant Primary Balance scenario, Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock, Real Exchange Rate Shock, Combined and Contingent Liability shocks produce larger deviations — examples include Combined: effective interest rate 2019 = 14.3; Contingent Liability Shock: primary balance 2019 = -8.7; Combined Macro-Fiscal and Contingent Liability Shock: primary balance 2019 = -9.8. - Risk indicators: - EMBIG (bp) shown as 413; 5Y CDS (bp) = 334. - Public Debt Held by Non-Residents indicated as 17 percent. - Public debt in foreign currency indicated as 12 percent. ### Capacity to repay, safeguards, and safeguards actions - Fund credit metrics: - 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. - CBE safeguards and reforms: - New audit firm engaged; align CBE reporting with Egyptian Accounting Standards starting with the 2018 audit. - Unwinding of FX deposits in foreign branches of domestic banks continued; full divestment expected by end-June 2019. - Review of the CBE Law with IMF TA; draft amendments to be submitted to Cabinet by end-September 2018 (reset from end-June). ### Staff appraisal, recommendations, and program decisions - Staff assessments: - Macroeconomic stabilization improving: external and fiscal deficits narrowing, inflation and unemployment declining, growth accelerating. - Reserve coverage comfortable at about 7 months of prospective imports. - Policy recommendations (preserved formulation): - Monetary: CBE should maintain restrictive monetary policy stance until inflation expectations are well anchored. - Exchange rate: preserve and enhance exchange rate flexibility; phase out repatriation mechanism to deepen interbank FX market. - Banking sector: continue monitoring smaller banks; develop clear rules on deploying public funds for financial stability. - Fiscal: guard against increases in government debt originating outside the budget sector; maintain consolidation to meet cumulative 5.5 percent of GDP target. - Energy subsidy reform: ensure fuel prices reach cost recovery as planned by end of 2018/19 and implement automatic fuel price indexation mechanism. - Structural reforms: broaden agenda to enhance transparency in industrial land allocation, strengthen competition and public procurement, improve SOE transparency, and tackle corruption. - Program review and approvals: - Staff supports completion of the third review under the Extended Arrangement. - Staff supports waiver of nonobservance of the end-December primary fiscal balance PC (minor deviation). - Staff supports modification of the end-June 2018 PC on the fuel subsidy bill. ### TMU, program monitoring, and reporting requirements (select highlights) - TMU exchange rates and valuations: - Program exchange rates as of June 30, 2016: SDR 0.7056; Euro 0.9019; British Pound 0.7462; Japanese Yen 102.7004; Saudi Riyal 3.7506; Chinese Yuan 6.6480. - Monetary gold valued at $1,258.65 per troy ounce. - Program EGP/$ exchange rates: FY 2017/18 = 18.0251; FY 2018/19 = 17.8572. - Key monitoring items and timetables: - Extensive reporting obligations for MoF and CBE (monthly, quarterly, weekly deadlines) for fiscal balances, NIR, NDA, EGPC arrears, debt stocks, and related data (detailed list preserved in source). - Continuous performance criteria include non-accumulation of external debt payment arrears and prohibitions on certain foreign exchange and trade restrictions. - Structural benchmarks and timing (selected): - Submit draft amendments to the CBE law: June 30, 2018 (reset to September 30, 2018). - Publish report on SOEs (split deliverables): part by June 30, 2018; remainder by December 31, 2018. - CBE FX deposits thresholds and elimination: under $4 billion by Dec 31, 2017 (met); $3 billion by June 30, 2018; $1.5 billion by Dec 31, 2018; eliminated by June 15, 2019. - Approve fuel price indexation mechanism and implement by end-December 2018 (Prime Minister approval occurred in June 2018; implementation to follow). *Source: ARAB REPUBLIC OF EGYPT — Recent Developments and Program Performance; IMF staff report extract (cr18213).* ### 1. Real and External Sector Developments __________________________________________________________ 16 ### 1. Real and External Sector Developments __________________________________________________________ 16 ### Recent developments and program performance - Macroeconomic stabilization is taking hold: growth accelerated from 4.2 percent in 2016/17 to 5.3 percent over the first three quarters of 2017/18, supported by higher net exports and investment. - Unemployment declined to 10.6 percent, the lowest since 2011. - Current account deficit declined sharply, reflecting a recovery in tourism and strong growth in remittance inflows; gross international reserves reached $43 billion at end-May. - Annual headline inflation declined from a peak of 33 percent in July 2017 to 11.4 percent in May 2018, reflecting last year’s monetary tightening and large base effects following the devaluation and fuel price hikes in 2016/17. - In May, S&P upgraded Egypt’s sovereign rating to B, reflecting the improved macroeconomic outlook and sound policy implementation. - Program performance through December: all end-December quantitative targets were met, except the performance criterion (PC) on the primary fiscal balance, which was missed by EGP0.1 billion. - The indicative target on Egyptian General Petroleum Company (EGPC) arrears was missed by $200 million (compared to the target of $400 million). - Two of three structural benchmarks (SBs) were met with delay: the 2018/19 divestment plan was announced in March (end-January SB); the fuel price indexation mechanism (end-February SB) was approved in June. - Most end-June PCs appear within reach, but: - The fuel subsidy bill is likely to exceed the target due to higher-than-programmed oil prices during 2017/18; the authorities are requesting a modification of this PC. - The end-June indicative target on budget sector debt is at risk partly due to higher-than-projected interest expenditures from repricing of government bonds held by the Central Bank of Egypt (CBE). ### Outlook and risks - Macroeconomic outlook: - Real GDP growth projected to rise to 5.5 percent in 2018/19, supported by the recovery in tourism and rising natural gas production (Zohr gas field coming online ahead of schedule). - Growth expected to reach 6 percent in the medium term assuming sustained reform momentum. - Average inflation expected to rise to 14.4 percent next year, driven by the recent fuel price hike, before declining to single digits in mid-2020. - Current account deficit projected to fall to 2.6 percent of GDP in 2018/19 (compared with 6 percent in 2016/17) and to 2 percent of GDP in the medium term. - Gross general government debt expected to decline from 103 percent of GDP in 2016/17 to 86 percent in 2018/19, and to around 74 percent by 2022/23. - External and domestic risks: - Recent shift to capital outflows as tightening global financial conditions caused investor pullback from emerging markets. - A further increase in global oil prices would put pressure on the budget and require a larger domestic fuel price adjustment to achieve cost recovery. - Additional risks: deterioration of security conditions disrupting tourism recovery; adjustment fatigue weakening reform momentum. - Mitigating factors: - Comfortable level of foreign reserves positions Egypt to manage outflows. - Authorities’ strong record of reform implementation and a sound macroeconomic policy framework. - Need to broaden and accelerate structural reforms to sustain private sector-led growth and absorb the rapidly growing labor force. ### Policy discussions — overarching objectives - Focus: consolidate macroeconomic stabilization gains while broadening structural reforms to foster sustainable, higher, and inclusive growth and job creation. - Planned fiscal consolidation to anchor public debt reduction remains on track, supported by further energy subsidy reform and well-targeted social spending. - Monetary policy to contain second-round effects from higher energy prices. - Updated Memorandum of Economic and Financial Policies (MEFP) expands structural reform agenda: improve efficiency of industrial land allocation, strengthen competition and public procurement, improve transparency of state owned enterprises, and tackle corruption. ### Monetary and exchange rate policies - Monetary stance: - Current framework based on money targeting, with reserve money growth in line with the IT for December 2017. - CBE reduced its overnight deposit rate by a cumulative 200 basis points in February and March to 16.75 percent as inflationary pressures eased. - Real money market and retail lending rates remain significantly positive and credit growth has slowed. - Staff and authorities agree monetary policy should remain cautious to contain second-round effects from recent energy price increases; further changes guided by inflation expectations and demand pressures. - CBE targets further reduction in inflation to single digits over the medium term. - Exchange rate and reserves: - Authorities committed to a flexible exchange rate to maintain competitiveness and cushion against external shocks; CBE has not intervened in the FX market or supplied foreign currency to SOEs. - Pound broadly stable over the past year, with modest depreciation in recent weeks tied to volatility in emerging market capital flows. - CBE will help deepen the interbank FX market and enhance exchange rate flexibility (MEFP ¶5). - CBE’s international reserves: gross international reserves projected at 143 percent of the Fund’s Assessing Reserve Adequacy (ARA) metric at end-June. - Program floor on accumulation of net international reserves (flow) set at -$1.5 billion for July-December 2018 to accommodate debt service obligations. - CBE to gradually divest FX deposits in foreign branches of domestic banks and reallocate to at least A-rated banks and financial instruments: - Reduced to under $4 billion by end-December 2017. - Reduce further to $3 billion by end-June 2018 (SB). - $1.5 billion by end-December 2018 (SB). - Eliminated by June 15, 2019 (SB). - Medium-term monetary framework: - CBE plans to adopt a forward-looking, interest rate-based monetary policy framework with inflation as the nominal anchor. - Comprehensive review of the Law of the Central Bank and the Banking System undertaken with IMF TA (MEFP ¶10). - Revised central bank law to establish price stability as primary objective, strengthen institutional and operational autonomy, and improve early intervention and resolution framework (MEFP ¶9). - Authorities requested a short extension in submission of the draft law to Cabinet from end-June to end-September 2018 (SB); mission supported this request. - CBE to strengthen analytical and liquidity management capacity, develop money markets, and improve communications strategy. ### Financial sector policies and resilience - Banking sector health: - Aggregate capital adequacy ratio improved from 14 percent in December 2016 to 15.2 percent in December 2017. - Leverage ratio improved from 4.8 to 6 percent over the same period. - Nonperforming loan (NPL) ratio improved from 6 to 4.9 percent due to NPL write-offs. - Banks’ high profitability expected to normalize as interest rates decline but remain sufficient to absorb possible increases in credit risk costs. - Most banks maintain solid liquidity buffers and actively manage balance sheets to mitigate interest rate and liquidity risks from large holdings of government securities. - CBE enforces a strict policy on dividend payments based on Internal Capital Adequacy Assessment Process outcomes. - Resilience and vulnerabilities: - Two largest public banks have capital adequacy ratios above prudential requirements but may require additional capital to support lending growth and IT upgrades. - Issuance of high-interest certificates of deposit in 2017 adversely affected profitability and internal capital generation for these banks. - Sale of non-core assets (real estate, shares) should cover part of capital needs. - CBE prohibition of dividend payments and restrictions on large lending transactions help preserve capital. - Several smaller banks have capital adequacy, asset quality, and profitability below sector averages but do not pose significant systemic risks; some will be recapitalized by shareholders, others expected to improve over 12 months. - Public funds and resolution framework: - Amendments to the CBE Law will establish the foundation for emergency liquidity assistance and bank resolution frameworks in line with best international practices (MEFP ¶24). - Ministry of Finance and CBE to develop clear rules on deploying public funds to maintain financial stability. - Funding of bank resolution and recapitalization of public banks to be primarily the responsibility of the government. ### Fiscal policy and consolidation - 2017/18 outcomes: - Egypt on track to achieve a primary surplus of 0.2 percent of GDP in 2017/18, in line with program target (excluding a capital transfer note regarding CBE recapitalization). - Fiscal performance benefited from increased taxes paid by the CBE on interest income from their stock of government bonds after adjusting these bonds to reflect market interest rates. - Higher tax from CBE, increase in excises, and under-execution of other spending helped offset expected overrun of 0.3 percent of GDP on the fuel subsidy bill due to higher-than-projected world oil prices (MEFP ¶11). - Fuel subsidy bill expected to reach EGP121 billion, above the program target of EGP108 billion; authorities request modification of the respective PC. - Overall deficit projected at 9.8 percent of GDP, compared with 9.2 percent projected at the time of the second review, reflecting higher-than-projected interest expenditures. - 2018/19 budget and medium-term consolidation: - 2018/19 budget targets a primary surplus of 2 percent of GDP, consistent with a planned three-year cumulative fiscal consolidation of 5.5 percent. - Overall deficit targeted to decline to 8.1 percent of GDP. - General government debt projected to decline to 86 percent of GDP from 103 percent in 2016/17. - Budget targets an increase in revenues of 0.4 percent of GDP, primarily from full-year impact of higher VAT and tobacco excises, higher stamp duties, and improved tax administration. - Public wage bill projected to decline by 0.5 percent of GDP from containment of wage increases and tight control over new hiring, reflecting modernization of public employment under the new civil service law. - Energy subsidies projected to decrease by 1.3 percent of GDP as fuel and electricity prices move toward cost-recovery levels. - Some savings from subsidy reform to be used to increase social spending by 0.3 percent of GDP to mitigate impacts on the most vulnerable. - Authorities will delay lower priority expenditures as a buffer against revenue underperformance to ensure targets are achieved (MEFP ¶12). - Program fiscal consolidation contributions (Change in percent of GDP): - Total revenue and grants: 0.9 (2016/17), -0.8 (2017/18), 0.4 (2018/19), cumulative 0.5. - o.w. Tax revenue: 0.3 (2016/17), 0.8 (2017/18), 0.4 (2018/19), cumulative 1.5. - Primary expenditure: -0.9 (2016/17), -2.7 (2017/18), -1.5 (2018/19), cumulative -5.1. - o.w. Wages: -1.4 (2016/17), -1.1 (2017/18), -0.4 (2018/19), cumulative -2.9. - Energy subsidies: 1.1 (2016/17), -0.7 (2017/18), -1.3 (2018/19), cumulative -0.8. - Primary balance: 1.7 (2016/17), 1.9 (2017/18), 1.9 (2018/19), cumulative 5.5. - Interest: 1.1 (2016/17), 0.1 (2017/18), 0.6 (2018/19), cumulative 1.1. - Overall balance: 1.6 (2016/17), 1.2 (2017/18), 1.6 (2018/19), cumulative 4.4. - Source: IMF staff calculations. - Note on CBE capital transfer: the primary surplus calculation excludes a capital transfer of EGP6 billion for recapitalization of the CBE; high policy rates and sterilization costs, together with below-market interest rates on the stock of government bonds held by the CBE, eroded the CBE’s capital during 2017/18. The stock of government bonds held by the CBE was adjusted to reflect market interest rates, effective from July 2017. ### Energy subsidy reform - Role: energy subsidy reform is central to fiscal consolidation. - Fuel subsidy bill: - Decreased from 3.3 percent of GDP in 2016/17 to a projected 2.7 percent of GDP in 2017/18. - Expected to decline further to 1.8 percent of GDP in 2018/19 despite significant increases in world oil prices. - In June 2018, authorities increased fuel prices by another 44 percent on average, raising pre-tax price-to-cost ratios to about 73 percent for gasoline, diesel, kerosene, and fuel oil (excluding LPG and fuel oil used for electricity generation and bakeries). - Additional increases planned to achieve full cost recovery by end-2018/19. - Prime Minister approved an automatic fuel price indexation mechanism for most fuel products in June 2018, to be implemented by end-December 2018. The mechanism adjusts fuel prices to changes in global oil prices, the exchange rate, and the share of imported fuel in domestic consumption (MEFP ¶17). - Electricity subsidies projected to decline from 0.7 percent of GDP in 2017/18 to 0.3 percent of GDP in 2018/19, and to be fully eliminated by 2020/21. - Rationale: fuel prices in Egypt remain among the lowest in the world despite increases, benefiting the well-off disproportionately; reform aims at cost recovery while protecting the vulnerable via increased social spending. *Source: ARAB REPUBLIC OF EGYPT — Recent Developments and Program Performance (IMF).* ### 15. The authorities are planning to strengthen and modernize tax administration. ### 15. The authorities are planning to strengthen and modernize tax administration. ### Tax administration modernization - Increasing the efficiency of revenue collection is essential to create fiscal space for investments in health and education, infrastructure and a sustainable social safety net. - Authorities are developing a fully integrated and segment-based structure supported by reformed IT systems and processes. - Income taxes and VAT will be administered in a single integrated organizational structure, with stepped-up efforts to address noncompliance (MEFP ¶14). ### Public financial management (PFM) reforms - A fiscal strategy paper was submitted to Cabinet in December 2017. - An updated fiscal risks statement and a comprehensive system to assess new state guarantees will be finalized by end-June 2018. - Ongoing work to prepare consolidated fiscal accounts, including the economic authorities, and to improve monitoring of SOEs. - Publication timetable: - By end-June 2018: a comprehensive report on public enterprises, including a full list of companies majority-owned by the government, broken down by industry, policy objectives, and ownership structure; and their financial statements and indicators of financial performance. - By end-December 2018: a report on the governance structure of all SOEs and their impact on government finances. - Authorities are preparing a roadmap for pension reform and plan to review the existing PFM law to introduce a medium-term budget framework incorporating multi-year expenditure ceilings based on a functional classification of spending. - Measures to improve fiscal transparency and accountability are being undertaken (MEFP ¶15). ### Structural reforms to support private sector-led growth - Context and objective: - Egypt faces long-standing structural challenges from inward-oriented economic policies and an expansive role of the state. - A more inclusive and private sector-led growth model is needed to absorb the expected significant increase in the labor force. - Access to land: - Most land is state-owned and acreage sold each year is insufficient for private sector needs. - Current industrial land allocation prescribes specific economic activities and sells land at a pre-set price based on government review of applications, contributing to misallocation and vulnerability to corruption and speculation. - Authorities intend to move to a transparent, competitive, and market-based mechanism to broaden land utilization and improve allocation efficiency (MEFP ¶25). - Timeline and actions: - A working group will be formed by end-June 2018 to prepare a reform plan for industrial land allocation by end-December 2018 (SB). - Based on this plan, new guidelines for industrial land allocation will be approved by a Ministerial decree and published by March 31, 2019 (SB). - The reform plan will include creation of an online platform to manage the entire process of land allocation, from tender announcements to reporting of the results. - Public procurement: - A new Government Procurement Law was approved in June. - Executive regulations for implementation of the new law are envisioned to be approved by end-March 2019 (SB). - Regulations will standardize government procurement processes and be applied uniformly to all government entities' tenders covered by the law (MEFP ¶25). - A committee will ensure SOE procurement rules are consistent with best practices highlighted in the new procurement law. - Public procurement will move from a paper-based system to a single e-Procurement portal; the e-Procurement portal will become operational by end-May 2019 (SB). - Competition and anti-corruption: - Authorities are working to strengthen the institutional, financial, and operational independence of the Egyptian Competition Authority (ECA), and enhance its accountability and transparency (MEFP ¶25). - The draft law underpinning these changes will be submitted to Parliament by October 30, 2018 (SB). - Authorities will initiate an open consultative process with stakeholders to develop a Right to Information Law and its implementing regulations (MEFP ¶25). - SOE divestment: - Authorities are moving forward with a program to divest minority shares in select SOEs to attract private investment, reduce the role of the state, and deploy public assets more productively (MEFP ¶25). - A detailed plan announced in April 2018 to divest stakes in at least 23 public entities over 24–30 months, of which 4 entities will be completed in 2018/19 (SB). - Women’s labor force integration: - Expenditure to improve availability of public nurseries and other facilities increased from EGP250 million in 2016/17 to EGP500 million in 2017/18. - This will be raised further to EGP600 million in the 2018/19 budget (SB, MEFP ¶26). - Authorities are working with United Nations Women to implement gender budgeting starting in 2018/2019, and exploring ways to simplify registration of home based nurseries. ### Financing and program issues - Program financing: - The program is financed through June 2019. - The financing gap for 2018/19 is estimated at $1.1 billion and will be financed with Eurobond issuance and/or from gross reserves, depending on financial market conditions. - Program definition change: - It is proposed to modify the program definition of the primary fiscal balance to exclude any recapitalization of the CBE. - Staff supports this modification, given that the need for such a direct capital injection does not reflect a change in the fiscal policy stance. ### Capacity to repay and safeguards - Fund credit outstanding as a share of gross reserves is 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 the same year (Table 10). - External risks have increased due to tightening global financial conditions and a pullback by investors from emerging markets, but Egypt is described as well positioned to manage any increase in capital outflows. - The CBE’s reserve position is strong, fiscal balances are improving, and the memorandum of understanding between the CBE and MoF on respective responsibilities for servicing Fund credit should ensure uninterrupted repayments. - CBE safeguards and reforms: - CBE engaged a new audit firm in line with its revised policy on selection and appointment of external auditors. - Work is underway to align CBE financial reporting practices with Egyptian Accounting Standards starting with the 2018 audit. - CBE continues to unwind its holding of FX deposits in foreign branches of domestic banks, with full divestment expected by end-June 2019. - Authorities are undertaking a review of the CBE Law with IMF TA and aim to submit the draft amendments to Cabinet by end-September 2018 (initially planned for end-June). ### Staff appraisal — key assessments and policy recommendations - Macroeconomic status: - Macroeconomic conditions continued to improve during 2018 with external and fiscal deficits narrowing, inflation and unemployment declining, and growth accelerating. - Near-term growth outlook is supported by recovery in tourism and rising natural gas production. - Current account deficit is projected to remain below 3 percent of GDP and public debt to fall to 74 percent of GDP by 2022/23. - Reserve coverage remains comfortable at about 7 months of prospective imports. - Monetary policy: - The CBE should maintain its restrictive monetary policy stance until inflation expectations are well anchored. - Monetary tightening in 2017 helped anchor inflation expectations and rein in inflation after the devaluation and fuel price hikes in 2016/17. - Monetary policy should remain cautious to contain second-round effects from increases in energy prices, with further policy changes guided by inflation expectations and demand pressures. - Exchange rate policy: - Preserving and enhancing exchange rate flexibility is critical to sustain gains in macroeconomic stabilization and cushion against external shocks. - The CBE’s policy of refraining from interventions in the interbank market, except to potentially mitigate disorderly conditions, is an essential element of its policy framework. - Staff believes phasing out the repatriation mechanism would further deepen the interbank FX market and enhance exchange rate flexibility. - Banking sector: - The banking sector is broadly healthy and resilient to moderate shocks. - The two largest public banks are financially stable but may require recapitalization in the next two years to support strong lending growth. - The CBE should continue close monitoring of several smaller banks whose capital adequacy, asset quality, and profitability are below sector averages. - Development of clear rules on deploying public funds to maintain financial stability is strongly recommended. - Fiscal consolidation: - Fiscal consolidation remains on track to achieve the planned three-year cumulative fiscal consolidation of 5.5 percent of GDP. - The primary surplus target of 0.2 percent of GDP appears likely to be met. - The 2018/19 budget targets a primary surplus of 2 percent of GDP, which would reduce general government debt to 86 percent of GDP from 103 percent in 2016/17. - Authorities’ commitment to delay lower priority expenditures in 2018/19 as a buffer against risks from revenue underperformance or higher world oil prices is welcomed. - Authorities should guard against increases in government debt originating from outside the budget sector. - Energy subsidy reform: - Ongoing energy subsidy reform is critical to support fiscal consolidation. - Fuel prices remain among the lowest in the world and benefit the well-off disproportionately. - Steps to increase fuel prices to close the gap relative to cost recovery in the context of rising world oil prices were timely. - The 2018/19 budget will continue to replace poorly targeted energy subsidies with programs that directly support poor households. - It is essential that fuel prices reach cost recovery as planned by the end of 2018/19 and are accompanied by implementation of the recently approved automatic fuel price indexation mechanism. - Structural reform agenda: - The expanded structural reform agenda aims to address key impediments to growth including weak governance and a large role for the state. - Initial steps include enhancing transparency in industrial land allocation, strengthening competition and public procurement, improving transparency and accountability of SOEs, and tackling corruption. - The overall agenda to move to a transparent market-based economy with limited state intervention remains large. ### Risks to the program - Risks identified: - Increased global risk aversion and higher international oil prices. - Reform fatigue. - Risk of acceleration in capital outflows as global financial conditions tighten. - A further increase in global oil prices would put pressure on the budget and require a larger adjustment of domestic fuel prices to achieve cost recovery. - Potential deterioration of the security situation that would disrupt the recovery in tourism. - Mitigating factors: - Healthy level of foreign reserves leaves Egypt well positioned to manage any acceleration in outflows. - Heightened importance of a sound macroeconomic framework and consistent policy implementation. *International Monetary Fund staff report extract.* ### 35. Staff supports the authorities’ request for the completion of the third review under ### Staff supports the authorities’ request for the completion of the third review under the Extended Arrangement ### Program review, waivers, and modifications - Staff supports the authorities’ request for the completion of the third review under the Extended Arrangement. - Staff supports the authorities’ request for a waiver of nonobservance of the end-December performance criterion on the primary fiscal balance, citing a minor deviation from the target. - Staff supports the request for the modification of the performance criterion on the fuel subsidy bill for end-June 2018. ### Key macroeconomic outcomes and projections (select figures preserved exactly as in source) - Real GDP (market prices): 2016/17 = 4.2; 2017/18 Second Review = 4.8; 2017/18 Revised Proj. = 5.2; 2018/19 Proj. = 5.5. - Consumer prices (end of period): 2016/17 = 29.8; 2017/18 Second Review = 11.9; 2017/18 Revised Proj. = 12.6; 2018/19 Proj. = 15.2; period average 2018/19 = 13.1. - Gross debt (general government): 2016/17 = 103.0 percent of GDP; 2017/18 Second Review = 91.3 percent of GDP; 2017/18 Revised Proj. = 92.4 percent of GDP; 2018/19 Proj. = 86.7 percent of GDP; 2018/19 Revised Proj. (Table 8) = 86.2 percent of GDP; medium-term projections 2019/20–2022/23 = 83.5, 81.0, 78.0, 74.2 percent of GDP respectively. - Gross debt (budget sector, LE): 2017/18 = 4,623; 2018/19 = 5,238 (in billions of Egyptian pounds) (Table 3a/3b memoranda). - Budget sector: Revenue and grants (percent of GDP) 2017/18 Revised Proj. = 18.2; 2018/19 Proj. = 18.6. Expenditure (incl. net acquisition of financial assets) 2017/18 Revised Proj. = 27.9 percent of GDP; 2018/19 Proj. = 26.1 percent of GDP. - Overall balance (budget sector, percent of GDP): 2016/17 = -10.9; 2017/18 Second Review = -9.2; 2017/18 Revised Proj. = -9.7; 2018/19 Proj. = -7.4; 2018/19 Revised Proj. (Table 8) = -8.1 (budget sector overall balance, IMF staff definition). - Primary balance (budget sector, percent of GDP): 2016/17 = -1.8; 2017/18 Second Review = 0.2; 2017/18 Revised Proj. = 0.2; 2018/19 Proj. = 2.1; 2018/19 Revised Proj. (Table 8 primary budget balance) = 2.0. - Energy subsidies (budget sector, percent of GDP): 2016/17 = 4.1; 2017/18 Second Review = 3.1; 2017/18 Revised Proj. = 3.4; 2018/19 Proj. = 1.2; 2018/19 Revised Proj. = 2.1. - Fuel subsidy (budget sector, in billions of Egyptian pounds): 2016/17 = 51.0; 2017/18 Second Review = 115.0; 2017/18 Revised Proj. = 108.0; 2018/19 Proj. = 120.9; 2018/19 Revised Proj. = 48.4; 2019/20 Proj. = 99.1; 2020/21 Proj. = 40.4; 2021/22 Proj. = 26.8; 2022/23 Proj. = 29.5; 2022/23 (Table 3a) = 33.3. - Current account (percent of GDP): 2016/17 = -6.0; 2017/18 Second Review = -6.0; 2017/18 Revised Proj. = -4.5; 2018/19 Proj. = -2.8; 2018/19 Revised Proj. = -4.0; medium-term projections (Table 8) 2019/20–2022/23 = -3.1, -2.4, -1.8, -1.6. - Gross international reserves (end-period, in billions of US$): 2016/17 = 30.7; 2017/18 Second Review = 34.5; 2017/18 Revised Proj. = 44.4; 2018/19 Proj. = 33.0; 2018/19 Revised Proj. = 44.8; medium-term projections (Table 8) 2019/20–2022/23 = 42.5, 43.4, 45.3, 47.5. - In months of next year's imports of goods and services (reserves): 2016/17 = 5.2; 2017/18 Second Review = 5.7; 2017/18 Revised Proj. = 6.8; 2018/19 Proj. = 5.2; 2018/19 Revised Proj. = 6.1; medium-term projections (Table 8) 2019/20–2022/23 = 5.6, 5.4, 5.2, 5.1. - External debt (percent of GDP): 2016/17 = 41.3; 2017/18 Second Review = 34.6; 2017/18 Revised Proj. = 34.5; 2018/19 Proj. = 30.3; 2018/19 Revised Proj. = 29.9; medium-term projections (Table 8) 2019/20–2022/23 = 26.4, 25.0, 23.3, 19.7. - Exports of goods and services (in millions of US$; memorandum Table 10): 2016/17 = 37,585; 2017/18 = 45,781; 2018/19 = 53,061; 2019/20 = 57,914; projections 2020/21–2022/23 = 62,528; 67,860; 74,438. - Unemployment rate (period average, percent): 2016/17 = 12.2; 2017/18 Second Review = 11.2; 2017/18 Revised Proj. = 11.1; 2018/19 Proj. = 9.9; 2018/19 Revised Proj. = 9.7; medium-term projections (Table 8) 2019/20–2022/23 = 8.1, 7.5, 6.9, 6.3. ### Fiscal and programmatic implications emphasized by staff - Support for completion of the third review under the Extended Arrangement, despite a minor deviation from the end-December primary fiscal balance performance criterion, reflects staff judgment that the deviation warrants a waiver rather than suspension. - Support for modification of the end-June 2018 performance criterion on the fuel subsidy bill indicates staff recognition of the need to adjust program metrics to reflect policy or implementation realities surrounding fuel subsidy management. *Source: IMF staff assessment and data as presented in the cited IMF staff report (selected tables and figures).* ### Annex I. Public/External Debt Sustainability Analysis ### Annex I. Public/External Debt Sustainability Analysis ### Baseline public debt indicators and projections - Nominal gross public debt (in percent of GDP): 2016: 76.3; 2017: 96.8; 2018: 103.0; 2019: 92.4; 2020: 86.2; 2021: 83.5; 2022: 81.0; 2023: 78.0; projection for 2023 shown also as 74.2 in one table. - Public gross financing needs (in percent of GDP): 2016: 20.6; 2017: 46.8; 2018: 38.2; 2019: 34.9; 2020: 31.1; 2021: 36.9; 2022: 35.7; 2023: 41.9; 2023 alternate value: 40.4. - Sovereign spreads / market indicators: EMBIG (bp) 3/413; 5Y CDS (bp) 334. - Ratings (foreign / local): Moody's B3 / B3; S&P's BB / 3 (displayed as BB3); Fitch BB / 3 (displayed as BB3). - Effective interest rate (in percent, defined as interest payments divided by debt stock at the end of previous year): 2016: 8.6; 2017: 10.4; 2018: 10.9; 2019: 11.1; 2020: 12.0; 2021: 11.1; 2022: 9.1; 2023: 8.4; alternate 2023: 8.8. ### Growth, inflation, and primary balance assumptions (baseline) - Real GDP growth (in percent): 2016: 4.3; 2017: 4.3; 2018: 4.2; 2019: 5.2; 2020: 5.5; 2021: 5.9; 2022: 6.0; 2023: 6.0. - Inflation (GDP deflator, in percent): 2016: 11.1; 2017: 6.2; 2018: 22.9; 2019: 21.5; 2020: 14.6; 2021: 10.4; 2022: 7.6; 2023: 7.0; alternate 2023 value: 6.7 appears in some tables. - Nominal GDP growth (in percent): 2016: 15.9; 2017: 10.9; 2018: 28.1; 2019: 27.8; 2020: 21.0; 2021: 16.9; 2022: 14.0; 2023: 13.4; alternate 2023: 13.1. - Primary balance (in percent of GDP), baseline projections: 2018: -0.8; 2019: 1.3; 2020: 1.7; 2021: 1.9; 2022: 1.9; 2023: 1.8. - Primary (noninterest) revenue and grants (in percent of GDP): 2016: 23.1; 2017: 20.1; 2018: 21.5; 2019: 20.1; 2020: 20.3; 2021: 19.6; 2022: 19.6; 2023: 19.6; cumulative 2007-2015: 118.9. - Primary (noninterest) expenditure (in percent of GDP): 2016: 26.8; 2017: 24.4; 2018: 24.0; 2019: 21.0; 2020: 19.0; 2021: 17.9; 2022: 17.8; 2023: 17.7; cumulative 2007-2015: 111.1. ### Contributions to changes in public debt (2007–2023 and cumulative) - Change in gross public sector debt (in percent of GDP): 2016: 0.3; 2017: 8.4; 2018: 6.2; 2019: -10.7; 2020: -6.2; 2021: -2.7; 2022: -2.5; 2023: -3.0; 2023 alternate: -3.7; cumulative: -28.8. - Identified debt-creating flows cumulative (2007–2015 and projected total): -41.0 (table shows series 2016–2023: -0.2; 4.7; -3.8; -12.4; -8.0; -5.7; -5.2; -5.1; -4.6). - Primary deficit contribution (in percent of GDP) series: 2016: 3.7; 2017: 4.3; 2018: 2.5; 2019: 0.8; 2020: -1.3; 2021: -1.7; 2022: -1.9; 2023: -1.9; cumulative: -7.8. - Automatic debt dynamics (cumulative contribution): -34.7; series by year: -4.4; 0.9; -6.5; -13.5; -6.8; -4.3; -3.6; -3.6; -3.0. - Interest rate / growth differential contribution (identical series): -4.7; -0.3; -13.0; -13.5; -6.8; -4.3; -3.6; -3.6; -3.0; cumulative: -34.7. - Of which: real interest rate contribution: -1.9; 3.1; -9.9; -9.3; -2.6; 0.1; 0.7; 0.7; 1.1; cumulative: -9.2. - Of which: real GDP growth contribution: -2.8; -3.5; -3.2; -4.2; -4.2; -4.3; -4.4; -4.3; -4.1; cumulative: -25.6. - Exchange rate depreciation contribution series: 0.3; 1.2; 6.5 (later years omitted in table). - Other identified debt-creating flows (including GG: Net Lending): series: 0.6; -0.4; 0.1; 0.2; 0.2; 0.3; 0.3; 0.3; cumulative: 1.6. - Residual, including asset changes (cumulative): 12.2; series: 0.4; 3.6; 10.0; 1.8; 1.8; 3.1; 2.7; 2.1; 0.8. ### Composition of debt, financing needs, and external debt indicators - Gross nominal public debt (trend displayed graphically for 2016–2023; exact series above). - Public gross financing needs (in percent of GDP) projection series shown graphically 2016–2023; values above provide annual numbers. - By maturity (in percent of GDP): short-term and medium-and-long-term components plotted historically and in projection. - By currency (in percent of GDP): local currency-denominated and foreign currency-denominated components plotted. - External debt (baseline, in percent of GDP): 2013: 16.3; 2014: 15.5; 2015: 15.0; 2016: 18.3; 2017: 41.3; 2018: 34.5; 2019: 29.9; 2020: 26.4; 2021: 25.0; 2022: 23.3; 2023: 19.7; debt-stabilizing non-interest current account: -5.2. - Change in external debt (in percent of GDP): 2013: 4.0; 2014: -0.8; 2015: -0.5; 2016: 3.3; 2017: 23.0; 2018: -6.8; 2019: -4.6; 2020: -3.5; 2021: -1.4; 2022: -1.7; 2023: -3.6. - Identified external debt-creating flows (4+8+9, in percent of GDP): 2013: 0.8; 2014: -1.4; 2015: 0.4; 2016: 3.9; 2017: 8.2; 2018: -2.6; 2019: -2.3; 2020: -2.0; 2021: -2.7; 2022: -3.5; 2023: -3.9. - Current account deficit, excluding interest payments (in percent of GDP): series includes 2013: 2.0; 2014: 0.7; 2015: 3.5; 2016: 5.7; 2017: 5.5; 2018: 2.0; 2019: 1.6; 2020: 2.1; 2021: 1.5; 2022: 0.9; 2023: 0.7. - Exports (in percent of GDP): 2013: 17.0; 2014: 14.2; 2015: 13.3; 2016: 10.5; 2017: 14.7; 2018: 18.3; 2019: 17.4; 2020: 16.8; 2021: 17.2; 2022: 17.6; 2023: 17.6. - Imports (in percent of GDP): 2013: 23.4; 2014: 22.7; 2015: 21.8; 2016: 20.1; 2017: 26.5; 2018: 28.4; 2019: 25.7; 2020: 25.3; 2021: 25.1; 2022: 25.0; 2023: 24.7. - Net non-debt creating capital inflows (negative, in percent of GDP): series 2013–2023: -1.0; -1.4; -2.0; -2.1; -3.2; -3.4; -3.4; -3.6; -3.7; -4.0; -4.2. - Automatic debt dynamics contribution to external debt (series): -0.1; -0.7; -1.0; 0.2; 5.9; -1.3; -0.5; -0.6; -0.5; -0.4; -0.4. - Contribution from nominal interest rate (external debt, in percent): 0.3; 0.2; 0.2; 0.2; 0.5; 1.0; 1.1; 1.0; 1.0; 1.0; 0.9. - Contribution from real GDP growth (external debt, in percent): -0.4; -0.4; -0.6; -0.7; -1.0; -2.2; -1.6; -1.6; -1.5; -1.4; -1.3. - Residual, including change in gross foreign assets (in percent of GDP): 2013: 3.1; 2014: 0.6; 2015: -0.9; 2016: -0.6; 2017: 14.8; 2018: -4.2; 2019: -2.3; 2020: -1.5; 2021: 1.3; 2022: 1.8; 2023: 0.3. - External debt-to-exports ratio (in percent): 2013: 95.8; 2014: 108.6; 2015: 113.1; 2016: 174.7; 2017: 281.6; 2018: 188.3; 2019: 172.0; 2020: 156.9; 2021: 145.3; 2022: 132.2; 2023: 111.6. - Gross external financing need (in billions of US dollars): series 2013–2023: 11.3; 11.9; 18.1; 25.2; 25.0; 21.7; 15.4; 16.3; 14.1; 12.9; 12.5. - Gross external financing need (in percent of GDP): 3.9; 3.9; 5.4; 7.6; 9.7; 10-Year; 10-Year; 8.7; 5.0; 4.7; 3.9; 3.3; 2.9 (table formatting varies; exact boxed values preserved from source where shown). ### Alternative scenarios and stress tests (high-level outcomes) - Historical scenario baseline comparisons shown for key variables: - Historical Real GDP growth scenario: 2018: 5.2; 2019: 4.0; 2020: 4.0; 2021: 4.0; 2022: 4.0; 2023: 4.0. - Historical Primary Balance scenario: 2018: -0.8; 2019: -4.0; 2020: -4.0; 2021: -4.0; 2022: -4.0; 2023: -4.0. - Constant Primary Balance scenario (primary balance held at 2018 level): Primary Balance series: 2018: -0.8; 2019: -0.8; 2020: -0.8; 2021: -0.8; 2022: -0.8; 2023: -0.8. - Selected stress test scenario outcomes (headline variable examples): - Primary Balance Shock scenario—Primary balance (in percent of GDP): 2018: -0.8; 2019: 0.2; 2020: 1.5; 2021: 1.8; 2022: 1.9; 2023: 1.8. - Real GDP Growth Shock scenario—Real GDP growth (in percent): 2018: 5.2; 2019: 4.0; 2020: 4.3; 2021: 6.0; 2022: 6.0; 2023: 6.0. - Real Interest Rate Shock—Effective interest rate (in percent): 2018: 11.1; 2019: 12.0; 2020: 12.5; 2021: 11.0; 2022: 10.3; 2023: 10.9. - Real Exchange Rate Shock—Inflation (GDP deflator, in percent) shows a spike to 49.3 in 2019 for the shock scenario. - Combined Shock and Contingent Liability Shock scenarios produce larger deviations in primary balance and effective interest rate in early projection years (e.g., Combined: effective interest rate 2019: 14.3; Contingent Liability Shock: primary balance 2019: -8.7; Combined Macro-Fiscal and Contingent Liability Shock: primary balance 2019: -9.8). - Stress test metrics plotted include Gross Nominal Public Debt (in percent of GDP), Gross Nominal Public Debt (in percent of Revenue), and Public Gross Financing Needs (in percent of GDP) across 2018–2023 under baseline and shocks. ### Risk assessment and vulnerability indicators (selected values) - Gross financing needs benchmark context: gross financing needs benchmark of 15% used for coloring cells (table methodology note). - EMBIG average (last 3 months, 15-Aug-17 through 13-Nov-17) used for market perception; value shown earlier as EMBIG (bp) 413. - Indicators (2017, vis-à-vis risk-assessment benchmarks): external financing requirement, public debt held by non-residents, public debt in foreign currency, annual change in short-term public debt; specific cell color logic described (green/yellow/red/white). - Public Debt Held by Non-Residents (in percent of total) indicated as 17% in one table. - Public debt in foreign currency (in percent of total): 12 (table shows 12 in context of benchmarks). ### Forecast track record and realism of baseline assumptions - Forecast track record percentiles: - Real GDP growth forecast error: Egypt median forecast error 1.05 has percentile rank 29%. - Primary Balance forecast error: Egypt median forecast error -2.24 has percentile rank 10%. - Inflation (deflator) forecast error: Egypt forecast error 1.15 has percentile rank 82%. - CAPB (Cyclically-Adjusted Primary Balance) adjustment distribution: - 3-year CAPB adjustment greater than 3 percent of GDP in approx. top quartile has a percentile rank of 9% for Egypt. - 3-year average CAPB level greater than 3.5 percent of GDP has a percentile rank of 50% for Egypt. ### Key macroeconomic historical averages and assumptions underlying baseline (selected) - Historical (2013–2017) and baseline (2018–2023) key variables (selected): - Real GDP growth (in percent) historical series includes 2013: 3.3; 2014: 2.9; 2015: 4.4; 2016: 4.3; 2017: 4.2; 2018: 4.0; baseline projection 2019–2023: 5.2; 5.5; 5.9; 6.0; 6.0; 6.0 (consistent with earlier tables). - GDP deflator in US dollars (change in percent) series includes values such as 0.0; 3.1; 4.1; -4.0; -26.0; 3.1; 11.8; -7.3; 15.8; 6.5; -0.3; 0.0; 3.4 (table shows multi-year series). - Nominal external interest rate (in percent) historical and projected series: 2.2; 1.5; 1.4; 1.6; 2.1; 1.8; 0.3; 2.3; 3.7; 3.7; 4.1; 4.3; 4.0 (table formatting preserves exact values shown). - Growth of exports and imports in US dollar terms (in percent) series provided across years (values preserved in source). ### Program-related policy actions and requests (from Letter of Intent and MEFP summary) - Program implementation status and requests: - Most end-December 2017 quantitative performance criteria (PC) met, except primary fiscal balance missed by a very small margin; two structural benchmarks implemented with delays. - Request for completion of the third review of the extended arrangement under the IMF's Extended Fund Facility and disbursement of the fourth tranche in the amount equivalent to SDR 1,432.76 million (70.3 percent of quota and about $2 billion). - Request for waiver of non-observance for the performance criterion on primary fiscal balance for end-December 2017 (missed by a very small margin). - Request for modification of the performance criterion on the fuel subsidy bill for June 2018 because of higher than projected global oil prices. - Fuel pricing policy actions: - In June (2018) the authorities raised average fuel prices by 44 percent. - Authorities approved an automatic fuel price indexation mechanism to be introduced during 2018/19; mechanism will adjust fuel prices to changes in the exchange rate and oil prices to preserve cost-recovery ratios and safeguard the budget. - Use of IMF resources: - IMF resources requested will be used for budget support and will be maintained in government accounts at the CBE. - Timing of reviews: - Fourth review expected to be completed on or after November 11, 2018. - Fifth review expected to be completed on or after March 15, 2019. - Program commitments: - Authorities state they will monitor developments, take additional measures if necessary, consult the Fund on adoption of measures and revisions to the MEFP, and supply timely and accurate data for program monitoring. *Source: IMF staff.* ### 1. Macroeconomic stabilization is strengthening. Real GDP growth accelerated from ### 1. Macroeconomic stabilization is strengthening. Real GDP growth accelerated from ### Macroeconomic outcomes (first half of 2017/18 and recent indicators) - Real GDP growth accelerated from 4.2 percent in 2016/17 to 5.2 percent in the first half of 2017/18 led by natural gas, construction, and tourism. - CPI inflation declined from 33 percent in July 2017 to 11.4 percent in May. - Core inflation (excluding volatile food items and regulated prices) fell from 35.3 percent to 11.1 percent in May. - Current account deficit narrowed to 2.6 percent of GDP in the first half of 2017/18, from 6.5 percent the same period of the last year. - Non-oil exports increased by 9.7 percent and non-oil imports increased by 2.9 percent, y-o-y, in the first half of 2017/18. - Tourism receipts rose by nearly 214 percent during the same period. - Portfolio investments reached $8 billion, while net FDI flows fell by 12 percent to $3.8 billion. - Gross budget sector debt reached 90.8 percent of GDP at end-December. - The exchange rate of the pound to the dollar remained broadly stable. - Gross international reserves reached $43.4 billion in May. ### Program performance (end-December and structural benchmarks) - All end-December performance criteria and indicative targets (IT) were met, except: - A PC on the primary balance, missed by EGP100 million on a EGP14 billion target. - An IT on clearance of EGPC arrears, which fell short due to the company’s continued financial difficulties in view of higher oil prices. - Most structural benchmarks were implemented, with some delays: - FX deposits of the CBE in foreign branches of the Egyptian banks reduced to $3.9 billion by December 31, 2017. - Fuel price indexation mechanism approved by the Prime Minister in June instead of February. - FY2018/19 plan to raise equity in public enterprises from private sources published in March instead of January. ### Policy goals and reform program objectives - Comprehensive reform program aims to improve welfare by creating a supportive environment for private sector development, inclusive growth and job creation. - First-year focus: restoring macroeconomic stability, resolving domestic and external imbalances, modernizing fiscal and monetary policy frameworks, strengthening the energy sector, and improving the business climate. - Ongoing objectives: entrench macroeconomic stabilization, create additional fiscal space for infrastructure and human capital, broaden structural reforms to raise productivity and growth, and better integrate Egypt with global trade. - Ambition: become a well-diversified modern economy and regional trade and energy hub. ### Monetary and exchange policies - Main CBE goal: reduce inflation to single digits over the medium term to support real incomes and enhance external competitiveness. - Monetary developments and stance: - Annual inflation declined from 33 percent in July 2017 to 11.4 percent in May 2018. - CBE lowered policy rates twice by 100 basis points each in February and March. - Future policy: data-driven, decisions based on inflation expectations; possible further easing if dis-inflation continues and demand pressures remain contained; readiness to tighten if inflationary pressures re-emerge. - Exchange rate and reserves: - Maintain flexibility of the exchange rate; floating regime viewed as critical for competitiveness. - Gross international reserves projected at 143 percent of the Fund’s ARA metric for the floating regimes for June 2018 and considered adequate. - CBE will supply FX to government for servicing foreign debt; public enterprises to meet FX needs in the market. - CBE will not generally intervene in the interbank FX market but may make FX sales or purchases in exceptional cases; interventions to be transparent. - Portfolio flows remained strong in Q1 2018 despite cumulative 200 basis points policy rate cuts, tighter global financial conditions, and the introduction of the repatriation fee in December. - Monetary policy framework during program: - Continue money targeting; reserve money as an indicative target reflecting market liquidity projections. - IMF TA mission confirmed good practices in liquidity management and forecasting framework. - Established a joint Cash Coordination Committee in February 2018 to strengthen CBE–MoF information flow. - Developed a framework to analyze high frequency patterns of cash in circulation, fiscal revenues, expenditures, and financing needs. - Monetary operations to rely on indirect instruments (deposit auctions, standing facilities). - Cap the overdraft account at EGP66 billion in 2018/19 (equivalent to 10 percent of the previous three years’ revenues as per the CBE law); overdrafts issued at market rates. - Any additional holdings of government securities by the CBE will be determined by monetary policy considerations. - CBE lending to commercial banks to be for monetary policy and emergency liquidity assistance if needed. - Targeted programs and phase-out: - Subsidized lending by the CBE for SME and social housing will be gradually phased out once cumulative flow limits are exhausted. - EGP10 billion limit on SME working capital subsidy reached in March 2018 and initiative discontinued. - Limits for other programs: EGP5 billion for medium-sized firms’ capital expenditure, EGP20 billion for social housing programs, EGP30 billion on loans to small and certain segments of agricultural micro enterprises issued after January 1, 2018 that allows commercial banks to reduce required reserves by loan amounts. - Term loans will amortize per contractual schedules; working capital facilities may be renewed for existing borrowers. - Beyond limits, loan subsidies to small enterprises will be financed from the state budget. - Support development of microfinance institutions. - FX deposit divestment schedule (structural benchmarks): - Reduced to under $4 billion by end-December 2017. - Reduce further to $3 billion by end-June 2018. - Reduce to $1.5 billion by end-December 2018. - Eliminate by 15 June 2019. - Medium-term monetary framework transition: - Intend to adopt forward-looking, interest rate-based framework with inflation as the nominal anchor. - Strengthen analytical and liquidity management capacity, develop money markets, improve communications. - Revise banking legislation to establish price stability as primary objective, strengthen CBE autonomy, contain fiscal dominance, improve early intervention/resolution framework. - Continue publishing monetary policy reports and financial stability reports. ### Banking law and institutional reforms (objective and timetable) - Reviewing legal framework for central bank and commercial banks; IMF TA provided for drafting amendments. - Decided to revamp entire legislation; submission to Cabinet aimed by end-September 2018 instead of end-June 2018 (requesting short extension). - Key objectives of revisions: 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 that CBE lending to banks is only for short-term liquidity support and phase out development lending by the CBE as indicated in ¶7 above; 5) Ensure that the CBE law prevails against any contradicting provisions in other laws; 6) Clarify terms of the Board’s appointment and provision of 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 the CBE recapitalization and the distribution of unrealized profits; 10) Include specific mechanisms for CBE recapitalization, if required, financed by the government; 11) Clarify the 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 the use of public funds for resolution funding will primarily be covered by budgetary outlays; 12) Publish the audited financial statements of the CBE; 13) Further define a supervisory framework for early intervention and resolution of banks. ### Fiscal policy outcomes and objectives - 2017/2018 budget execution pressures: - High global oil prices and interest rates; average oil prices about 11 percent higher than projected. - Annual fuel subsidy bill expected to exceed budgeted figure by about 0.2 percent of GDP. - Programmed primary surplus of 0.2 percent of GDP to be reached, excluding capital injections in the CBE; fiscal adjustment of 2 percent of GDP compared to previous year. - Higher non-tax revenues (excluding investments self-financing), higher taxes from repriced CBE bonds since July 2017, and reductions in other spending offset fuel subsidy overrun and high interest bill. - By end-June, general government gross debt projected to reach 92.7 percent of GDP compared to 103 percent of GDP in June 2017. - Fiscal policy in 2018/19: - Aim to keep general government debt on a clearly declining path; projected to decline to 86 percent of GDP by end-2018/19. - Budget for 2018/19 (approved by Parliament on June 5) targets a primary surplus of the budget sector of 2 percent of GDP, consistent with a programmed 3-year consolidation of the primary balance of 5.5 percent of GDP (excluding capital injection in the CBE). - Beyond 2018/19, maintain primary surpluses at about 2 percent of GDP to reduce gross general government debt to 74 percent of GDP by 2022/23. ### Main policy measures in the 2018/19 budget - Tax revenue increase by 0.4 percent of GDP via: increased VAT collections, full-year impact of higher excises on tobacco, revising/increasing stamp duty on licenses and government services, implementation of simplified tax regime for SMEs, higher fees on Free Zone companies, and revenue administration improvements. - Energy subsidies reduced by 1.3 percent of GDP. - Wage bill decline by 0.3 percent of GDP through containment of base salary growth, tight control of bonuses and allowances, hiring controls, and public employment modernization aligned with new civil service law passed in August 2016. - Public investment increase to 2.8 percent of GDP; excluding self-financed projects public investment budgeted to increase by 0.3 percent of GDP. Other expenditure reduced by 0.1 percent of GDP. - Allocation of 0.2 percent of GDP to improve public transportation and childcare to improve female labor force participation. - A social package to mitigate energy price reform impact on the most vulnerable will be partially financed from a contingency of 0.3 percent of GDP set aside. - Preparedness to delay lower priority expenditure, including investments, if needed to meet primary surplus target; prepared to save any revenue overperformance. ### Improving tax collections - Strengthen and modernize tax administration to create fiscal space for health, education, infrastructure, and social safety net. - Consolidate reform initiatives into a Medium-term Revenue Strategy (MTRS). - Develop fully integrated, segment-based structure supported by reformed IT systems and processes; administer income taxes and VAT in a single integrated organizational structure. - Replace outmoded processes with modern IT; strengthen staff capacity. - Undertake measures to address non-compliance to prevent tax-evasion and non-payment. - Publish a Government Strategy to guide implementation; establish a taskforce reporting to the Minister to prepare the MTRS roadmap and consult stakeholders. - Seek further technical assistance from the Fund. ### Public Financial Management and transparency measures - Submitted a fiscal strategy paper to Cabinet in December 2017; finalize an updated fiscal risks statement and a comprehensive system to evaluate and decide on new state guarantees by end-June 2018 (structural benchmark). - Economic authorities: - Review operational performance and finances to ensure correct classification per international standards. - Introduce sectoral classification in accordance with GFSM2014; prepare consolidated fiscal accounts integrating economic authorities by end-March 2019 (may seek IMF and development partner assistance). - State-owned enterprises (SOEs): - Prepare and publish a comprehensive report on SOEs by June 30, 2018, including: sector overview and financial performance; full list of companies owned by government (by industry, policy objectives, type of ownership); information on individual companies including abridged financial statements, financial performance indicators, board members, management, auditors, and subsidies received from the budget, if any (structural benchmark). - Publish a supplementary report by end-December 2018 covering government ownership policy implementation and the sector’s impact on government finances and the economy (structural benchmark). Reports to be prepared and published annually. - Social Insurance Fund (SIF) reforms: - Increased minimum value of pensionable monthly wage from EGP160 to EGP400 starting 2017/2018. - Minimum pensionable monthly wage to automatically increase by 25 percent annually for the coming 5-years and by 10 percent thereafter. - Increased maximum pensionable wage by 15 percent on average over past years and will continue to do so. - Develop a clear road map of pension reform by September 2018. - Public Finance Management (PFM) framework: - Intend to put in place a modern PFM law to revamp budget process and give MoF mandate as custodian of state financial resources and coordinator of macroeconomic policy. - Undertake review of existing PFM legal framework and diagnostics to enable a medium-term budget framework and associated reforms, introduce medium-term expenditure framework with multi-year expenditure ceilings and improved functional classification. - Request IMF technical assistance for this effort. - Commit to continue presenting a pre-budget statement to Parliament with every budget. - Fiscal transparency and accountability: - Publish six standard reports throughout the budget cycle including mid-year review, pre-budget statement, and citizen’s budget. - Augmented annual financial statement sent to Parliament to include fiscal risks, guarantees, and administrative classification of spending. - Establish a Transparency and Public Participation Unit within the Ministry of Finance by December 2018 (structural benchmark). - Create a citizen follow-up mechanism and an online platform to strengthen accountability. - Sign partnership protocols with public and private entities to build public awareness and monitoring. - Note: Egypt’s ranking in the fiscal transparency index improved significantly in the past two years. *Source: cr18213 - 1. Macroeconomic stabilization is strengthening. Real GDP growth accelerated from* ### 16. We are continuing a comprehensive reform program for the energy sector, which ### 16. We are continuing a comprehensive reform program for the energy sector, which ### Energy sector reform objectives and strategy - Reform covers 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; consequences listed: - 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 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. - Strategy: gradually remove untargeted subsidies and enhance private sector participation according to a medium-term strategy approved by the Minister of Petroleum on March 30, 2017; diagnostic study by external consultants informed the strategy. - Legal/regulatory advancement: new Gas law approved by Parliament in July 2017 to promote competition, allow private sector participation in downstream activities, and establish an independent regulator; executive regulations published in February 2018. ### Fuel subsidy reforms, tariff adjustments, and indexation - Electricity tariff adjustments: - raised by an average of 30 percent in July 2016; - raised by an average of 40 percent in July 2017; - increased by 26 percent starting July 1, 2018; - plan to increase further to achieve cost recovery in the coming years. - Fuel price adjustments (retail): - gasoline and diesel: raised by an average of 53 percent in June 2017; - LPG, kerosene and fuel oil: prices raised by 100, 55 and 40 percent respectively in June 2017. - In June 2018, fuel prices increased by another 44 percent on average. - After June 2018 increases, pre-tax price-to-cost ratios for gasoline, diesel, kerosene and fuel oil (excluding fuel oil used for electricity generation and bakeries) were about 73 percent. - Policy target: achieve 100 percent cost recovery by June 15, 2019 (excluding LPG and fuel oil used for electricity generation and bakeries) — completion of the fuel subsidy reform (structural benchmark). - Automatic fuel price indexation mechanism: - approved by the Prime Minister in June 2018; - designed to maintain cost-recovery ratios for fuel products and safeguard the budget from unexpected exchange rate and global oil price changes; - indexation mechanism for all fuel products (gasoline, diesel, kerosene and fuel oil, except for fuel oil used for electricity generation and bakeries) to be implemented by end-December 2018; - possibility to introduce indexation for Gasoline 95 earlier depending on international oil market developments. - Transparency and communication: - quarterly publication of unit costs and subsidies of fuel products and the impact on the overall subsidy bill for the budget will continue; - launch of a communication campaign to familiarize the population with the fuel indexation mechanism and process. - Fiscal management note: the indexation includes a smoothing mechanism that may occasionally cause temporary re-emergence of subsidies; authorities will be prepared to take necessary fiscal measures to achieve the primary balance target. ### Egyptian General Petroleum Company (EGPC) financial restoration plan - EGPC financial deterioration since the 2011 revolution; revenues fell short of costs, requiring budget subsidies and expensive borrowing. - Arrears history and targets: - arrears exceeded $6 billion in 2014; - at end-June 2017 arrears amounted to $2.4 billion; - EGPC cleared $200 million between end-June 2017 and end-December 2017 instead of the planned $400 million (indicative target); - planned reduction of arrears to about $1.9 billion by end-June 2018; - commitment to fully eliminate arrears by end-June 2019; - request to modify end-June 2018 indicative target on arrears clearance from the programmed $1.1 billion to $500 million. - Plan components (drawing on external consultant recommendations): - ongoing fuel subsidy reform to improve EGPC revenues; - measures to strengthen corporate governance and optimize operating costs; - encourage private sector participation by offering minority shares in several state-owned energy companies as part of the government's wider IPO program; - strategy to gradually settle outstanding arrears. ### Natural gas potential, production trends, and outlook - Historical decline in gas production: daily output fell from 7 billion cubic feet (bcf) in 2010 to about 4 bcf in 2015/16. - Recent discoveries and investment: - several new fields in the Nile delta and Mediterranean territorial waters discovered; Zohr field highlighted as most promising; - 76 new upstream exploration agreements signed with investment commitments in excess of $15 billion. - Production recovery and projections: - gas production increased during 2016/17 and reached 4.5 bcf by June 2017; - projected to increase to 7.7 bcf per day over the next three years, which exceeds Egypt's domestic need currently 5.2 bcf per day and could enable exports. - Offshore exploration suggests potential for even larger deposits if confirmed. - Negotiations with international gas exploration companies on development and production sharing agreements are at an advanced stage. - Impact of enhanced production and efficiency: - higher domestic production of oil and gas, more efficient electricity plants, and higher reliance on renewables expected to bring down cost per unit of various fuel products and electricity and contribute to limiting the fiscal burden. ### Financial sector policies — banking system health and objectives - Banking system indicators (December 2017 and FY ending 2016): - average capital adequacy ratio stood at 15.2 percent (December 2017); - Basel-recommended floor cited as 9.875 percent and CBE-mandated 11.875 percent; - return on equity is 30.9 percent (for FY ending 2016); - share of non-performing loans declined from 6 percent in 2016 to 4.9 percent; - specific loan-loss provisioning coverage is at 90.5 percent. - Policy intent: preserve and further strengthen health and resilience of Egypt's financial system; framework aims to infuse public confidence and ensure efficient intermediation. - Focus areas: - (a) strengthening the regulatory and supervisory framework, including consolidated supervision; - (b) phasing in the capital conservation buffer in line with the Basel timelines; - (c) promoting competition to enhance efficiency in delivery of financial services; - (d) strengthening the crisis management and resolution framework to mitigate potential systemic risks; - (e) promoting financial inclusion without compromising credit quality. ### Banking supervision, stress testing, and crisis preparedness - Monitoring: - continue monitoring banks’ ability to withstand exchange rate and interest rate shocks; - CBE's Banking Supervision department will continue rigorous bank-by-bank stress tests based on adverse macroeconomic scenarios; - continued monitoring of currency mismatches on balance sheets of large corporations and state-owned enterprises to mitigate possible credit risks. - Regulatory enhancements 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 management tools planned: - implement new emergency liquidity assistance and bank resolution frameworks in line with best international practices; - Ministry of Finance and CBE to develop clear rules on deploying public funds to maintain financial stability. ### Business environment and other structural reforms - Broad objective: unlock growth potential through market-friendly reforms to attract investments, raise productivity and competitiveness, support exports, and create jobs; improve Doing Business and Global Competitiveness rankings. - Recent legislative steps: Parliament passed new investment law, industrial licensing law, companies law and insolvency law. - Key measures and structural benchmarks: - Industrial land allocation reform: - identified availability and access to land as macro critical, especially for SMEs and exports; - plan to streamline industrial land allocation to increase availability and introduce transparent, competitive, market-based mechanisms; - form a working group by end-June 2018 to report directly to the Prime Minister and prepare a reform plan (structural benchmark); - plan finalized by end-December 2018 (structural benchmark) and include: (a) permissible use of land by investors for broad industrial purposes with only limited restrictions; (b) market-based land allocation mechanisms with open, transparent and competitive bidding; (c) clear eligibility criteria for bidders; (d) simplified and standardized document requirements; (e) establishing an online platform and moving the entire process online (structural benchmark). - based on the plan, new guidelines for industrial land allocation to be approved by Ministerial decree and published by March 31, 2019 (structural benchmark). - Public procurement reform: - Government Procurement Law in Parliament; executive regulations to align procurement procedures with best international practices once law enacted; - form a committee after law and executive regulations enacted to assess procurement regulations and SOE practices; Prime Minister to approve a reform plan by June 15, 2019 to ensure SOE procurement rules consistent with best practices (structural benchmark). - executive regulations envisioned to be approved by end-March 2019 (structural benchmark). - develop a single e-Procurement portal to be operational by end-May 2019 (structural benchmark) and gradually replace paper-based system. - introduce a code of Integrity for public sector procurement staff before end of 2019. - plan to apply MAPS 2 - “Methodology for Assessing Procurement System“ to diagnose procurement system strengths and weaknesses. - SMEs and tax regime: - working on a modern tax regime for SMEs with reduced flat tax rate on annual recorded turnover levels; - new legislation expected to be submitted to Cabinet by end-June 2018 and approved by Parliament by end-September. - Egyptian Electricity Holding Company restructuring: - compiling a plan to financially restructure the company to improve financial soundness and enable commercial transactions without a Government guarantee/support; - plan to be jointly announced by the Ministries of Finance and Electricity by end-August 2018. - Transportation sector: - separate regulatory authority for public transportation from the Ministry of Transportation; - creation of an independent regulatory authority was to be announced by end-June 2018 (structural benchmark); request for extension of this SB to end-December 2018 due to Cabinet deliberations. - Egyptian Competition Authority (ECA) strengthening: - pass a law to ensure ECA reports directly to the Prime Minister and is independent from any Minister; - provide ECA with administrative fining powers, eliminate government representation and increase judiciary and technical experts’ representation on the board; provide an earmarked budget as a single digit subject to review of the Administrative Control Authority; - exempt ECA from the salaries cap and issue implementing regulations to Article 15 (3) to give ECA independence in hiring; - establish clear criteria for assessing ECA and chairperson performance; - increase transparency: require publication of motivated decisions with non-confidential case files and market studies, introduce a referencing system for board decisions, update website with non-confidential cases and decisions and supporting analyses; - issue regulations clarifying procedures and conditions to receive exemptions from competition law prohibitions; guidelines to calculate fines and settlements; guidelines to grant leniency on cartel cases; methodology to identify and remove barriers to competition in legislation, policies, or decrees. - draft law to be submitted to Parliament by October 30, 2018 (structural benchmark). - Right to Information law: - initiate consultative process with stakeholders to develop a Right to Information Law and implementing regulations aiming to pass a law that conforms to international good practices. - Export promotion and trade facilitation: - non-oil exports of goods were 6.4 percent of GDP in 2016/17; - planned actions for FY2018/19: reduce number of documents and time required to export and import via standard unified custom clearance forms and digital links to stakeholders; facilitate financing through export guarantees and export credit facilities; establish an Export Guarantee Agency; improve marketing support and logistical support via Export Development Authority and Center for Business Services for Export Development; develop large inland dry ports (first PPP project tendered at 6th October City with rail connectivity); set up a Single Window Platform for exporters and importers and further develop electronic connectivity between ports and the Customs Authority. - Labor, women, and child care investment: - 2016/17 budgeted and spent EGP250 million to improve public nurseries and other facilities; - 2017/18 budgeted EGP500 million on nurseries for 0 to 4-year old children (structural benchmark); - planned increase to EGP600 million in 2018/19. - joint committee established April 2017 with multiple stakeholders to improve women’s participation; work with UN Women to introduce and implement gender budgeting starting 2018/2019; simplify rules and facilitate registration of home-based nurseries to expand job opportunities for women and child care coverage. - IPO and divestment program: - five-year program to attract private investment in public enterprises to reduce the role of the state and redeploy public assets; - IPO inter-ministerial committee created by decree at end October 2017; Committee approved and announced a detailed plan in April 2018 to divest stakes in at least 23 SOEs over 24-30 months, of which 4 SOEs by June 15, 2019 (structural benchmark). - planned divestment estimated to generate around EGP80 billion and bring total market capitalization of these companies to EGP430 billion. *ARAB REPUBLIC OF EGYPT — INTERNATIONAL MONETARY FUND* ### 26. The program is financed for the next 12 months. The financing gap for 2018/19 is ### cr18213 - 26. The program is financed for the next 12 months. The financing gap for 2018/19 is ### Financing gap and financing sources - The financing gap for 2018/19 is estimated at $1.1 billion and will be financed with a new Eurobond and/or from gross reserves. - The program is financed for the next 12 months. ### Modification request on primary fiscal balance definition - Request to modify the program definition of the primary fiscal balance to exclude any recapitalization of the CBE from the budget. - Rationale: the need for such direct capital injection is difficult to predict and it does not reflect a change in the fiscal policy stance. ### Program monitoring framework - The program will be monitored through prior actions, quantitative performance criteria (PCs), indicative targets (ITs), and structural benchmarks (SBs). - Semi-annual program reviews based on December and June test dates. - All quantitative PCs and ITs are listed in Table 1; prior actions and structural benchmarks are set out in Table 2. - The Technical Memorandum of Understanding (TMU) describes definitions of quantitative PCs, consultation and data provision requirements. ### Key quantitative performance criteria and indicative targets (Table 1 excerpts and notable figures) - Net international reserves of the CBE ($ million; cumulative change, floor) - Program June 2017: 4,175 - Adjusted June 2017: 12,756 - Actual June 2017: 14,620 (Met? Yes) - Program December 2017: -2,561 - Adjusted December 2017: 2,297 - Actual December 2017: 5,500 (Met? Yes) - Program December 2018: -839 - Adjusted December 2018: -839 - Proposed December 2018: -1,500 - Net domestic assets of the CBE (at program rates; ceiling) - Program June 2017: 204 - Adjusted June 2017: 160 - Actual June 2017: -224 (Met? Yes) - Program December 2017: 81 - Adjusted December 2017: 145 - Actual December 2017: -103 (Met? Yes) - Program December 2018: 56 - Adjusted December 2018: 56 - Proposed December 2018: 303 - Fuel subsidies (cumulative, ceiling) - Program June 2017: 62 - Adjusted June 2017: 62 - Actual June 2017: 115 (Met? No) - Program December 2017: 65 - Adjusted December 2017: 65 - Actual December 2017: 23 (Met? Yes) - Program December 2018: 108 - Adjusted December 2018: 121 - Proposed December 2018: 50 - Primary fiscal balance of the budget sector (cumulative, floor) - Program June 2017: -29 - Adjusted June 2017: -30 - Actual June 2017: -64 (Met? No) - Program December 2017: -14 - Adjusted December 2017: -14 - Actual December 2017: -14 (Met? No) - Program December 2018: 9 - Adjusted December 2018: 9 - Proposed December 2018: 15 - Accumulation of external debt payment arrears ($ million; continuous PC ceiling) - Program and adjusted values shown as 0 and actuals 0 for relevant dates (Met? Yes) - Memo items (selected) - Program disbursements ($ million; cumulative) - Program June 2017: 16,300 - Adjusted June 2017: 24,881 - Actual June 2017: 2,450 - Program December 2017: 6,628 - Adjusted December 2017: 5,950 - Actual December 2017: 5,950 - Program December 2018: 4,000 - Gross foreign reserve assets acquired through the repatriation mechanism ($ million; cumulative) - For some periods values shown as 0 and for others 680 or 0 per table - External budget support loans ($ million; cumulative) - Program June 2017: 7,450 - Adjusted June 2017: 12,432 - Actual June 2017: 3,350 - Program December 2017: 3,450 - Adjusted December 2017: 8,350 - Actual December 2017: 8,350 - Program December 2018: 2,000 - Project loans ($ million, cumulative) - Program June 2017: 0 - Adjusted June 2017: 100 - Actual June 2017: 0 - Note: cumulative flow from the beginning of the fiscal year (July 1). For FY2017/18, cumulative flows are from November 1, 2017. For FY2018/19, cumulative flows are from July 1, 2018. ### Structural benchmarks (Table 2) — objectives, timing, and status (selected items) - Submit to Cabinet draft amendments to the CBE law consistent with MEFP ¶10. - Objective: Strengthen and modernize the legislative framework governing the central bank. - Timing: June 30, 2018 (Reset to September 30, 2018) - 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 ¶15. - Objective: Improve debt management. - Timing: June 30, 2018 - Spend EGP500 million to improve availability of public nurseries for 0 to 4-year old children and other facilities to enhance women's ability to seek jobs. MEFP ¶25. - Objective: Improve labor force participation for women. - Timing: June 30, 2018 - Prime Minister to approve fuel price indexation mechanism specifying formula, frequency/magnitude rules, and institutional framework (design in consultation with Fund staff). - Objective: Strengthen energy subsidy reform. - Timing: February 28, 2018 (Status: Not met) - CBE FX deposits at foreign branches of Egyptian banks not to exceed $4 billion. MEFP ¶8. - Objective: Improve foreign exchange reserve management. - Timing: December 31, 2017 (Status: Met) - CBE FX deposits at foreign branches of Egyptian banks not to exceed $3 billion. MEFP ¶8. - Objective: Improve foreign exchange reserve management. - Timing: June 30, 2018 - Publish a report on all state-owned enterprises with specified elements (overview, list, ownership, governance, impact on government finances, information on individual companies) MEFP ¶15. - Objective: Improve transparency and accountability of public enterprises. - Timing: December 31, 2018 (To be split in two: (a),(b) and (e) due by June 30, 2018; (c) and (d) by December 31, 2018) - Publish FY2018/19 plan to raise equity from private sources in public enterprises through listing of shares or other means. MEFP ¶25. - Objective: Develop capital markets and reduce the role of the state. - Timing: January 31, 2018 (Status: Not met. Implemented with delay.) - New prior action: The draft 2018/19 budget, consistent with program understandings, to be approved by Parliament. - Objective: Strengthen fiscal sustainability. - Timing: Prior action - Increase fuel prices to raise price-to-cost ratios to 100 percent. MEFP ¶17. - Objective: Eliminate fuel subsidies. - Timing: June 15, 2019 - CBE FX deposits at foreign branches of Egyptian banks not to exceed $1.5 billion. MEFP ¶8. - Objective: Improve foreign exchange reserve management. - Timing: December 31, 2018 - CBE FX deposits at foreign branches of Egyptian banks eliminated. MEFP ¶8. - Objective: Improve foreign exchange reserve management. - Timing: June 15, 2019 - Establish a Transparency and Public Participation Unit within the Ministry of Finance. MEFP ¶15. - Objective: Improve transparency of public finances. - Timing: December 31, 2018 - Publish report on SOEs covering 2017/18 with specified elements (first part due June 30, 2018; second part due December 31, 2018). MEFP ¶15. - Objective: Improve transparency and accountability of public enterprises. - In FY2018/19 spend EGP600 million to improve 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 ¶25. - Objective: Improve labor force participation for women. - Timing: June 30, 2019 - Submit to Parliament a draft law to reform the ECA governance, independence, powers, transparency, and related regulations. MEFP ¶25. - Objective: Strengthen competition. - Timing: October 30, 2018 - Approve executive regulations for the Government Procurement Law to standardize procurement rules and complaint resolution. MEFP ¶25. - Objective: Strengthen competition, optimize public spending and reduce corruption. - Timing: March 31, 2019 - Prime Minister to approve reform plan to ensure SOE procurement rules consistent with new Government Procurement law. MEFP ¶25. - Timing: June 15, 2019 - E-Procurement portal will start operating. MEFP ¶25. - Timing: May 31, 2019 - Working group to prepare reform plan for industrial land allocation; finalize reform plan and approve guidelines per schedule (various dates between June 30, 2018 and March 31, 2019). MEFP ¶25 - Bring to market shares in at least four SOEs. MEFP ¶25. - Objective: Develop capital markets and reduce the role of the state. - Timing: June 15, 2019 ### Technical Memorandum of Understanding (Attachment II, June 20, 2018) — exchange rates, definitions, and key TMU points - 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 - Monetary gold valued at $1,258.65 per troy ounce. - Program exchange rate of the pound against the US dollar: - FY 2017/18: 18.0251 (actual exchange rate on May 31, 2017) - FY 2018/19: 17.8572 (actual exchange rate on May 31, 2018) - A. Net International Reserves (NIR) — definitions and adjustors - NIR defined as difference between foreign reserve assets and reserve-related liabilities; targets are cumulative change since beginning of fiscal year; monitored in US$ using program exchange rates. - Foreign reserve assets include monetary gold, SDRs, foreign currency cash, securities, deposits abroad, reserve position at the Fund, and other official reserve assets; excludes frozen/pledged/encumbered assets, assets from short-term swaps (original maturity <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 include all short-term FX liabilities of the CBE with original maturity <360 days, government’s FX deposits with maturity <360 days, banks’ required reserves in FX, and all credit outstanding from the Fund on the CBE balance sheet. - As of September 30, 2017, foreign reserve-related liabilities thus defined amounted to $8,431 million. - Adjustors: - NIR floor adjusted by full amount of cumulative excess (shortfalls) in program disbursements relative to projections in Table 1 memo items. - NIR floor adjusted up by full amount of cumulative gross foreign reserve assets acquired through the repatriation mechanism relative to projections in Table 1 memo items. - Program disbursements defined to include external disbursements of loans (including IMF), grants and deposits for budget support, foreign reserve asset-creating loans and deposits to the CBE with original maturity >360 days, rollovers >360 days, and external bond placements; include net issuance of government T-bills in foreign currency; exclude project loans and grants. - B. Ceiling on Average Reserve Money (IT) - Reserve money (RM) = currency in circulation outside the CBE (includes cash in vaults) + balances on commercial banks’ overnight deposits + banks’ correspondent accounts (includes required reserves in local currency at the CBE). - RM excludes balances in deposit auctions and 7-day deposits at the CBE. - For each semester, average RM calculated from daily CBE balance sheets as average for last month of semester. - For December 2016, average RM amounted to EGP541.47 billion. - Adjustor for change in reserve requirement ratio (rr): - Revised RM ceiling = Program RM ceiling + banks’ correspondent accounts in local currency x (new rr/old rr - 1) - Reserve money targets assumptions for banks’ correspondent accounts: - June 2018: EGP182 billion - December 2018: EGP 317 billion - C. Ceiling on Net Domestic Assets (NDA) 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. - As of December 29, 2016, NDA thus defined amounted to EGP573.76 billion. - Program targets the cumulative change in NDA since fiscal year start. - Adjustors: 1) NDA targets adjusted down (up) by full amount of cumulative excess (shortfall) relative to baseline projections in memo items in external budget support loans and grants in U.S. dollars (project loans and grants excluded); U.S. dollar amounts converted to Egyptian pounds using program EGP/$ exchange rates. 2) In event of change in reserve requirement ratio (rr), NDA ceiling adjusted: - Revised NDA ceiling = Program NDA ceiling + banks’ correspondent accounts in local currency x (new rr/old rr -1) - Assumptions about banks’ correspondent accounts same as in ¶9. *International Monetary Fund — Attachment II: Technical Memorandum of Understanding (June 20, 2018).* ### 11. The general government comprises the budget sector, the Social Insurance Funds and the ### 11. The general government comprises the budget sector, the Social Insurance Funds and the National Investment Bank (NIB) ### Definitions and institutional coverage - The general government comprises the budget sector, the Social Insurance Funds and the National Investment Bank (NIB). - The budget sector comprises: - the central government (administration), - the governorates (local administration), - public service authorities, including the General Authority for Government Services, - other regulatory authorities and supervisory agencies, - funds, universities and hospitals. ### Fiscal balance definitions and historical outcome - The primary balance of the budget sector under the program is defined as: - the overall balance plus total interest payments of the budget sector and any capital injection in the CBE. - The overall balance is measured as total revenue minus total expenditure and net acquisition of financial assets, measured on a cumulative basis from the beginning of the fiscal year. - Historical outcome: - For the fiscal year 2016/17 the primary balance of the budget sector was EGP-63 billion. ### Off-budget funds and reporting obligation - The authorities will inform IMF staff of the creation of any new off-budgetary funds or programs immediately. - This includes any new funds, or other special budgetary and extra-budgetary programs that may be created during the program period to carry out operations of a fiscal nature as defined in the IMF’s Manual on Government Finance Statistics 2001. ### Adjustor for external project loans - The target for the primary balance of the budget sector will be adjusted up (down) by the full amount of the shortfall (excess) in the disbursement of external project loans. - Disbursement shortfalls will reduce primary deficits and excesses will increase them. - U.S. dollar amounts will be converted into Egyptian pounds using the program EGP/$ exchange. ### Tax revenue (IT) - Tax revenue includes: - personal income tax, - corporate income tax, - GST/VAT, - excises, - international trade taxes, - other taxes. ### Fuel subsidies (PC) - Fuel subsidies are defined as the total amount of subsidies paid by the budget sector for gasoline, diesel, kerosene, LPG and fuel oil. - These subsidies are measured in domestic currency on a cumulative basis from the beginning of the fiscal year. ### EGPC arrears (IT) - Ceiling applies to accumulation of EGPC arrears to foreign creditors (international oil companies) on a net basis, reflecting industry practice of attributing payments to the most overdue receivables. - EGPC arrears will be measured in $. - Stock as of June 30, 2017: - $2.4 billion. ### Debt of the budget sector (IT) - Debt of the budget sector is defined as the outstanding stock of debt issued by the budget sector. - U.S. dollar amounts will be converted into Egyptian pounds using the program EGP/$ exchange rates. - The program target is defined as a cumulative change in debt of the budget sector from the beginning of the fiscal year. - Stock as of June 30, 2017: - EGP3,748.7 billion. ### 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. - An external debt payment arrear is defined as an amount of payment obligation (principle and interest) due to nonresidents by the general government and the CBE, which has not been made when due under the contract, including any applicable grace period. - The performance criterion applies on a continuous basis throughout the arrangement. - Standard continuous performance criteria include: 1. prohibition on the imposition or intensification of restrictions on making of payments and transfers for current international transactions; 2. prohibition on the introduction or modification of multiple currency practices; 3. prohibition on the conclusion of bilateral payments agreements that is inconsistent with Article VIII; 4. prohibition on the imposition or intensification of import restrictions for balance of payments reasons. ### Consultation clause on foreign exchange sales - Direct sales of foreign exchange to SOEs and the government include sales of foreign exchange by the CBE to the government other than for debt service and to SOEs such as EGPC, GASC, and other. - If foreign exchange sales to SOEs and the government, and commercial banks are excessive, a consultation will be held with the IMF Executive Board on policies comprising: - (i) the stance of monetary policy; - (ii) the reasons for deviations from the program targets, taking into account compensating factors; - (iii) necessary remedial actions. ### Monitoring and reporting requirements - Performance under the program will be monitored using data supplied to the IMF by the Ministry of Finance and the CBE as outlined in Tables 3A and 3B, consistent with the program definitions above. - The authorities will transmit promptly to the IMF staff any data revisions. ### Data reporting (selected timetable and items) - Ministry of Finance submissions (selected): - Overall deficit of the budget sector: M, 30 calendar days. - Overall deficit of the general government, NIB and SIFs: M, 45 calendar days. - Summary of budget sector accounts, including revenues, expenditures and net acquisition of financial assets on a cash basis, consistent with IMF GFS 2001 Manual: M, 30 calendar days. - Summary accounts of NIB and SIFs, consistent with presentation of general government accounts: M, 45 calendar days. - Program disbursements and project loans to the general government: W and M, 30 calendar days. - Domestic debt stock and debt service costs of the general government and budget sector, including interest payments and amortization: M, 30 calendar days (45 days for the general government). - Debt of the budget sector at actual and program exchange rates: M, 30 calendar days. - Debt guarantees issued by General Government and the CBE: Q, 45 calendar days. - Stock of bonds issued by the government to Social Insurance Fund: Q, 30 calendar days. - Auctions of t-bills and t-bonds via primary dealers: W, 7 working days. - Gross transfers to EGPC: Q, 90 calendar days. - Fuel subsidies to EGPC: Q, 90 calendar days. - Stock of EGPC arrears to foreign creditors: Q, 90 calendar days. - Use of overdraft facility at the CBE (end of period stock): W, 15 calendar days. - Stock of outstanding domestic arrears by creditor: M, 30 calendar days. - Value and volume of crude oil, oil product, liquid and natural gas, and bunker and jet fuel exports and imports (from Ministry of Petroleum): Q, 90 calendar days. - Components of foreign direct investment (investments and capital repatriation) to the petroleum sector (from Ministry of Petroleum): Q, 60 calendar days. - Central Bank of Egypt submissions (selected): - Program net international reserves and its components at program and current exchange rates: M, 7 working days. - Program disbursements and its breakdown by components: M, 7 working days. - Breakdown of gross foreign assets and liabilities by currency at actual and program exchange rates: M, 15 calendar days. - Program NDA of the CBE and its components: M, 15 calendar days. - Stock of outstanding external debt payment arrears of the general government (if any) by creditor: M, 30 calendar days. - Projections for external debt payments falling due in the next four quarters, interest and amortization: Q, 30 calendar days. - Monthly cash flow table (past outcomes and projections for 12 months): M, 15 calendar days. - Balance of payments data in electronic format: Q, 90 calendar days. - CBE foreign exchange deposits held at commercial banks headquartered in Egypt: W, 5 working days. - Daily official exchange rates EGP/$ (submitted once a week for the previous week): W, 5 working days after the end of the week. - Central bank daily purchases and sales of foreign exchange by counterparts – commercial banks, EGPC, GASC, government: W, 2 working days after the end of the week. - Daily average buy and sell exchange rates EGP/$ as quoted by foreign exchange bureaus and banks (submitted once a week for the previous week): W, 5 working days after the end of the week. - Daily interbank turnover in the FX spot market: M, 15 working days. ### Statement highlights by Mr. Beblawi and Ms. Abdelati (June 29, 2018) - Macroeconomic outcomes and indicators: - GDP is estimated to have risen to over 5 percent in the year ending June 2018. - The primary fiscal deficit is estimated to have shifted to a small surplus. - Public debt will have significantly declined as a share of GDP. - International reserves nearly tripled from their low point and now exceed their earlier peak in 2010. - Inflation was brought down to 11.4 percent in May 2018 after having soared to over 33 percent. - Policy implementation and effects: - Wide-ranging structural reforms were implemented, contributing to confidence gains, deeper access to international financial markets, and upgrades from rating agencies. - Communication of reform rationale and leadership statements were key to public acceptance. - President El-Sisi tasked the new cabinet (first meeting on June 21) to: - (i) work toward a growth target of 7 percent while further reducing the budget deficit, unemployment, and inflation; - (ii) keep national security a priority; - (iii) improve the quality of life for citizens; - (iv) expand protections for low-income earners; - (v) improve education; - (vi) improve government services. - Near-term outlook and risks: - Recovery of tourism and rising natural gas production should support growth in the near-term. - Risks include global investor sentiment toward emerging markets, global oil prices, deterioration in the security situation, and adjustment fatigue. - Monetary policy and exchange rate stance: - The CBE plans to maintain a tight monetary policy and a flexible exchange rate. - The tight monetary stance helped bring down inflation following the large devaluation and series of price hikes. - CBE has refrained from any intervention since the floating of the pound. - The Egyptian pound lost two-thirds of its value relative to 2010, boosting net exports; current account deficit narrowed to an estimated 2½ percent of GDP. - Portfolio inflows reached 7 percent of GDP but have recently tapered and seen outflows. - Fiscal consolidation and medium-term debt targets: - Fiscal consolidation was large and necessary given prior deficits exceeding 10 percent of GDP and general government debt surpassing 100 percent of GDP. - Fuel subsidy over-run amounted to 0.3 percent of GDP due to devaluation and higher oil prices. - Targets and projections: - primary surplus targeted at 2 percent of GDP in 2018/19 with further consolidation measures next year; - general government debt to decline from 103 percent of GDP in 2016/17 to 86 percent of GDP in 2018/19; - primary surplus maintained at 2 percent of GDP and debt to decline further to 74 percent of GDP by 2022/23; - debt service cost projected to decline by 4 percent of GDP over the medium-term. - An automatic price adjustment mechanism approved by the Prime Minister in June for implementation during 2018/19 to lock-in fuel subsidy reform gains. - Minister of Petroleum affirmed that fuel subsidies would be eliminated completely by next year. - Financial sector health: - Large public banks report comfortable capital positions and continued profitability. - Banks’ capital adequacy ratios stood at over 15 percent in December 2017. - NPL ratios had declined to 4.9 percent with virtually full provisioning (99 percent). - Banks expect private sector credit growth to revive once interest rates decline. - Public financial management and institutional reforms: - Ministry of Finance modernizing operations, improving transparency and accountability, enhancing institutional capacity. - Fiscal strategy paper submitted to Cabinet in December 2017. - Updated statement of fiscal risks being finalized with procedures for assessing new state guarantees. - Tax collection modernization by integrating income taxes and VAT and upgrading IT systems. - Gender-budgeting to be introduced in 2018/19 with United Nations Women program support. - Structural reforms to boost investment and private sector: - Adoption of a new investment law, establishment of a consolidated investment center, simplification of licensing procedures. - A working group established to review allocation mechanism for industrial land. - New government Procurement Law approved; single e-Procurement portal to handle all public procurements. - Divesture plan announced to divest stakes in at least 23 public entities over 24-30 months (first 4 to be completed in the next fiscal year). - Closing remarks: - Authorities express appreciation for IMF team engagement and emphasize the need to accelerate transformative reforms to share benefits more broadly. *Source: cr18213 - 11. The general government comprises the budget sector, the Social Insurance Funds and the National Investment Bank (NIB).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18213.pdf_