## 1. Recent Macroeconomic Developments ## Source details **Canonical URL:** [1. Recent Macroeconomic Developments](https://www.imf.org/-/media/files/publications/cr/2019/1egyea2019001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/1egyea2019001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/1egyea2019001.pdf.json) --- ### Recent macroeconomic performance - GDP growth rose from 4.2 percent in 2016/17 to 5.3 percent in 2017/18, supported by the recovery in net exports and investment that offset the softening in domestic consumption. - Unemployment rate declined to single digits and is at its lowest since 2011. - Current account deficit narrowed to 2.4 percent of GDP from 5.6 percent in the previous year. - Gross international reserves stood at around 6 months of prospective imports at end-2018; CBE international reserves were about $42 billion in December (equivalent to 6 months of imports). - Headline inflation: declined to 11 percent in May, rose to 17.7 percent in October, and fell to 12 percent in December. - Core inflation remained contained at around 8 percent. - Budget recorded a primary surplus of 0.2 percent of GDP in 2017/18 (excluding EGP6 billion of CBE recapitalization), an improvement of 2 percent of GDP from 2016/17. - General government gross debt fell from 103 percent of GDP to 93 percent of GDP in one year (2016/17 to 2017/18). ### External and financial developments - Since April, tightening global financing conditions and investor pullback caused net portfolio outflows and pushed up yields on government securities by around 300–400 basis points. - Authorities cancelled a number of domestic bond auctions and shortened maturities of new issuances to contain interest costs. - Increased purchases by the state-owned National Investment Bank partly offset the decline in foreign demand for treasury securities; NIB does not have a banking license and is not subject to banking supervision. - Government overdraft with the CBE exceeded the statutory limit in mid-September but was subsequently contained; CBE Law sets a ceiling on overdrafts at ten percent of average revenues over the past three years. - Despite sizable capital outflows, the Egyptian pound remained stable through mid-January; gross international reserves about 125 percent of the Fund’s ARA metric at end-2018 and projected to be maintained about the same level throughout the program period. - Some large state-owned banks breached regulatory limits on net open FX positions (NOP); CBE will no longer grant exemptions and will strictly enforce sanctions. - Banks remain liquid, profitable, generally well capitalized; nonperforming loans are contained and well provisioned. ### Program performance and structural benchmarks - All end-June and end-December performance criteria and indicative targets were met, except: - End-June indicative target on public debt breached because of higher-than-programmed interest expenditure. - End-December indicative target on payment of EGPC arrears was missed; the shortfall was pre-paid in 2017/18. - Structural benchmarks (SBs) delayed or missed partly due to capacity constraints: - FX deposits of the CBE in foreign branches of domestic banks reduced to under $1.5 billion on January 3, 2019 instead of December 31, 2018. - Working group on reform of industrial land allocation formed in September due to cabinet reshuffle. - Two SOE reports implemented by end-June and end-December respectively but had gaps in coverage and information. - Draft law on the Egyptian Competition Authority delayed to January 2019 instead of October 2018. - Formation of the independent regulatory authority for transport not completed by end-December 2018; proposed as SB for end-March 2019. - Draft banking law submitted to Cabinet in December instead of September to allow time to reflect Fund technical assistance recommendations. - Despite delays, program objectives remain achievable. ### Outlook and key projections (conditional on agreed program policies) - GDP growth projected to rise to 5.5 percent in 2018/19. - Growth projected to rise to 6 percent over the medium term as structural reforms raise private investment. - Inflation expected in the range of 13–14 percent by the end of the fiscal year, and to reach single digits in 2020. - Current account deficit projected to gradually narrow from 2.4 percent of GDP in 2017/18 to under 2 percent of GDP in the medium term. - General government gross debt projected to decline to 74 percent of GDP by 2022/23. ### Risks to the outlook and mitigation - Balance of risks has worsened with recent global financial tightening: - A sustained increase in real interest rates or an abrupt depreciation of the pound could produce adverse public debt dynamics. - Limited exchange rate flexibility is discouraging inflows into the local treasury market. - Short FX positions of some banks expose them to disorderly exchange rate adjustment. - An unexpected increase in global oil prices would increase the fuel subsidy bill in 2018/19 and require larger fuel price adjustments. - Calls on state-guaranteed loans or other contingent liabilities from large infrastructure projects could pressure public debt. - Other risks: deterioration of the security situation affecting tourism; resistance from vested interests; public reaction to fuel subsidy reforms. - Risk mitigation: authorities’ record of reform implementation and the heightened importance of maintaining sound policies, including greater exchange rate flexibility. ### Monetary, exchange rate, and financial sector policy measures - Monetary policy: - Will remain anchored to the CBE’s medium-term objective of guiding inflation down to single digits. - Monetary stance expected to remain restrictive; CBE prepared to tighten further if demand pressures reemerge. - To achieve operational reserve money targets, the CBE will manage domestic liquidity using open market operations while containing government overdrafts (proposed end-March 2019 PC). - Beginning in fiscal year 2019/20, all overdrafts will be issued at market rates (currently, overdrafts under the limit issued at 12.25 percent; any amount above at policy rate plus 400 basis points). - Government measures to address food price volatility include improving logistics and transport infrastructure. - Exchange rate policy: - Greater exchange rate flexibility is essential to buffer external shocks and preserve competitiveness. - In November the CBE eliminated the repatriation mechanism for new inflows to deepen the FX market. - Persistent breaches of FX exposure limits by banks will no longer receive exemptions from the NOP limit; sanctions will be strictly enforced. - Financial sector and institutional reforms: - CBE aims to gradually move to an interest rate-based monetary policy framework anchored to inflation in the medium term. - Revised draft Banking Law (finalized with Fund technical assistance and sent to Cabinet) will: - Improve collegial decision making in the CBE. - Establish price stability as the primary objective of monetary policy. - Limit monetary financing and strengthen CBE institutional and operational autonomy. - Limit CBE lending to banks for short-term liquidity support and clarify CBE and government roles in crisis management. - Strengthen supervisory framework for early intervention and resolution. ### Fiscal policy, 2018/19 budget outlook and targets - On track to reach targeted primary surplus of 2 percent of GDP, completing a programmed three-year fiscal consolidation of 5.5 percent of GDP. - Overall deficit projected to narrow from 9.8 percent of GDP in 2017/18 to 8.3 percent in 2018/19 (0.2 percent of GDP higher than programmed due to higher borrowing costs). - Tax revenue expected to fall slightly short of programmed but remain unchanged from the previous year at 14.2 percent of GDP. - Consolidation driven by projected reduction in the energy subsidy bill by 1.4 percent of GDP (of which 0.9 percent of GDP is due to lower fuel subsidies) and a smaller wage bill by 0.3 percent of GDP. - Part of savings allocated to increase investment by 0.3 percent of GDP. - Smaller overall deficit and high nominal GDP growth projected to reduce general government gross debt from 93 percent of GDP last year to about 86 percent this year. - Authorities committed to delaying non-priority spending if needed to reach the primary surplus target. - Implementation of a Medium-Term Revenue Strategy; Fund providing technical assistance. ### Social protection and distributional measures - Takafol and Karama cash transfer programs expanded coverage to more than 10 million people. - Forsa—program to help create job opportunities. - Mastoura—microcredit program for women. - Sakan Karim—promotes access to clean drinking water and sanitation. - Additional compensatory measures include lump-sum public wage bonuses, a 15 percent increase in pensions, and progressive tax credits. - Authorities considering broader pension system reform; distributional implications require careful assessment. ### Fuel and electricity subsidy reforms - Fuel subsidy reform: - Committed to reaching full cost recovery by end-2018/19 for all fuel products, except for LPG and fuel oil used in bakeries and electricity generation (structural benchmark for June 15, 2019). - At current oil prices, most fuel products are priced at about 85-90 percent of cost recovery. - Phased introduction of fuel price indexation: - Fuel price indexation mechanism for gasoline Octane 95 implemented from end-December 2018 with first price adjustment at end-March 2019. - Indexation for other fuel products to be introduced by June 5, 2019 with the first price adjustment at end-September 2019 (proposed SB). - Authorities planning to hedge oil prices but advised caution regarding instruments with upfront costs. - Electricity subsidy reform: - Reform will continue towards the goal of full elimination by 2020/21. ### Public debt, financing conditions, and fiscal policy objectives - Debt sustainability and risks: - Updated DSA indicates Egypt’s debt is sustainable but subject to significant risks from less favorable financing conditions. - Interest cost as a share of tax revenue is higher compared to peers; increased reliance on shorter-term debt and foreign currency financing has raised rollover and exchange rate risks. - Fiscal posture required: - Maintain primary surpluses of around 2 percent of GDP in the coming years to resolve still-high debt. - This target is well above the debt stabilizing primary deficit of 2.7 percent of GDP. - Specific numeric note: - The estimated cost in 2018/19 is about 0.3 percent of GDP. ### State-owned enterprises (SOEs) transparency and National Investment Bank (NIB) - SOE reporting and governance: - Update to June report at end-December includes about 300 SOEs with abridged financial statements for most. - Supplementary report describes legal framework governing state ownership and impact on government finances but lacks details on impact on the economy. - Authorities plan to improve SOE reports and publish them annually; use them as basis for comprehensive SOE reform strategy. - NIB restructuring: - NIB is part of general government, holds significant retail deposits as investment certificates, maintains a large portfolio of SOE loans, and is not subject to banking regulations and supervision. - Coinciding with foreign portfolio investor exit, NIB expanded its balance sheet by investing proceeds from increased issuance of certificates in treasury securities. - Authorities plan to form an inter-ministerial committee which by end-March 2019 will develop a plan, endorsed by the Prime Minister, with NIB’s revised mandate, new business model, and proposed financial structure (SB). ### Structural reforms to boost private-sector growth - Agenda and progress: - Structural reform agenda remains ambitious; Egypt advanced eight positions in the World Bank’s Ease of Doing Business ranking for 2019 and 15 positions on World Economic Forum’s 2018 Global Competitiveness index. - Reforms aim to strengthen competition, improve governance, limit scope for corruption, and reduce the role of the state. - Industrial land allocation: - Current system inefficient and prone to misallocation. - Working group formed in September; first draft (December 2018) lacked operational details; authorities committed to develop new guidelines to be approved by Ministerial decree and published by end-March 2019 (proposed modified SB). - Public procurement and competition policy: - Government Procurement Act signed into law on October 3, 2018 and effective on November 2. - Executive regulations and e-Procurement portal planned with SBs targeting end-May 2019 and June 15, 2019 for SOE procurement alignment. - Draft law revamping the Egyptian Competition Authority submitted to Parliament in January; expected to be passed by end-March 2019 (end-October 2018 SB originally). ### Financing, external risks, and central bank safeguards - Program financing and contingency: - Program fully financed until its expiration. - Tighter external financing expected to be alleviated by $1 billion of the World Bank’s new DPF loan and $250 million from the German authorities. - Additional financing can be raised with a Eurobond issuance and/or from gross reserves if needed. - Capacity to repay and Fund exposure: - Fund credit outstanding as a share of gross reserves projected to peak at 26.7 percent by the end of this year. - Debt service to the Fund as a ratio of exports of goods and services would reach 0.9 percent in 2020/21. - CBE safeguards and governance: - CBE implementing 2017 safeguards recommendations, with some delays. - CBE engaged a consulting firm to align financial reporting with Egyptian Accounting Standards starting with the 2018 audit. - CBE continues to unwind FX deposits in foreign branches of domestic banks, with full divestment expected by end-June 2019. - Draft amendments to the banking law to strengthen CBE independence and governance were submitted in December 2018. ### Staff appraisal, outlook, and policy priorities - Macroeconomic progress: - Since program start: growth accelerated; external and fiscal deficits narrowed; international reserves increased; public debt, inflation, and unemployment declined; social protection strengthened. - Policy priorities: - Enhance exchange rate flexibility, preserve adequate international reserves, and reduce public debt. - Maintain restrictive monetary policy stance until disinflation trend is firmly reestablished. - Minimize monetary financing of the deficit to support monetary policy credibility. - Maintain primary surpluses at around 2 percent of GDP over the medium term and implement structural reforms to raise GDP growth. - Fuel subsidy reform: - Authorities committed to reaching cost-recovery prices for most fuel products by mid-June 2019. - Automatic fuel price indexation mechanism will adjust prices quarterly with a 10 percent cap on each quarterly adjustment. - Banking sector and NIB: - Banking sector remains healthy; NIB needs restructuring. - Two largest public banks are financially stable but may require additional capital in the next two years if strong lending growth continues. - Several smaller banks will require continued CBE monitoring. - Structural reform continuation: - Reforms of competition policy, public procurement, SOE management and transparency, industrial land allocation, and public finance management have the potential to improve the investment climate and governance. - Reform efforts should be stepped up and carried forward beyond the program period. *Source: ARAB REPUBLIC OF EGYPT — INTERNATIONAL MONETARY FUND, "1. Recent Macroeconomic Developments."* ### 1. Recent Macroeconomic Developments _________________________________________________________ 5 ### 1. Recent Macroeconomic Developments ### Recent macroeconomic performance - GDP growth rose from 4.2 percent in 2016/17 to 5.3 percent in 2017/18, supported by the recovery in net exports and investment that offset the softening in domestic consumption. - Unemployment rate declined to single digits and is at its lowest since 2011. - Current account deficit narrowed to 2.4 percent of GDP from 5.6 percent in the previous year, reflecting rising tourism and robust remittance inflows. - Gross international reserves stood at around 6 months of prospective imports at end-2018; CBE international reserves were about $42 billion in December (equivalent to 6 months of imports). - Headline inflation: declined to 11 percent in May, rose to 17.7 percent in October (primarily due to energy price increases in June and a jump in some vegetable prices), and fell to 12 percent in December as vegetable prices partially reversed. - Core inflation remained contained at around 8 percent. - The budget recorded a primary surplus of 0.2 percent of GDP in 2017/18 (excluding EGP6 billion of CBE recapitalization), an improvement of 2 percent of GDP from 2016/17. - General government gross debt fell from 103 percent of GDP to 93 percent of GDP in one year (2016/17 to 2017/18), aided by strong nominal GDP growth and the primary surplus. ### External and financial developments - Since April, tightening global financing conditions and investor pullback from emerging markets caused considerable net portfolio outflows from Egypt, pushing up yields on government securities by around 300–400 basis points. - Authorities responded by cancelling a number of domestic bond auctions and shortening maturities of new issuances to contain interest costs. - Increased purchases by the state-owned National Investment Bank partly offset the decline in foreign demand for treasury securities; the National Investment Bank does not have a banking license and is not subject to banking supervision. - The remaining shortfall in domestic financing was met by drawing on the government’s overdraft facility with the Central Bank of Egypt (CBE), which exceeded the statutory limit in mid-September but was subsequently contained. (CBE Law sets a ceiling on overdrafts at ten percent of average revenues over the past three years.) - Despite sizable capital outflows, the Egyptian pound remained stable through mid-January; international reserves of the CBE were adequate (gross international reserves about 125 percent of the Fund’s ARA metric at end-2018 and projected to be maintained at about the same level throughout the program period). - Some large state-owned banks breached regulatory limits on net open FX positions (NOP); the CBE will no longer grant exemptions from the NOP limit and will strictly enforce sanctions (proposed continuous SB). - Banks remain liquid, profitable, generally well capitalized, and nonperforming loans are contained and well provisioned. ### Program performance and structural benchmarks - All end-June and end-December performance criteria and indicative targets were met, except: - End-June indicative target on public debt breached because of higher-than-programmed interest expenditure (December data not yet available). - End-December indicative target on payment of EGPC arrears was missed; the shortfall was pre-paid in 2017/18. - Several structural benchmarks (SBs) were delayed or missed partly due to capacity constraints: - Foreign exchange deposits of the CBE in foreign branches of domestic banks were reduced to under $1.5 billion on January 3, 2019 instead of December 31, 2018. - Working group on reform of industrial land allocation formed in September (end-June SB) due to cabinet reshuffle. - Two SOE reports implemented by end-June and end-December respectively but had gaps in coverage and information. - Draft law on the Egyptian Competition Authority delayed to January 2019 instead of October 2018. - Formation of the independent regulatory authority for transport not completed by end-December 2018; proposed as SB for end-March 2019. - Reform plan for industrial land allocation lacked sufficient operational details, particularly on applying broad market-based principles. - Draft banking law submitted to Cabinet in December instead of September to allow time to reflect Fund technical assistance recommendations. - Despite delays, program objectives remain achievable. ### Outlook and risks - Outlook projections (conditional on agreed program policies): - GDP growth projected to rise to 5.5 percent in 2018/19, supported by tourism, construction, and rising natural gas production. - Growth projected to rise to 6 percent over the medium term as structural reforms raise private investment. - Inflation expected in the range of 13–14 percent by the end of the fiscal year, and to reach single digits in 2020. - Current account deficit projected to gradually narrow from 2.4 percent of GDP in 2017/18 to under 2 percent of GDP in the medium term. - General government gross debt projected to decline to 74 percent of GDP by 2022/23. - Balance of risks has worsened with recent global financial tightening: - A sustained increase in real interest rates or an abrupt depreciation of the pound could produce adverse public debt dynamics. - Limited exchange rate flexibility is discouraging inflows into the local treasury market. - Short FX positions of some banks expose them to disorderly exchange rate adjustment. - An unexpected increase in global oil prices would increase the fuel subsidy bill in 2018/19 and require larger fuel price adjustments to achieve cost recovery and preserve fiscal consolidation. - Calls on state-guaranteed loans or other contingent liabilities from large infrastructure projects could pressure public debt. - Other risks: deterioration of the security situation affecting tourism recovery; resistance from vested interests weakening reform momentum; public reaction to fuel subsidy reforms complicating implementation. - Risk mitigation: authorities’ record of reform implementation and the heightened importance of maintaining sound policies, including greater exchange rate flexibility. ### Policy discussions and measures Monetary, exchange rate, and financial sector policies - Monetary policy: - Will remain anchored to the CBE’s medium-term objective of guiding inflation down to single digits. - Monetary stance expected to remain restrictive to contain possible second-round effects from supply-driven inflation shocks. - CBE prepared to tighten further if demand pressures reemerge. - To achieve operational reserve money targets, the CBE will manage domestic liquidity using open market operations while containing government overdrafts (proposed end-March 2019 PC). - Beginning in fiscal year 2019/20, all overdrafts will be issued at market rates. (Currently, overdrafts under the limit are issued at a fixed rate of 12.25 percent, with any amount above the limit at the policy rate plus 400 basis points.) - Government measures to address food price volatility include improving logistics and transport infrastructure. - Exchange rate policy: - Greater exchange rate flexibility is essential to buffer external shocks and preserve competitiveness. - The pound has remained stable against the dollar but appreciated against other trading partner currencies in both nominal and real effective terms; persistent appreciation could limit current account narrowing. - In November the CBE eliminated the repatriation mechanism for new inflows to deepen the FX market. - Persistent breaches of FX exposure limits by banks will no longer receive exemptions from the NOP limit; sanctions will be strictly enforced. - Financial sector and institutions: - CBE aims to gradually move to an interest rate-based monetary policy framework anchored to inflation in the medium term. - A revised draft Banking Law (finalized with Fund technical assistance and sent to Cabinet) will: - Improve collegial decision making in the CBE. - Establish price stability as the primary objective of monetary policy. - Limit monetary financing and strengthen CBE institutional and operational autonomy. - Limit CBE lending to banks for short-term liquidity support and clarify CBE and government roles in crisis management. - Strengthen supervisory framework for early intervention and resolution. Fiscal policy - 2018/19 budget outlook and targets: - On track to reach targeted primary surplus of 2 percent of GDP, completing a programmed three-year fiscal consolidation of 5.5 percent of GDP. - Overall deficit projected to narrow from 9.8 percent of GDP in 2017/18 to 8.3 percent in 2018/19 (0.2 percent of GDP higher than programmed due to higher borrowing costs). - Tax revenue expected to fall slightly short of programmed but remain unchanged from the previous year at 14.2 percent of GDP. - Consolidation driven by projected reduction in the energy subsidy bill by 1.4 percent of GDP (of which 0.9 percent of GDP is due to lower fuel subsidies as higher oil prices partly offset by reduced consumption) and a smaller wage bill by 0.3 percent of GDP. - Part of savings allocated to increase investment by 0.3 percent of GDP. - Smaller overall deficit and high nominal GDP growth projected to reduce general government gross debt from 93 percent of GDP last year to about 86 percent this year. - Authorities committed to delaying non-priority spending if needed to reach the primary surplus target. - Implementation of a Medium-Term Revenue Strategy to strengthen and modernize revenue mobilization; Fund providing technical assistance. Social protection and distributional measures - Authorities have prioritized strengthening social protection and expanded targeted social programs: - Takafol and Karama cash transfer programs expanded coverage to more than 10 million people. - Forsa—program to help create job opportunities. - Mastoura—microcredit program for women. - Sakan Karim—promotes access to clean drinking water and sanitation. - Additional compensatory measures include lump-sum public wage bonuses, a 15 percent increase in pensions, and progressive tax credits. - Authorities considering broader pension system reform; distributional implications require careful assessment. Fuel and electricity subsidy reforms - Fuel subsidy reform: - Committed to reaching full cost recovery by end-2018/19 for all fuel products, except for LPG and fuel oil used in bakeries and electricity generation (structural benchmark for June 15, 2019). - At current oil prices, most fuel products are priced at about 85-90 percent of cost recovery. - Authorities opted for a phased introduction of fuel price indexation: - Fuel price indexation mechanism for gasoline Octane 95 implemented from end-December 2018 with first price adjustment at end-March 2019. - Indexation for other fuel products to be introduced by June 5, 2019 with the first price adjustment at end-September 2019 (proposed SB). - Authorities planning to hedge oil prices but were advised caution regarding financial instruments with upfront costs that provide temporary protection. - Electricity subsidy reform: - Reform will continue towards the goal of full elimination by 2020/21. *Source: ARAB REPUBLIC OF EGYPT — INTERNATIONAL MONETARY FUND, "1. Recent Macroeconomic Developments."* ### 13. A steady reduction in public debt remains the key objective of fiscal policy in the ### 13. A steady reduction in public debt remains the key objective of fiscal policy in the ### Public debt, financing conditions, and fiscal policy objectives - Updated debt sustainability analysis indicates that Egypt’s debt is sustainable, but subject to significant risks, including from less favorable financing conditions. - Interest cost as a share of tax revenue is higher compared to peers; increased reliance on shorter-term debt and foreign currency financing has raised rollover and exchange rate risks. - With a sizable exit of foreign investors from the treasury securities market: - Higher local currency yields may be unavoidable in the near term. - Cancelling bond auctions to avoid high rates may result in financing shortfalls or frequent resort to CBE overdrafts, which can be inflationary and undermine the CBE’s inflation targeting ambitions. - Authorities will reject only outlier bids in auctions, while allowing the winning bids to reflect market conditions. - Primary fiscal posture required: - Maintain primary surpluses of around 2 percent of GDP in the coming years to resolve still-high debt. - This target is well above the debt stabilizing primary deficit of 2.7 percent of GDP. - Efforts need support from continued implementation of reforms to raise Egypt’s growth potential. - Specific numeric notes: - The estimated cost in 2018/19 is about 0.3 percent of GDP. ### State-owned enterprises (SOEs) transparency and National Investment Bank (NIB) - SOE reporting and governance: - Significant progress: an update to the June report at end-December now includes about 300 SOEs with abridged financial statements for most. - A supplementary report describes the legal framework governing state ownership of SOEs and the impact of the SOE sector on government finances, but lacks details on the impact of the SOE sector on the economy. - Authorities plan to improve the quality of SOE reports and publish them annually; reports will form the basis for a comprehensive SOE reform strategy to streamline and modernize legal, governance, and operational frameworks. - Other priority fiscal actions include pension reforms, revisions to the PFM law to introduce medium-term budgeting, and improvements in fiscal transparency and accountability (MEFP ¶15). - NIB restructuring: - NIB is part of general government, holds significant retail deposits as investment certificates, and maintains a large portfolio of SOE loans but is not subject to banking regulations and supervision. - Coinciding with foreign portfolio investor exit, NIB expanded its balance sheet by investing proceeds from increased issuance of certificates in treasury securities. - Authorities plan to strengthen NIB’s financial position: - Form an inter-ministerial committee which by end-March 2019 will develop a plan, endorsed by the Prime Minister, with NIB’s revised mandate, new business model, and proposed financial structure (SB). ### Structural reforms to boost private-sector growth - Agenda and progress: - Structural reform agenda for remainder of the program remains ambitious (MEFP ¶25). - Egypt advanced eight positions in the World Bank’s Ease of Doing Business ranking for 2019 and 15 positions on World Economic Forum’s 2018 Global Competitiveness index. - Reforms aim to improve resource allocation efficiency by strengthening competition, improving governance, limiting scope for corruption, and reducing the role of the state. - Industrial land allocation: - Current system prescribes narrow land use, sells at nominal fixed price on a first-come-first-served basis — inefficient, leads to misallocation and forgone revenue, prone to perceptions of corruption. - Working group under the Prime Minister formed in September to prepare a reform plan for a transparent, competitive, market-based mechanism operated through an online platform. - First draft (December 2018) lacked sufficient operational details to meet the structural benchmark; did not envisage competitive bidding. - Authorities committed to develop new guidelines to be approved by a Ministerial decree and published by end-March 2019 (proposed modified SB). - Public procurement and competition policy: - Government Procurement Act signed into law on October 3, 2018 and became effective on November 2. - Executive regulations to standardize procurement procedures across government entities are being developed; due to delay, the SB on approval of executive regulations is proposed to be reset from end-March to end-May 2019. - e-Procurement portal to be launched by end-May 2019 (SB). - By June 15, 2019 the Prime Minister will approve a plan to align SOE procurement rules with the new law (SB). - Draft law revamping the Egyptian Competition Authority (ECA) submitted to Parliament in January (end-October 2018 SB); expected to be passed by Parliament by end-March 2019. The draft: - Strengthens operational autonomy and provides administrative fining powers. - Does not exclude ECA from the salary cap for public employees and does not provide a single digit budget, but ensures financial autonomy. - Other reform measures: - Minority stakes in five SOEs are being divested (end-December 2018 SB) and more are planned for 2019. - Expenditure of EGP600 million in 2018/19 to improve availability of public nurseries and other facilities to enhance women’s ability to seek jobs is on track. - Work to separate the regulatory authority for public transportation from the Ministry of Transportation is ongoing; authorities request to reset the SB to March 31, 2019 due to complexity. ### Financing, external risks, and central bank safeguards - Program financing and contingency: - Program fully financed until its expiration. - Tighter external financing expected to be alleviated by $1 billion of the World Bank’s new DPF loan and $250 million from the German authorities. - If needed, additional financing can be raised with a Eurobond issuance and/or from gross reserves, depending on market conditions. - Capacity to repay and Fund exposure: - Fund credit outstanding as a share of gross reserves is projected to peak at 26.7 percent by the end of this year. - Debt service to the Fund as a ratio of exports of goods and services would reach 0.9 percent in 2020/21 (Table 10). - CBE’s reserve position is strong; current account and fiscal balances are improving; memorandum of understanding between the CBE and MoF on servicing Fund credit should ensure uninterrupted repayments. - CBE safeguards and governance: - CBE is implementing 2017 safeguards recommendations, with some delays. - CBE engaged a consulting firm to align financial reporting with Egyptian Accounting Standards starting with the 2018 audit. - CBE continues to unwind FX deposits in foreign branches of domestic banks, with full divestment expected by end-June 2019. - Draft amendments to the banking law to strengthen CBE independence and governance were submitted in December 2018 (end-September SB). - Fund has not yet received a management letter from the CBE external auditor for the 2017/18 financial year; staff will follow up. ### Staff appraisal, outlook, and policy priorities - Macroeconomic progress and outlook: - Since program start: growth accelerated; external and fiscal deficits narrowed; international reserves increased; public debt, inflation, and unemployment declined; social protection strengthened. - Remainder of program focuses on consolidating stabilization gains and advancing reforms to strengthen medium-term growth prospects. - Risks to the outlook: - More difficult external environment poses challenges: tightening global financial conditions, capital outflows, pressure on external accounts, higher borrowing costs. - Additional risks: realization of contingent liabilities increasing public debt, increase in global oil prices, deterioration of security situation disrupting tourism recovery, resistance from vested interests weakening reform momentum. - These risks underscore the need to enhance exchange rate flexibility, preserve adequate international reserves, and reduce public debt. - Monetary and exchange-rate policy: - Exchange rate flexibility and a prudent monetary stance are critical to preserve macroeconomic stability. - Staff supports CBE’s intention to maintain a restrictive monetary policy stance until the disinflation trend is firmly reestablished. - Decisions to eliminate the repatriation mechanism and strengthen enforcement of regulatory rules on open FX positions of banks are welcomed. - Monetary financing of the deficit should be minimized to support credibility of the monetary policy framework. - Fiscal policy priorities: - This year’s budget is on track to achieve a primary surplus of 2 percent of GDP, completing the programmed fiscal adjustment of 5.5 percent of GDP in three years. - General government debt projected at 86 percent of GDP by end-2018/19; related interest cost imposes a heavy burden and risks crowding out social spending. - To address debt burden: - Maintain primary surpluses at around 2 percent of GDP over the medium term. - Implement structural reforms to raise GDP growth. - Increase tax revenue to create fiscal space for human capital, infrastructure, and social protection spending; authorities are implementing a Medium-Term Revenue Strategy supported by Fund technical assistance. - Fuel subsidy reform: - Authorities committed to reaching cost-recovery prices for most June products by mid-June 2019. - Automatic fuel price indexation mechanism will adjust prices quarterly to changes in underlying costs, with a 10 percent cap on each quarterly adjustment. - Once full cost recovery is reached, indexation is critical to safeguard the budget from re-emergence of subsidies. - Banking sector and NIB: - Banking sector remains healthy, but NIB needs restructuring. - Two largest public banks are financially stable but may require additional capital in the next two years if strong lending growth continues. - Several smaller banks, with financials below sector averages, will require continued CBE monitoring. - Structural reform continuation: - Reforms of competition policy, public procurement, SOE management and transparency, industrial land allocation, and public finance management have the potential to improve the investment climate and governance, and reduce rent-seeking and corruption. - To be enduring, reform efforts should be stepped up and carried forward beyond the program period. - The pickup in medium-term growth assumes sustained implementation of reforms. *ARAB REPUBLIC OF EGYPT — INTERNATIONAL MONETARY FUND (excerpt)* ### 31. Staff supports the authorities’ request for the completion of the fourth review under ### 31. Staff supports the authorities’ request for the completion of the fourth review under the Extended Arrangement. Staff also supports the request to establish end-March 2019 PCs for the fifth review. ### Real and external sector developments - Figure 2 presents indicators including Manufacturing Index and Tourism Production Index, Number of tourist arrivals (Millions, RHS), contributions to Real GDP Growth (Percent) from Public demand, Net exports, Private investment, Private consumption, and Real GDP growth. - Exports of Goods: Non-Oil (Value) and Imports of Goods: Non-Oil (Value) shown across 2010/11–2018/19 with Current Account Balance (Percent of GDP) plotted. - Financial account components shown as Direct investment (Net), Portfolio investment (Net), Commercial banks' NFA; Financial Account (Percent of GDP). - Effective Exchange Rates (Index, 2010=100): NEER and REER series displayed. - Consumer Price Index Inflation (Y-o-y, in percent) series for Headline, Food, Retail, Regulated items, Services. ### Fiscal sector developments (Figure 3 and Tables) - Budget sector revenue and expenditure trends presented (Percent of GDP) with components: Grants, Non-tax revenue, Tax revenue; Subsidies, Interest, Wages; Primary balance, Interest payments; External and Domestic general government debt; Net Claims on Government (Commercial banks, Central bank). - Table 1: Selected Macroeconomic Indicators, 2015/16–2019/20 (key entries) - Real GDP (market prices): 4.3 4.2 5.2 5.3 5.5 5.5 5.9 - Consumer prices (end of period): 14.0 29.8 12.6 14.4 13.1 14.5 10.7 - Gross Debt: 96.9 103.2 92.4 92.6 86.2 86.0 83.3 - Budget sector Revenue and grants: 18.1 19.0 18.2 18.2 18.6 18.3 17.8 - Budget sector Expenditure (incl. net acquisition of financial assets): 30.7 29.9 27.9 27.9 26.7 26.6 24.5 - Energy subsidies (Budget sector): 3.0 4.1 3.4 3.4 2.1 2.1 1.2 - Overall balance (Percent of GDP): -12.5 -10.9 -9.7 -9.8 -8.1 -8.3 -6.7 - Primary balance 4/: -3.5 -1.8 0.2 0.2 2.0 2.0 2.0 - Current account (Percent of GDP): -6.0 -5.6 -2.8 -2.4 -2.6 -2.5 -1.8 - Gross international reserves (in billions of US$): 17.1 30.7 44.4 43.5 44.8 44.9 45.4 - In months of next year's imports: 3.0 5.0 6.8 6.6 6.1 6.6 6.3 - Table 3a/3b: Budget Sector Operations (in LE and percent of GDP) - Revenue and grants (2019/20 Third Review): 808.7 (18.2 percent of GDP) - Tax revenue (2019/20 Third Review): 625.5 (14.1 percent of GDP) - Nontax revenue (2019/20 Third Review): 182.0 (4.1 percent of GDP) - Expenditure (2019/20 Third Review): 1,229.7 (27.7 percent of GDP) - Interest (2019/20 Third Review): 433.5 (9.8 percent of GDP) - Energy subsidies (2019/20 Third Review): 150.9 (3.4 percent of GDP) - Overall balance (IMF staff definition, 2019/20 Third Review): -430.4 ( -9.7 percent of GDP) - Financing composition (2019/20 Third Review): Net domestic 216.8; Net external 213.5 ### Monetary sector developments (Figure 4; Tables 5–6) - Money aggregates and banking indicators: - Reserve money (end-period growth): 29.3 -7.8 40.2 28.3 27.6 34.2 20.7 17.1 15.5 16.1 (annual percent changes across periods shown) - Broad money (M2) (annual percent change): 18.6 39.3 23.4 18.5 19.8 20.8 20.5 15.9 15.5 14.5 - Net Foreign Assets of Banks (In billions of U.S. dollars) and NFA series plotted across Jul-14 to Aug-18. - Deposit Dollarization and Loan Dollarization (Percent of total deposit or loan) series provided. - Credit to the Economy (Percent of GDP): Net Claims on General Government and Claims on Private Sector series displayed. - Interest rates: Interbank overnight rate and 12-month T-bill interest rate series (Percent). - Gross Official Reserves (Billions of U.S. dollars) series. - Table 5: Central Bank Accounts (end-period, in billions of Egyptian Pounds) - Net foreign assets: entries shown negative and positive across years. - Reserve money levels: 628 579 812 743 1,036 999 1,203 1,409 1,628 1,890 (end-period LE) - Currency in circulation and reserves and highly liquid assets of banks detailed. - Table 6: Monetary Survey (end-period, in billions of Egyptian pounds; percent changes) - Broad money (M2): 2,094 2,918 3,601 3,457 4,313 4,176 5,032 5,834 6,739 7,713 - Credit to the private sector (annual percent change): 14.2 38.0 7.5 10.1 18.2 19.2 18.9 15.7 15.6 15.9 - M2 (in percent of GDP): 77.3 84.1 81.2 77.9 80.4 77.1 77.9 78.8 80.1 80.8 ### Balance of payments and external sector (Tables 2a/2b; Table 11) - Table 2a (In billions of US$) highlights: - Current account: -19.8 -14.4 -6.9 -6.0 -8.1 -7.5 -6.2 -4.3 -3.3 -3.4 (2015/16 through projections) - Balance on goods and services: -32.2 -31.7 -25.3 -26.2 -25.5 -24.2 -23.1 -22.7 -23.7 -25.8 - Exports of goods and services: 34.8 37.1 45.8 47.3 53.1 54.8 58.9 63.2 66.5 69.1 - Imports of goods and services: -66.9 -68.8 -71.1 -73.5 -78.5 -79.0 -82.0 -85.9 -90.2 -94.9 - Services receipts and tourism receipts (notably Tourism receipts: 3.8 4.4 9.1 9.8 11.2 12.5 14.2 15.8 17.1 18.1) - Transfers: 16.8 21.8 24.7 26.5 26.1 27.6 28.9 30.1 31.2 32.3 - Capital and financial account: 21.2 15.3 12.5 13.1 5.4 6.1 6.7 5.7 5.7 7.3 - FDI (net, in billions of US$): 6.8 7.8 7.8 7.4 9.5 9.5 11.2 12.6 14.1 15.0 - Portfolio investment (net) and Commercial banks' NFA series included. - Overall balance and financing flows show changes in reserves and net use of IMF resources. - Table 2b (In percent of GDP) summaries: - Current account as percent of GDP: -6.0 -5.6 -2.8 -2.4 -2.6 -2.5 -1.8 -1.2 -0.9 -0.9 - Exports of goods and services (percent of GDP): 10.5 14.5 18.3 19.0 17.4 18.1 17.5 18.0 18.2 18.0 - Imports of goods and services (percent of GDP): -20.1 -26.8 -28.4 -29.4 -25.7 -26.1 -24.4 -24.5 -24.6 -24.8 - Gross international reserves (end of period, billions of US$): 17.1 30.7 44.4 43.5 44.8 44.9 45.4 46.5 48.2 50.8 - Table 11: External Financing Requirements and Sources - Gross financing requirements (in billions of US$): 29.6 31.3 22.9 29.6 36.4 27.7 26.1 27.1 - Current account deficit (in billions of US$): 19.8 14.4 6.0 7.5 6.2 4.3 3.3 3.4 - Maturing short-term debt (in billions of US$): 7.0 12.3 12.3 13.7 16.2 16.7 16.7 16.7 - Amortization of medium and long-term debt (in billions of US$): 2.8 4.6 4.7 8.3 14.0 6.7 6.1 7.0 - Sources: FDI (net): 6.8 7.8 7.4 9.5 11.2 12.6 14.1 15.0; Roll-over of short-term debt: 7.0 12.3 12.3 13.7 16.2 16.7 16.7 16.7; Medium- and long-term borrowing: 6.7 26.9 14.5 14.6 5.3 3.3 3.3 3.3 - Change in reserves (negative indicates increase): 2.5 -13.6 -12.8 -1.4 -0.5 -1.2 -1.7 -2.6 ### National accounts and medium-term projections (Tables 7a/7b and Table 8) - Table 7a: Growth contributions and annual changes - Real GDP at market price (annual change, percent): 4.3 4.2 5.2 5.3 5.5 5.5 6.0 6.0 - Investment (percent change): 11.2 11.3 15.7 12.8 5.4 10.0 9.8 10.5 - Exports of goods and services (annual percent change): -14.5 86.0 32.2 13.9 8.3 5.6 3.4 2.1 - Table 7b: Shares (percent of GDP) - Investment: 15.0 15.3 16.7 16.9 17.4 18.1 18.7 19.5 - Exports of goods and services: 10.3 15.8 18.9 18.0 17.5 18.0 18.1 18.0 - Net remittances inflows: 5.0 9.2 10.5 9.0 8.5 8.5 8.5 8.4 - Savings-investment balance (percent of GDP): -6.0 -5.6 -2.4 -2.5 -1.8 -1.2 -0.9 -0.9 - Table 8: Medium-Term Macroeconomic Framework (projections) - Real GDP (annual change, percent): 4.3 4.2 5.2 5.3 5.5 5.5 6.0 6.0 - CPI inflation (end-of-period, percent): 14.0 29.8 14.4 14.5 10.7 7.7 7.2 6.9 - Unemployment rate (period average, percent): 12.7 12.2 10.9 9.6 8.3 7.6 7.0 6.4 - General government overall balance (Percent of GDP): -12.0 -10.6 -9.6 -8.5 -6.5 -5.1 -4.1 -3.8 - Primary balance (Percent of GDP): -3.7 -2.4 -0.2 1.2 1.8 1.9 2.0 2.0 - Gross debt (Percent of GDP): 96.8 103.2 92.6 86.0 83.3 80.0 77.9 74.2 - Official reserves (in billions of US$): 17.1 30.7 43.5 44.9 45.4 46.5 48.4 51.0 (In months of next year's imports: 3.0 5.0 6.6 6.6 6.3 6.2 6.1 6.0) - Current account (Percent of GDP): -6.0 -5.6 -2.4 -2.5 -1.8 -1.2 -0.9 -0.9 - External debt (Percent of GDP): 18.3 41.3 37.4 34.4 31.3 27.8 26.8 23.7 ### Financial soundness and banking system indicators (Table 9) - Regulatory capital to RWA: 15.1 16.3 15.9 14.9 13.7 13.9 14.5 14.0 15.2 (end-June, percent) - NPLs to total loans: 13.4 13.6 10.9 9.8 9.3 8.5 7.1 6.4 4.9 - Loan provisions to non-performing loans: 100.4 92.5 94.6 97.1 99.8 98.9 99.0 99.1 98.7 - Return on assets: 0.8 1.0 1.0 1.0 1.0 1.3 1.5 2.0 2.0 - Return on average equity: 13 14.3 14.3 13.9 14.5 18.9 24.4 30.9 30.9 ### Capacity to repay the Fund (Table 10) and Extended Arrangement schedule (Table 12) - Table 10: Fund repurchases and charges (Millions of SDRs and US$; projections) - Fund repurchases and charges (Millions of SDRs): 22.6 78.7 177.4 276.4 447.7 800.1 1,240.6 across 2016/17–2022/23 - Repurchases (Millions of US$): 0.0 0.0 0.0 164.2 522.4 955.2 (SDR-to-USD conversions and percent of exports and reserves shown) - Fund credit outstanding (Millions of SDRs): 1,970 5,731 8,597 8,597 8,432 7,910 6,955 - Fund credit outstanding (Millions of US$): 2,750 8,000 12,000 12,000 11,771 11,042 9,708 - Table 12: Schedule of Purchases Under the Extended Arrangement (Amounts and Conditions) - November 11, 2016: 1,970.05 Millions of SDR = 2,750 Millions of US Dollars = 96.7 percent of Quota — Board approval of the EFF - March 15, 2017: 895.48 Millions of SDR = 1,250 Millions of US Dollars = 44.0 percent of Quota — First review and end-December 2016 performance criteria - November 11, 2017: 1,432.76 Millions of SDR = 2,000 Millions of US Dollars = 70.3 percent of Quota — Second review and end-June 2017 performance criteria - March 15, 2018: 1,432.76 Millions of SDR = 2,000 Millions of US Dollars = 70.3 percent of Quota — Third review and end-December 2017 performance criteria - November 11, 2018: 1,432.76 Millions of SDR = 2,000 Millions of US Dollars = 70.3 percent of Quota — Fourth review and end-June 2018 performance criteria - June 20, 2019: 1,432.76 Millions of SDR = 2,000 Millions of US Dollars = 70.3 percent of Quota — Fifth review and end-March 2019 performance criteria - Total: 8,596.57 Millions of SDR = 12,000 Millions of US Dollars = 422.0 percent of Quota - Memorandum items: Quota (SDR, million) 2037.1; USD/SDR exchange rate 1.3959 ### Staff recommendation and procedural request - Staff supports the authorities’ request for: - Completion of the fourth review under the Extended Arrangement. - Establishment of end-March 2019 performance criteria (PCs) for the fifth review. *Sources: Egyptian authorities; IMF staff estimates and projections; Central Bank of Egypt; Ministry of Finance; IMF staff calculations and projections.* ### Annex I. Public/External Debt Sustainability Analysis ### Annex I. Public/External Debt Sustainability Analysis ### Executive summary and overall assessment - The Debt Sustainability Analysis indicates that Egypt’s debt is sustainable, but is subject to significant risks. - Baseline projections: - Debt is projected to decline to 86 percent of GDP by the end of the program (2018/19) and to about 71 percent of GDP by 2023/24. - Main risks identified: - Sustained increase in interest rates due to a further tightening of global financial conditions. - Weaker growth. - Less ambitious fiscal consolidation. - Contingent liabilities arising from state-owned enterprises and government guarantees. - Policy guidance: - Sustained fiscal consolidation in combination with structural reforms to boost growth is needed to put Egypt’s debt on a steady declining path. ### Baseline scenario assumptions and projections - Growth and macro assumptions: - Real GDP growth increases from an average of 3 percent in 2010/11–2015/16 to almost 5½ percent in 2018/19 and to 6 percent over the medium term. - Average inflation declines from a peak of 21 percent in 2017/18 to 7 percent in 2023/24. - Effective interest rates on general government debt are projected to decline. - The primary balance is projected to improve by about 2 percent of GDP in 2018/19, driven mainly by declining wage and energy subsidy bills. - Debt and financing projections: - General government debt projected to decline to 86 percent of GDP in 2018/19. - Debt-to-GDP ratio projected to reach about 71 percent of GDP in 2023/24. - Gross financing needs remain large during the projection period given high starting debt stock and large rollover needs. - Risk benchmarks and indicators (medium-term): - Debt-to-GDP remains above the emerging markets benchmark of 50 percent of GDP. - Gross financing needs average 36 percent of GDP during the projection period versus the 10 percent of GDP benchmark. - Profile risks: - “Market perception” and “debt held by nonresidents”: moderate risk. - “Change in the share of short-term debt”: high risk due to increased reliance on shorter-term debt in the previous year. - Foreign-currency debt: 30 percent of total in 2018/19 — moderate risk. ### Realism of baseline and alternative scenarios - Forecast bias and past errors: - Median forecast errors for 2008–2016: growth -1.1 percent, inflation 1.2 percent, primary balance -2.2 percent — implying an optimistic bias. - Recent improvement: forecast errors for GDP narrowed in the last two years. - Alternative scenarios and outcomes: - Historical scenario (growth and primary balance at last 10-year averages): - Debt-to-GDP increases to 100 percent of GDP in 2023/24 compared with 93 percent in 2017/18. - Gross financing needs increase to about 60 percent of GDP in 2023/24. - Weaker fiscal consolidation scenario (unchanged growth forecast but fiscal consolidation temporarily weaker by 0.8 percent of GDP): - Debt-to-GDP would be 81 percent in 2020/21 compared with 79 percent in the baseline. ### Stress tests and scenario-specific impacts - Growth shock (GDP growth 1.2 percentage points lower and inflation 0.3 percentage point lower in 2018/19 and 2019/20): - Debt would decline to 72 percent of GDP over the medium term compared to 69 percent in the baseline. - Real interest rate shock (increase of about 350 basis points over the projection period): - Debt increases by around 3 percentage point of GDP to 72 percent of GDP over the medium term compared to the baseline. - Large real exchange rate shock (hundred percent depreciation of the Egyptian pound): - Debt increases in the next year by 6 percentage point of GDP compared to the baseline, and by 3 percentage point of GDP over the medium term. - Combined macro-fiscal shock: - Assumptions: temporary growth shortfall of 1.2 percentage points for two years; looser fiscal stance by about 1 percentage point over two years; about 140 percent nominal exchange rate depreciation. - Outcome: debt increases to 90 percent of GDP in the following year compared to 82 percent of GDP under the baseline; over the medium term, debt remains about 10 percentage point of GDP higher than under the baseline. - Contingent liability shock (customized): - Assumption: contingent liability equal to 10 percent of GDP materializes, worsening the primary balance, raising interest rates and temporarily adverse macro effects. - Outcome: debt-to-GDP increases to 93 percent of GDP in 2019/20 compared to 82 percent in the baseline. - Severe combined shock (macroeconomic shock + contingent liability): - Outcome: debt-to-GDP increases to 100 percent of GDP in the next year; over the medium term debt would decline to around 88 percent of GDP and gross financing needs would be about 50 percent of GDP. ### Key numeric projections and indicators (selected exact figures) - Debt and financing: - Nominal gross public debt: 78.5 (2017), 103.2 (2018), 92.6 (2019), 86.0 (2020), 83.3 (2021), 80.0 (2022), 77.9 (2023), 74.2 (2024), 71.4 (projection end). - Public gross financing needs: 25.3 (2017), 38.2 (2018), 32.3 (2019), 36.2 (2020), 31.9 (2021), 35.3 (2022), 36.4 (2023), 37.5 (2024), 38.3 (projection). - Growth and inflation: - Real GDP growth: 4.0 (2017), 4.2 (2018), 5.3 (2019), 5.5 (2020), 5.9 (2021), 6.0 (2022–2024). - Inflation (GDP deflator): 10.4 (2017), 22.9 (2018), 21.4 (2019), 15.7 (2020), 12.6 (2021), 8.1 (2022), 7.2 (2023), 7.0 (2024). - Fiscal and interest indicators: - Effective interest rate (interest payments divided by debt stock end-previous year): 9.0 (2017), 10.9 (2018), 11.6 (2019), 12.7 (2020), 11.4 (2021), 9.7 (2022), 8.7 (2023), 8.4 (2024), 9.0 (projection). - Primary balance (percent of GDP): 4.1 (2017), 2.5 (2018), 0.4 (2019), -1.0 (2020), -1.8 (2021), -2.0 (2022), -2.1 (2023), -2.0 (2024) — cumulative identified debt-creating flows -36.1 over projection period reported. - Market perception and ratings: - EMBIG (bp): 467 (as reported in table). - 5Y CDS (bp): 367 (as reported in table). - Ratings: Moody's B3; S&P's BB; Fitch BB. ### External debt and external financing dynamics (selected exact figures) - External debt metrics and dynamics (selected): - Baseline external debt-to-GDP and projections: 37.4 (2017), 34.4 (2018), 31.3 (2019), 27.8 (2020), 26.8 (2021), 23.7 (2023) (table shows series across years). - Change in external debt (selected years): 4.0 (2013), -0.8 (2014), -0.5 (2015), 3.3 (2016), 23.0 (2017), -3.9 (2018), -3.0 (2019), -3.1 (2020), -3.5 (2021), -1.0 (2022), -3.1 (2023) (table entries). - Gross external financing need (in billions of US dollars): 11.3 (2013), 12.0 (2014), 18.1 (2015), 25.2 (2016), 24.0 (2017), 20.5 (2018), 22.3 (2019), 22.6 (2020), 23.6 (2021), 22.8 (2022), 22.9 (2023). - Gross external financing need (in percent of GDP): 3.9 (2013), 3.9 (2014), 5.4 (2015), 7.6 (2016), 9.4 (2017), 8.2 (2018), 7.4 (2019), 6.7 (2020), 6.7 (2021), 6.2 (2022), 6.0 (2023). ### Policy implications and recommendations (from analysis) - Continue and deepen fiscal consolidation to maintain primary surpluses consistent with the baseline projections. - Pursue structural reforms to boost private investment and sustainable growth to support debt reduction. - Manage debt profile vulnerabilities: - Reduce reliance on short-term debt to lower rollover and market-perception risks. - Limit exposure to contingent liabilities from state-owned enterprises and government guarantees through stronger monitoring and fiscal buffers. - Monitor and prepare contingency plans for shocks: - Interest rate increases, exchange rate pressures, and contingent liability calls can materially raise debt-to-GDP and gross financing needs; prepare macro-fiscal buffers and contingent financing arrangements accordingly. *Source: IMF staff, Annex I. Public/External Debt Sustainability Analysis (Egypt).* ### Appendix I. Letter of Intent ### Appendix I. Letter of Intent ### A. Recent Economic Development and Program Performance - Real GDP growth accelerated from 4.2 percent in 2016/17 to 5.3 percent in 2017/18 led by natural gas, tourism, and non-petroleum manufacturing. - CPI inflation declined from 33 percent in July 2017 to 12 percent in December 2018. - Core inflation (excluding volatile food items and regulated prices) declined from a peak of 35.3 percent to 8.3 percent by December. - The current account deficit narrowed to 2.4 percent of GDP in 2017/18 from 5.6 percent the year before, primarily driven by strong remittance inflows, improvement in oil trade deficit, and a recovery in tourism. - Non-oil trade balance declined as the increase in non-oil imports outpaced that of non-oil exports. - The budget outcome in 2017/18 was in line with projections. - Gross general government debt declined from 103 percent of GDP in 2016/17 to about 93 percent of GDP in 2017/18. - Despite significant portfolio outflows, the bilateral exchange rate of the pound against the US dollar has remained stable since May. - Program performance: - All end-June 2018 and end-December 2018 performance criteria and indicative targets (IT) were met except: - the end-June IT on the nominal accumulation of the budget sector debt (December data not yet available), and - the end-December IT on clearance of EGPC arrears given the difference was paid in advance in 2017/18. - Debt to GDP ratios for both the central and general government in June 2018 were in line with projected targets under the program. - Most structural benchmarks were implemented, some with delays or partial completion: - FX deposits of the CBE in foreign branches of Egyptian banks reduced to $2.9 billion by June 30, 2018 and further to under $1.5 billion on January 3, 2019. - A new system to evaluate and decide on new guarantees was finalized as planned. - EGP500 million was spent in 2017/18 to improve availability of nurseries. - A working group to prepare the reform plan for industrial land allocation was formed with a delay in August due to Cabinet reshuffle; the reform plan was completed in January instead of December 15, 2018 but needs additional details. - Draft amendments to the CBE law were finalized and submitted to Cabinet in December instead of September. - Draft law on the Egyptian Competition Authority (ECA) was submitted to Parliament in January 2019 instead of October 2018. - Separating the regulatory authority for public transportation by establishing the independent regulatory authority for transport was not completed by end-December 2018 and is proposed as a structural benchmark for end-March 2019. - Two reports on state-owned enterprises (SOEs) were prepared and published; the first was partially incomplete and omitted a number of SOEs and abridged financial statements; the second, issued in late December 2018, expanded coverage and added abridged financial statements for most SOEs. An additional report covered economic authorities. ### B. Economic Program — Objectives and Strategy - Program objectives: - Further strengthen macroeconomic stability by reducing inflation and public debt. - Promote inclusive growth, employment creation and private sector development. - Protect the poor and vulnerable. - First-year focus: - Restoring macroeconomic stability and resolving severe domestic and external imbalances while protecting the most vulnerable. - Modernizing fiscal and monetary policy frameworks, strengthening the energy sector, and improving the business climate. - Medium-term objectives: - Entrench macroeconomic stabilization through durable reforms. - Create additional fiscal space for investment in human development and infrastructure. - Place debt on a declining path. - Broaden structural reform agenda to raise productivity and growth and better integrate Egypt in global trade. - Ambition to become a dynamic, well-diversified, and modern economy and a regional trade and energy hub. ### C. Monetary and Exchange Policies - Monetary objective: - The main goal of the CBE is to reduce inflation to single digits over the medium term. - Recent inflation and policy posture: - Annual inflation declined from the peak of 33 percent in July 2017 to 12 percent in December 2018. - In light of recent temporary spike in food prices, the government is developing measures: new storage facilities (especially in remote areas), improvements in transportation infrastructure, and creation of agricultural hubs. - CBE has kept policy rates unchanged since April (in light of temporary food price spikes and tightening global financing conditions). - Monetary policy will remain data-driven with decisions on interest rates based on inflation expectations; CBE may ease the monetary stance as inflation trends down but will tighten if inflation pressures reemerge. - Exchange rate and reserves: - Maintain flexibility of the exchange rate and preserve adequate official reserves. - Elimination of the repatriation mechanism for all new inflows of foreign capital announced on November 28, 2018 (does not affect balances entered prior to that date). - CBE will not, in general, intervene in the interbank FX market but will supply foreign exchange to the government for servicing foreign debt; public enterprises to meet FX needs in the market. - CBE will stand ready to make FX sales or purchases in exceptional cases when unusually large short-term flows pose stability risks; interventions will be transparent and objectives clearly communicated. - Gross international reserves projected at 130 percent of the Fund’s ARA metric for floating regimes for June 2019; intention to maintain reserves within the Fund’s adequacy range. - Monetary policy framework and operations: - During program period, framework will remain based on money targeting. - Reserve money will be an indicative target reflecting projections of market liquidity consistent with chosen inflation path. - A joint Cash Coordination Committee (established February 2018) to ensure information flow between CBE and MoF. - Developed framework for analyzing high frequency patterns of cash in circulation, fiscal revenues, expenditures, and external and domestic financing needs. - Monetary operations will primarily rely on indirect policy instruments such as deposit auctions and standing facilities. - Overdraft account capped at EGP66 billion in 2018/19 (equivalent to 10 percent of the previous three years’ revenues), in line with the CBE law. - In September, the cap was temporarily exceeded to compensate a budget financing shortfall; overdraft balances were reduced below the limit by October 23 and remained below since then. - The overdraft facility reached EGP 21.2 billion by end December 2018. - A proposed performance criterion (PC) on the level of the overdraft for end-March 2019 is set as shown in the MEFP Table 1. - The Memorandum of Understanding between the CBE and MoF will be modified to indicate overdrafts will be issued at market rates starting from July 1, 2019. - Any additional holdings of government securities by the CBE will be determined by monetary policy considerations. - CBE lending to commercial banks will be for monetary policy (short-term liquidity management) and, if needed, for emergency liquidity assistance. - Subsidized lending programs and limits: - Subsidized lending by CBE for SME and social housing programs will be gradually phased out once system-wide cumulative flow limits are exhausted. - EGP10 billion limit on loans for SME working capital that receive an interest rate subsidy reached in March 2018 and the initiative discontinued. - As of end-September 2018: - EGP2.6 billion utilized of the EGP5 billion limit for medium-sized firms’ capital expenditure. - EGP17 billion utilized of the EGP20 billion limit for social housing programs. - EGP20 billion utilized of the EGP30 billion limit on loans to small and certain segments of agricultural micro enterprises issued after January 1, 2018 (these loans allow commercial banks to reduce required reserves by the loan amounts). - Term loans under these initiatives will amortize per contractual schedules; working capital facilities may be renewed for existing borrowers. - Beyond these limits, loan subsidies to small enterprises will be financed from the state budget. - Support to develop microfinance institutions will continue. - CBE FX deposits in foreign branches: - To be gradually divested. Deposits reduced to below $3 billion by end-June 2018, and below $1.5 billion on January 3, 2019, marginally missing the end-December structural benchmark. - These deposits will be fully reallocated in at least A-rated banks and financial instruments by 15 June 2019 (structural benchmark). - Transition to inflation-targeting framework: - Medium-term intent to adopt a forward-looking and interest rate-based monetary policy framework with inflation as the nominal anchor. - To ensure smooth transition: - Continue strengthening analytical and liquidity management capacity. - Further develop money markets to improve monetary transmission. - Continue improving communications strategy. - Establish price stability as the primary objective of monetary policy and strengthen CBE’s institutional and operational autonomy in ongoing revisions to banking legislation. - Contain fiscal dominance, and improve early intervention and resolution framework. - Continue regular publication of monetary policy reports and financial stability reports. - Banking law revisions: - Fund provided extensive technical assistance in drafting amendments to the CBE law. - Draft submitted to Cabinet in December 2018 and expected approval by Parliament before end-March [text ends here]. *Letter of Intent and attached Memorandum of Economic and Financial Policies and Technical Memorandum of Understanding (as provided).* ### 2019. Some of the key objectives of the revisions are: ### 2019. Some of the key objectives of the revisions are: ### Central Bank of Egypt (CBE) law revisions and governance - Define price stability as the primary objective of monetary policy. - Strengthen the CBE’s operational autonomy. - Limit monetary financing of the deficit. - Ensure that CBE lending to banks is only for short-term liquidity support and phase out any development lending by the CBE as indicated in ¶7 above. - Ensure that the CBE law prevails against any contradicting provisions in other laws. - Clarify the terms of the Board’s appointment and provision of non-executive majority. - Include a double veto procedure and objective dismissal grounds for all board members. - Strengthen Board oversight over CBE management and ensure clear division of labor. - Strengthen rules related to the CBE recapitalization and the distribution of unrealized profits. - Include specific mechanisms for CBE recapitalization, if required, financed by the government. - 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. - Publish the audited financial statements of the CBE. - Further define a supervisory framework for early intervention and resolution of banks. ### Fiscal policy stance and debt trajectory - Aim to keep general government debt on a clearly declining path. - Projected decline in general government debt from 93 percent of GDP in 2017/18 to 86 percent of GDP by end-2018/19. - 2018/19 budget targets a primary surplus of the budget sector of 2 percent of GDP. - This is 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 72 percent of GDP by 2022/23. - Overall fiscal deficit expected to be in line with budget estimates. - Projected overall deficit of the budget sector to reach 8.5 percent of GDP compared to 8.4 percent of GDP as approved by the Parliament last June. - Despite higher interest bill due to less favorable global financial conditions, the deficit as percent of GDP would only marginally increase to 8.5 percent of GDP due to higher projected nominal GDP. - Considering a $3-5 billion Eurobond in the first half of 2019 and seeking additional foreign financing from bilateral and multilateral partners. - Domestic financing mobilized primarily through quarterly announced auctions of government securities at market interest rates. ### Main policy measures in the 2018/19 budget - Tax revenue increases from: full year impact of increased VAT collections; higher excises on tobacco products; revising and increasing stamp duty on various licenses and government services; implementation of simplified tax regime for SMEs; introducing a tax dispute settlement law; base broadening of the corporate income tax; and a comprehensive program to improve revenue administration. - Energy subsidies will be reduced by 1.3 percent of GDP. - The wage bill will decline by 0.3 percent of GDP due to earlier containment of base salary growth, tight control on bonuses and allowances and the hiring process, and continuing modernization of the public employment framework in line with the new civil service law, passed by Parliament in August 2016. - Public investment will increase to 2.7 percent of GDP. Excluding self-financed projects which are deficit neutral, public investment is budgeted to increase by 0.2 percent of GDP. A large share of the higher public investment envelope is directed to human development and to lagging regions. - Other expenditure will be reduced by 0.2 percent of GDP. - Allocation of 0.2 percent of GDP to improve public transportation and enhance the availability and quality of childcare to improve female labor force participation. - Social package to mitigate energy price reform impact: progressive lump sum public wage bonuses in addition to regular salary increase; an increase in pensions by 15 percent; and a progressive revision of tax credits. - Commitment to delay lower priority expenditure as well as investments, if needed to meet primary surplus target, and preparedness to save any revenue overperformance. ### Improving revenues — Medium-term Revenue Strategy (MTRS) - Implement a Medium-term Revenue Strategy (MTRS) to strengthen and modernize revenue mobilization, simplify and streamline procedures and create fiscal space for investments in health and education, infrastructure and a sustainable social safety net. - MTRS covers both tax policy and tax administration; will revise tax policy and related legislation and modernize the Egyptian Tax Administration (ETA). - Develop 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. - Modern IT will replace outmoded processes for ETA and businesses. - Strengthen staff capacity to provide high quality and accurate services. - Measures to address non-compliance to prevent tax-evasion and non-payment. - Established a Working Group in November comprising high level representatives from MoF top management and key revenue mobilization agencies and a dedicated Technical Secretariat in October. - Published an Action Plan to develop and implement the MTRS approved by the Cabinet in September. - Intend and plan to publish the MTRS. ### Public financial management (PFM) and transparency measures - Submitted to the Cabinet a fiscal strategy paper in December 2017; by end-June 2018 finalized an updated fiscal risks statement and a comprehensive system to evaluate and decide on new state guarantees. - Revamping debt management strategy to ensure sustained declining path of public debt over the medium term, optimized debt profile in terms of maturity and diversification. - Established a high-level committee under the Prime Minister to coordinate implementation of the debt management strategy; the strategy will be approved by the Prime Minister by end-March 2019. - Review operational performance and finances of economic authorities to ensure correct classification according to international standards; prepare consolidated fiscal accounts integrating their accounts in the general government accounts for analytical purposes by end-March 2019. - Strengthening monitoring of state-owned enterprises (SOEs); published a report on SOEs in June 2018 with elements including an overview of the sector, list of companies owned by the government, information on individual companies and indicators of financial performance, board members, management, auditors, and subsidies received. - Updated SOE report published in late December 2018 expanded to cover all SOEs with abridged financial statements added for most of them. - Develop a comprehensive SOE reform strategy aimed at streamlining and modernizing the legal, governance and operational frameworks and strengthening financial performance and oversight. - Plan to restructure National Investment Bank (NIB): NIB’s balance sheet expanded by 40 percent during 2017/18; will create a committee comprising representatives of the ministries of Planning, Monitoring and Administrative Reform, Finance, and the CBE to review NIB’s operations and finances; by March 31, 2019 will develop a plan, endorsed by the Prime Minister, with the revised mandate, the business model and the proposed financial structure of the entity going forward (structural benchmark). - Social Insurance Fund (SIF) reforms: increased minimum value of pensionable monthly wage from EGP160 to EGP400 starting 2017/2018; the minimum pensionable monthly wage would 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; working on developing a comprehensive reform plan for the social insurance funds and pension system by end of the current fiscal year. - Public Finance Management framework: intend to put in place a modern PFM law, review existing PFM legal framework, introduce a medium-term expenditure framework, and continue presenting a pre-budget statement to Parliament with every budget. - Fiscal transparency and accountability: publish six standard reports throughout the budget cycle including a mid-year review report, a pre-budget statement, and a citizen’s budget; financial statement sent to Parliament augmented to include data on fiscal risks, guarantees, and administrative classification of spending. - Established a Transparency and Public Participation Unit within the Ministry of Finance in October 2018 and working on creating a citizen follow-up mechanism and an online platform to strengthen accountability. ### Energy sector policies and subsidy reform - Continue comprehensive reform program for petroleum, gas and electricity to improve financial position and raise efficiency. - Objectives: gradually remove untargeted subsidies and enhance private sector participation; medium-term strategy for energy sector reforms approved by the Minister of Petroleum on March 30, 2017. - New Gas law approved by Parliament in July 2017 promotes competition, allows private sector participation in downstream activities, and establishes an independent regulator; executive regulations published in February 2018. - Electricity tariff increases: raised by an average of 30 percent in July 2016, 40 percent in July 2017, and 26 percent in July 2018; tariffs will be increased further to achieve cost recovery in the coming years. - Retail fuel price increases: gasoline and diesel retail prices raised by an average of 53 percent in June 2017; prices of LPG, kerosene and fuel oil raised by 100, 55 and 40 percent respectively; June 2018 fuel prices increased by another 44 percent on average. - At current global oil prices, pre-tax price-to-cost ratios are at about 85-90 percent for gasoline, diesel, kerosene and fuel oil (excluding fuel oil used for electricity generation and bakeries). - Objective to achieve 100 percent cost recovery by June 15, 2019 (excluding LPG and fuel oil used for electricity generation and bakeries; structural benchmark). - Prime Minister decree in December 2018 to introduce automatic fuel price indexation mechanism for gasoline Octane 95 with first price adjustment scheduled at end-March 2019; indexation for other fuel products to be introduced in June 2019 with first price adjustments scheduled by end-September (SB). - Indexation mechanism asymmetric for Octane 95 until full cost recovery is reached in June, adjusting price only when underlying costs increase; from June onwards mechanism will be symmetric for all fuel products. - Price adjustments will take place quarterly and will be capped at 10 percent as a smoothing mechanism. - Launched a public awareness campaign including publishing evolution of unit costs and subsidies of fuel products and impact on the overall subsidy bill. - Introduced a hedging mechanism to further protect the budget from commodity price shocks including oil prices. - Egyptian General Petroleum Company (EGPC) restoration plan: EGPC accumulated more than $6 billion in arrears to international oil companies by end-2014. - EGPC cleared $200 million in the first half of 2017/18 instead of planned $400 million, then cleared another $1 billion in the second half; additional $187 million paid during June-December 2018, reduced from the programmed $1 billion by the amount prepaid in 2017/18. - At end-December 2018 the stock of arrears amounted to $1.043 billion. - Commitment to fully eliminate the arrears by end-June 2019. - Gas production: declined from 7 billion cubic feet (bcf) in 2010 to about 4 bcf in 2015/16; increased to 6 bcf by September 2018, matching Egypt’s domestic consumption. - Gas production projected to rise further to 7.7 bcf by end-2019. - Enhanced domestic production, 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 - Egypt's banking system described as liquid, profitable and well capitalized. - In June 2018, the average capital adequacy ratio stood at 15.6 percent, well above the Basel-recommended floor of *Italicized source attribution line.* ### 9.875 percent and the CBE-mandated 11.875 percent; return on equity is at a healthy 21.5 percent ### 9.875 percent and the CBE-mandated 11.875 percent; return on equity is at a healthy 21.5 percent ### Key findings - Policy/benchmark rates cited: 9.875 percent and the CBE-mandated 11.875 percent. - Profitability indicator: return on equity is at a healthy 21.5 percent. - Asset quality note: "and the share of non-performing loans in total loans declined from 4.9 percent in 2017 to" ### Banking sector indicators - Reported rates: 9.875 percent; CBE-mandated 11.875 percent. - Return on equity: 21.5 percent. - Non-performing loans: declined from 4.9 percent in 2017 to *Source: https://www.imf.org/-/media/files/publications/cr/2019/1egyea2019001.pdf* ### 4.3 percent. Specific loan-loss provisioning coverage is at 89.3 percent. However, the net open ### 1egyea2019001 - 4.3 percent. Specific loan-loss provisioning coverage is at 89.3 percent. However, the net open ### Banking system health and risks - Specific loan-loss provisioning coverage is at 89.3 percent. - Banking system net open foreign exchange position (NOP) changed from: - long 17.75 percent of regulatory capital in December 2017 - to short 12.1 percent in September 2018. - Continuous structural benchmark: CBE will ensure strict compliance with NOP limits, will not grant exemptions, and will apply sanctions to all violators. - Any non-compliant bank will bring down its NOP to regulatory limit by May 2019. - Transparency measure: starting from end-June 2019 data, system-wide NOP figures will be disseminated quarterly by the CBE along with other FSIs. - Continued supervisory actions and resilience measures: - Bank-by-bank stress tests by CBE Banking Supervision based on adverse macroeconomic scenarios. - Ongoing monitoring of currency mismatches on balance sheets of large corporations and state-owned enterprises. ### Regulatory and supervisory strengthening (objectives and actions) - Regulatory and policy framework goals: - (a) strengthen the regulatory and supervisory framework, including consolidated supervision; - (b) phase in the capital conservation buffer in line with the Basel timelines; - (c) promote competition to enhance efficiency in delivery of financial services; - (d) strengthen crisis management and resolution framework to mitigate systemic risks; - (e) promote financial inclusion without compromising credit quality. - Recent or planned supervisory measures: - 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. - Strengthening governance and accountability of bank management. - Crisis preparedness: - Plans to implement new emergency liquidity assistance and bank resolution frameworks aligned with best international practices. - MoF and CBE to develop clear rules on deploying public funds to maintain financial stability. ### Business environment and structural reforms (priorities and benchmarks) - Reform objectives: attract investments, raise productivity and competitiveness, support exports, create jobs, and improve Doing Business and Global Competitiveness rankings (Egypt advanced by 8 and 15 positions respectively in latest reports). - Industrial land allocation reform: - Working group formed in September (reports to Prime Minister); consulting firm engaged; first draft prepared in December 2018. - Target: finalize plan and develop new guidelines to be approved by Ministerial decree and published by March 31, 2019 (modify current end-March structural benchmark). - Guidelines to cover: (a) permissible use of land; (b) market-based land allocation mechanisms; (c) clear eligibility criteria; (d) simplified and standardized document requirements; (e) online platform and moving entire process online. - Public procurement reforms: - Government Procurement Act approved by Parliament in July and signed into law on October 3. - Executive regulations to be drafted to align procedures with international best practices. - Committee to assess SOE procurement practices; Prime Minister to approve reform plan by June 15, 2019 (structural benchmark). - Request to reset approval of executive regulations from end-March to end-May 2019 (structural benchmark). - e-Procurement portal to start operational by end-May 2019 (structural benchmark). - Introduce a code of Integrity for public sector procurement staff before end of 2019. - SME and tax policy: - Work on modern tax regime for SMEs with a reduced flat tax on annual recorded turnover; legislation expected submitted to Cabinet by end-January 2019 and approved by Parliament before end of 2018/2019. - Electricity sector: - Plan to financially restructure the Egyptian Electricity Holding Company; joint announcement by Ministries of Finance and Electricity by end-May 2019. - Transport regulation: - Separate regulatory authority for public transportation from Ministry of Transportation; structural benchmark reset to March 31, 2019. - Egyptian Competition Authority (ECA) strengthening: - Draft law submitted to Parliament (delayed to January); expected to be passed before end-March 2019. - Provisions sought include: ECA reporting directly to Prime Minister, administrative fining powers, elimination of government representation on board, increased judiciary/technical expert representation, earmarked single-digit budget subject to Administrative Control Authority review, implementing regulations for hiring independence, performance criteria, enhanced transparency and publication of motivated decisions and non-confidential case files, guidelines for fines, leniency on cartels, and methodology to remove barriers to competition. - Right to Information Law: - Initiate open consultative process with stakeholders; aim to pass a law conforming to international good practices. - Export and trade facilitation measures: - Non-oil exports were 6.8 percent of GDP in 2017/18. - Planned reforms in FY2018/19 include reducing documents and time to export/import, unified custom clearance forms, digital links between stakeholders. - Plans to facilitate financing via export guarantees and an Export Guarantee Agency; improve marketing support and logistical support via Export Development Authority and Center for Business Services for Export Development. - Development of large inland dry ports (first PPP project tendered at 6th October City with rail connectivity). - Work to set up a Single Window Platform and electronic connectivity between ports and Customs Authority. - Childcare and female labor participation: - Spent EGP250 million in 2016/17; EGP500 million in 2017/18 for nurseries (0 to 4-year olds); planned EGP600 million in 2018/19. - Proposal to drop this measure as a structural benchmark. - Joint committee established April 2017; work with UN Women to introduce gender budgeting starting 2018/2019. - SOE divestiture program: - IPO inter-ministerial committee created by Prime Minister end October 2017; detailed plan approved April 2018. - Plan to divest stakes in at least 23 SOEs over 24-30 months; stakes in five SOEs currently being divested and another four intended to follow in 2019. - Planned divestment estimated to generate around EGP80 billion and bring total market capitalization of these companies to EGP430 billion. ### Financing and program monitoring - Program financing for next 12 months: - $1 billion from the World Bank’s new Development Program Financing for Enabling Private Sector and Territorial Development for Inclusive Growth. - $250 million from Germany. - Eurobonds (amounts not specified). - Program monitoring instruments: prior actions, quantitative performance criteria (PCs), indicative targets (ITs), and structural benchmarks (SBs). - Fifth program review test date: March 2019. - Tables 1 and 2 list quantitative PCs/ITs and prior actions/SBs (as referenced in text). ### Key program numerical facts and definitions (selected) - As of September 30, 2017: - Foreign reserve assets as defined amounted to $35,879 million. - Foreign reserve-related liabilities amounted to $8,431 million. - As of December 29, 2016: - Net domestic assets (NDA) of the CBE amounted to EGP573.76 billion. - For December 2016: - Average reserve money amounted to EGP541.47 billion. - Program exchange rates (as of June 30, 2016): - SDR 0.7056 per US$ - Euro 0.9019 per US$ - British Pound 0.7462 per US$ - Japanese Yen 102.7004 per US$ - Saudi Riyal 3.7506 per US$ - Chinese Yuan 6.6480 per US$ - Monetary gold valued at $1,258.65 per troy ounce. - Program pound exchange rates: - FY 2017/18: 18.0251 (actual on May 31, 2017) - FY 2018/19: 17.8572 (actual on May 31, 2018) - As of December 31, 2018: - Government overdraft at the CBE amounted to EGP 21.2 billion. - Stock of EGPC arrears amounted to $1.0 billion. - Memo: Non-oil exports of goods were 6.8 percent of GDP in 2017/18. ### Technical and operational program definitions (high-level) - Net international reserves (NIR) = foreign reserve assets − reserve-related liabilities; monitored in US$ and changes are cumulative since fiscal year start. - Foreign reserve assets exclude frozen, pledged or encumbered assets; exclude assets from short-term currency swaps (original maturity < 360 days). - Program disbursements include: external disbursements of loans, grants, deposits for budget support, foreign reserve asset creating loans and deposits to the CBE with original maturity > 360 days, rollovers > 360 days, net issuance of government T-bills in foreign currency; exclude project loans and grants. - Reserve money (RM) = currency in circulation outside CBE + balances on commercial banks’ overnight deposits + banks’ correspondent accounts (local currency required reserves at CBE); excludes deposit auctions and 7-day deposits at the CBE. - Net domestic assets (NDA) of CBE = net credit to government + net credit to public economic authorities + credit to banks + open market operations (with specified exclusions). - Primary fiscal balance of the budget sector = overall balance + total interest payments of budget sector + any capital injection in CBE; cumulative from fiscal year start. - Fuel subsidies measured cumulatively in domestic currency for gasoline, diesel, kerosene, LPG and fuel oil. - Continuous PC: non-accumulation of external debt payment arrears by general government and CBE; defined as any payment due to nonresidents not made when due under contract (including grace period). ### Data reporting and monitoring requirements (selected frequencies and lags) - Ministry of Finance submissions: - Overall deficit of the budget sector: Monthly, 30 calendar days. - Summary of budget sector accounts: Monthly, 30 calendar days. - Program disbursements and project loans to general government: Weekly and Monthly, 30 calendar days. - Gross transfers to EGPC: Quarterly, 90 calendar days. - Stock of EGPC arrears to foreign creditors: Quarterly, 90 calendar days. - Financial information of NIB (detailed): Quarterly, 30 calendar days. - Central Bank of Egypt submissions: - Program net international reserves and components: Monthly, 7 working days. - Breakdown of gross foreign assets and liabilities by currency: Monthly, 15 calendar days. - Program NDA and components: Monthly, 15 calendar days. - CBE foreign exchange deposits at commercial banks headquartered in Egypt: Weekly, 5 working days. - Bank-by-bank foreign exchange net open position: Monthly, 30 calendar days. - Commercial banks core FSI indicators by peer group and bank-by-bank data: Quarterly, 75 calendar days. - Central bank’s weekly analytical balance sheet (preliminary): Weekly, 7 working days after end of week. - Daily reserve money: Weekly submission, 14 working days after end of week. - Daily official exchange rates EGP/$: Weekly, 5 working days after end of week. ### Program implementation status and structural benchmark outcomes (selected) - Some SBs met, some implemented with delay, and some not met (see Table 2 listings). - Examples: - Improve debt management: based on guarantees report — Met (June 30, 2018). - Spend EGP500 million on nurseries for 0–4 year olds — Met (June 30, 2018). - CBE FX deposits at foreign branches not to exceed $3 billion — Met (June 30, 2018). - Form working group for industrial land allocation — Not met (June 30, 2018); implemented with delay in July. - Publish report on all SOEs — Not met (June 30, 2018); report incomplete. - Submit draft amendments to CBE law by September 30, 2018 — Not met; implemented with delay in December 2018. - Submit draft law strengthening ECA by October 30, 2018 — Not met; law submitted January 2019 but missing items under b) and c). - Eliminate repatriation mechanism by December 31, 2018 — Met. - CBE FX deposits at foreign branches not to exceed $1.5 billion by December 31, 2018 — Not met; implemented with delay on January 3, 2019. - Establish Transparency and Public Participation Unit within MoF by December 31, 2018 — Met. - Proposed benchmarks and deadlines for March 31, 2019 and June 15/June 2019 for several reforms (see Table 2). ### Authorities’ assessment and macroeconomic outcomes (statement by Executive Director and Senior Advisor) - Economic performance highlights: - Growth reached 5.3 percent last year. - Unemployment declined to single digits from a peak of 13 percent. - Gross international reserves peaked approaching $44 billion at end-November 2018, declined to $41.8 billion at end-December 2018. - Foreign currency inflows exceeded $117 billion since November 3, 2016. - Headline (core) inflation peaked at 33 (35.3) percent in July 2017; fell to 12 (8.3) percent in December 2018. - Primary fiscal surplus first registered in past fiscal year; expected to reach 2 percent of GDP in current fiscal year. - Overall budget deficit (excluding grants) projected to reach 8½ percent of GDP for the year, down from average 13¾ percent in FY13-16. - Public debt declined last year by 10 percentage points of GDP and will decline by another 7 percentage points by June 2019 to 86 percent of GDP. - Policy stance: - CBE to continue data-driven monetary policy; medium-term aim to adopt forward-looking interest-based framework with inflation anchor. - Fiscal policy being strengthened via Debt Management Strategy, Medium-term Revenue Strategy, and Transparency and Public Participation Unit within MoF. - Structural reform agenda broad and ambitious; authorities emphasize realism in sequencing and request staff support and peer-country examples where relevant. - Additional facts and estimates: - Average fuel price-to-cost ratio now estimated at 85 percent compared to 73 percent at time of mission (as reported in December 2018 staff report). - Current FY19 budget oil price assumption: $74 pbl, with buffers accommodating up to $78 pbl. *Source: ARAB REPUBLIC OF EGYPT — INTERNATIONAL MONETARY FUND; Attachment II. Technical Memorandum of Understanding; January 27, 2019.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/1egyea2019001.pdf_