## 1egyea2023001 - 261.13 million (equivalent to about US$ 347 million), which will help meet the balance of ## Source details **Canonical URL:** [1egyea2023001 - 261.13 million (equivalent to about US$ 347 million), which will help meet the balance of](https://www.imf.org/-/media/files/publications/cr/2023/english/1egyea2023001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1egyea2023001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1egyea2023001.pdf.json) --- ### Financing package and program scope - 46-month Extended Fund Facility (EFF) request: SDR 2,350.17 million (115.4 percent of quota). - Immediate financing noted: 261.13 million (equivalent to about US$ 347 million). - Expected catalyzed additional financing: about US$14 billion from Egypt’s international and regional partners, including new financing from GCC countries and other partners through ongoing divestment of state-owned assets and traditional forms of financing. - Additional facility request: authorities requested access under the Resilience and Sustainability Facility (RSF), which could provide up to an additional SDR 1 billion. - Financing strategy highlights: - Substantial financing from regional partners, including divestment of state-owned assets. - Proceeds from certain purchases of equity stakes in state-owned assets will go towards increasing international reserves and closing the financing gap. - GCC countries committed to roll over deposits at the Central Bank of Egypt and to bring fresh financing through such investments. - Staff projects a financing gap of around US$17 billion over the next 46 months with the policies outlined in the MEFP. - Program financing commitments for first 12 months include contributions from the World Bank, AIIB, AfDB, AMF, and China Development Bank, and proceeds from sales of state-owned assets. ### Program objectives and core policy package - Overarching goals: preserve macroeconomic stability, restore buffers, and pave the way for sustainable, inclusive, and private-sector-led growth. - Core policy components: - Permanent shift to a flexible exchange rate regime to increase resilience and rebuild external buffers. - Monetary policy to gradually reduce inflation and strengthen policy transmission; transition away from subsidizing lending schemes. - Fiscal consolidation and debt management to ensure downward trajectory in public-debt-to-GDP and contain gross financing needs, while increasing social spending and strengthening the social safety net. - Wide-ranging structural reforms to reduce the state footprint, level the playing field, facilitate private-sector-led growth, and strengthen governance and transparency. ### Macroeconomic outlook and key projections - Growth projection under program: gradually rise to between 5½ and 6 percent; memo projections list Real GDP (market prices) series: 3.5 (2019/20); 3.4 (2020/21); 6.6 (2021/22); 4.0 (2022/23); 5.3 (2023/24); 5.7 (2024/25); 5.9 (2025/26); 5.9 (2026/27); 6.0 (2027/28). - Inflation expectations: - CPI inflation (end of period): 5.6 (2019/20); 4.9 (2020/21); 13.2 (2021/22); 14.8 (2022/23); 8.7 (2023/24); 7.0 (2024/25) onward to 7.0 through 2027/28. - CPI inflation (period average): 5.7 (2019/20); 4.5 (2020/21); 8.5 (2021/22); 15.8 (2022/23); 11.1 (2023/24); 7.6 (2024/25); 7.0 (2025/26) onward. - Public debt and primary balance targets: - General government debt projection: reduce to around 78 percent of GDP by FY2026/27 (tables: Gross general government debt series include 88.5 (2021/22); 85.5 (2023/24); 77.9 (2026/27)). - Primary surplus targets: sustained primary surplus of around 1.7 percent of GDP in FY2022/23, 2.1 percent in FY2023/24, and towards 2½ percent thereafter (MEFP and QPCs: 1.7 (FY2022/23); 2.1 (FY2023/24); 2.3 thereafter in some tables). - Current account and reserves: - Current account deficit: improve towards 2 percent of GDP over the medium term; table series: -3.5 (2021/22); -3.0 (2022/23); -2.5 (2023/24); -2.4 (2024/25); -2.1 (2025/26); -1.8 (2026/27). - Reserve rebuilding projected NIR accumulation assumed: gradual accumulation of $6.0 billion in FY2022/23 (QPC), US$10.1 billion in FY2023/24; NIR projected to increase to $41.5 billion by end of the Fund-supported program, raising gross reserves to around 120 percent of the ARA metric. - Baseline assumptions: - Baseline assumes modest return of portfolio flows with nonresident holdings of local currency debt converging back to end-2020-21 SBA levels only by end-FY2025/26. - Program includes an adjustor to increase the NIR target if nonresident inflows are larger than projected. ### Recent developments and macro performance (selected figures) - Growth outturn for FY2021/22: 6.6 percent. - Inflation at end of FY2021/22: 13.2 percent; inflation reached 16.2 percent (y/y) in October (FY2022/23). - International reserves (Tier 1 + Tier 2): recovered to $50 billion as of end-FY2020/21 (Tier 1 $39.4 billion; Tier 2 $10.1 billion); declined to $36.9 billion after March 2022 shocks; $32.2 billion by end-August (FY2022/23 reference); foreign reserve assets as of September 30, 2022: $32,671 million. - Banks’ net foreign assets (NFAs): -$11.8 billion by end-February 2022 (a decrease of more than $18 billion since February 2021 peak); banks’ NFAs = -$12 billion by end-August 2022. - Exchange rate developments: - Pound depreciated by 16 percent on March 21, 2022; depreciated by 23 percent (October 26 to November 7); overall pound depreciated by 55 percent between end-February and early November 2022. - CBE announced shift to a durably flexible exchange rate regime on October 27, 2022. - CBE monetary actions: - Upfront monetary tightening: policy rates increased by 100 bps to 9.25 percent on March 21; cumulatively raised by 500 bps since March with policy rate (overnight deposit) at 13.25 percent as of October. - Reserve requirement increased from 14 percent to 18 percent in September. - State-owned banks issued high-yield CDs: 1-year at 18 percent; later 3-year at 17.25 percent. ### Fiscal policy, revenue mobilization, and social protection - Government social protection and food security measures: EGP 130 billion (1.7 percent of GDP) package announced in March; additional EGP 70 billion social protection package announced in October (to be accommodated within the budget envelope). - Committed social spending: at least EGP 153 billion in FY2022/23 (IT). - Takaful and Karama expansion: expand to cover 5 million households by end-January 2023 (SB); additional expansion of 1 million households announced in July. - Revenue mobilization targets: - Aim to increase tax-to-GDP ratio by around 2 percentage points over the medium term via the Medium-Term Revenue Strategy (MTRS). - Identify tax policy measures to be implemented in FY2023/24 to ensure an increase of 0.3 p.p. in the tax-to-GDP ratio (end-February 2023 SB). - Potential tax policy measures and estimated yields (percent of GDP): - Phase out CIT exemptions in free zones: 0.16 - Introduce WHT on external long-term debt: 0.04 - Tax dividends and interest of listed firms: 0.04 - Reform property tax: 0.13 - Simplify VAT (subject all goods other than basic foodstuffs to standard VAT): 0.46 - Increase annual license fee on motor vehicles to about 1% of the value of the vehicle: 0.05 - Multiple compliance improvement strategies total: 0.28 (0.02 + 0.03 + 0.06 + 0.03 + 0.04 + 0.13) - Total estimated yield listed: 1.19 ### Monetary policy transmission and safeguards - CBE commitments and operational rules: - Flexible exchange rate reflecting FX supply and demand; cease direct provision of FX from reserves for government entities’ imports (MEFP ¶9). - No recourse to foreign exchange interventions or use of banks’ NFAs to stabilize exchange rate level; interventions guided by a volatility-based framework. - Strict limits on commercial banks’ net FX open position; early corrective actions for banks approaching limits (continuous SB). - Repeal of Letter No. 49 of February 13, 2022 (mandating use of LCs) by end-December 2022 (SB). - CBE will not introduce or intensify restrictions on payments and transfers for current international transactions (continuous performance criteria). - Monetary policy operational targets: - Daily overnight interbank rate to remain within 50 bps of the mid-corridor rate (indicative target). - CBE to ensure full pass-through of the policy rate to the interbank market and discontinue subsidized lending schemes. - Inflation target and consultation bands: - CBE’s inflation central value: 7 percent. - Inner bands: 5 to 9 percent (staff engagement if outside). - Outer bands: 3 to 18 percent in December 2022; 3 to 15 percent in June 2023 — consultation with Executive Board if inflation outside. ### Structural reform agenda and divestment plan - Structural objectives: reduce state footprint, level playing field between public and private sectors, enhance governance, reduce trade barriers, and facilitate private-sector-led growth and job creation. - State ownership and SOE reforms: - Publish state ownership policy endorsed by the President (end-December 2022 SB). - Identified initial group of companies for SFE pre-IPO fund; objective to raise $2.5 billion in the first phase of pre-IPO stake sales by June 2023. - Proceeds from SFE and sales to sovereign wealth funds to be deposited in earmarked CBE account and accrue to international reserves; divestment proceeds recorded as FDI once sales take place. - Requirements: biannual SOE financial accounts submission to Ministry of Finance; publish procurement contracts exceeding EGP 20 million within 30 days (continuous SB). - Trade facilitation and business climate: - Adopt risk-based customs procedures to reduce time for release of imports at Port of Alexandria from 16 days in August 2021 to 12 days in March 2023 (end-May 2023 SB). - Governance and anticorruption: - Digitalize asset declarations; require submission at least once every three years during EFF and intend to move to annual submissions; publish compliance rates. ### Debt dynamics, DSA, and capacity to repay - Sovereign risk and DSA: - Overall final assessment: High (Annex II). - Debt sustainability: Sustainable but not with high probability. - Public debt path (Baseline public debt percent of GDP selected series): - Actual 2022: 95.2; 2023: 95.6; 2024: 92.1; 2025: 89.5; 2026: 86.5; 2027: 83.0; 2028: 79.5; 2029: 75.8; 2030: 72.2. - Gross financing needs (GFN, percent of GDP selected series): 28.8 (2022); 30.2 (2023); 36.9 (2024); 40.6 (2025); 39.2 (2026); 35.4 (2027). - Fund exposure and capacity to repay: - Fund credit outstanding as a share of gross reserves peaked at 60.7 percent in FY2021/22 and is projected to decline to around 7 percent by the end of the Fund-supported program. - Fund repurchases and charges (Millions of SDR) projection highlights: 1,688.0 (2022/23); 4,109.2 (2023/24); 4,891.9 (2024/25). - Fund credit outstanding (Millions of SDR) projection highlights: 13,278 (2022/23); 10,455 (2023/24); 6,644 (2024/25); 4,865 (2025/26); 3,836 (2026/27). - Proposed EFF schedule (availability dates and amounts): nine equal purchases of 261.13 (Millions of SDR) each on dates from December 16, 2022 through September 15, 2026 totaling 2,350.17 (Millions of SDR). - Under proposed EFF, credit outstanding would peak at SDR 13.7 billion (672 percent of quota) in March/April 2023 and remain above 435 percent of quota until December 2024. - Debt service to the Fund as a ratio of exports of goods and services would rise to 8.1 percent in FY2024/25 before declining. ### Risks, mitigating factors, and recommended policy responses - Key risks: - Durability of the shift to a flexible exchange rate may be challenged by political and social pressures. - Fiscal consolidation amid rising living costs could face social pushback. - Slower-than-expected structural reform implementation and resistance from vested interests. - Global outlook risks (e.g., spillovers from Russia’s war in Ukraine, commodity price shocks, de-anchoring of inflation expectations) could impede reserve rebuilding and economic recovery. - Domestic risk assessments (Annex I) list likelihood and impact for major risks: - Intensifying spillovers from Russia’s war in Ukraine — Relative Likelihood: High; Impact: High. - Commodity price shocks — Relative Likelihood: High; Impact: High. - De-anchoring of inflation expectations and stagflation — Relative Likelihood: Medium; Impact: Medium/High. - Abrupt exchange rate adjustment — Relative Likelihood: Medium; Impact: High. - Limited resumption in tourism revenue — Relative Likelihood: High; Impact: Medium/High. - Materialization of fiscal contingent liabilities — Relative Likelihood: Medium; Impact: Medium/High. - Mitigating factors: - Authorities’ favorable track record under previous Fund-supported programs, strong ownership, frequent and candid communication, and political support at the highest level. - Program design includes adjustors (NIR, divestment proceeds) and monitoring clauses (banks’ NFA consultation threshold of cumulative $2 billion decline over three months). ### Monitoring, conditionality, and implementation timetable - Program monitoring: - Semi-annual reviews: first review expected in March 2023 (observance of end-December 2022 performance criteria) and second review in September 2023 (observance of end-June 2023 performance criteria). - Monitoring instruments: prior action, quantitative performance criteria (including NIR floors and primary balance targets), indicative targets, and structural benchmarks. - Selected quantitative targets and definitions: - Net international reserves (NIR) floor with multiple adjustors (program disbursements, external commercial borrowings, stock of local-currency T-bills/T-bonds held by nonresidents, repo margin calls, FX intervention). - Program disbursement projections (cumulative external program disbursements from September 30, 2022): $1,591 million (end-December 2022); $3,183 million (end-March 2023); $5,696 million (end-June 2023). - Program exchange rates for FY2022/23 as of September 30, 2022: SDR per US$ 0.781323; Euro per US$ 1.0293; British Pound per US$ 0.9213; Japanese Yen per US$ 144.7094; Saudi Riyal per US$ 3.7576; Chinese Yuan per US$ 7.1305; Egyptian pound per US$ 19.4970 (CBE official buy rate). - Selected prior actions and structural benchmarks (examples and timing): - Issue CBE circular discontinuing subsidized lending initiative and PM decree moving remaining initiatives to budget (prior action). - Repeal Letter No. 49 (LC requirement) by end-December 2022 (SB). - Publish CAO’s three most recent annual audit reports by end-January 2023 (SB). - Expand Takaful and Karama coverage to 5 million households by end-January 2023 (SB). - Publish state ownership policy endorsed by the President by end-December 2022 (SB). - Adopt risk-based customs procedures and reduce Port of Alexandria release time to 12 days by March 2023 (end-May 2023 SB). *Source: Excerpts from ARAB REPUBLIC OF EGYPT — REQUEST FOR EXTENDED ARRANGEMENT UNDER THE EXTENDED FUND FACILITY; IMF staff report and MEFP (1egyea2023001).* ### 261.13 million (equivalent to about US$ 347 million), which will help meet the balance of ### 1egyea2023001 - 261.13 million (equivalent to about US$ 347 million), which will help meet the balance of ### Financing package and program scope - EFF request: 46-month Extended Fund Facility (EFF) of 115.4 percent of quota (SDR 2,350.17 million or about $3 billion). - Immediate financing noted: 261.13 million (equivalent to about US$ 347 million) to help meet the balance of payments need and provide support to the budget. - Expected catalyzed additional financing: about US$14 billion from Egypt’s international and regional partners, including new financing from GCC countries and other partners through ongoing divestment of state-owned assets and traditional forms of financing from multilateral and bilateral creditors. - Additional facility request: authorities requested access under the Resilience and Sustainability Facility (RSF), which could provide up to an additional SDR 1 billion; RSF discussions expected in the context of future EFF reviews. - Financing strategy highlights: - Substantial financing will come from regional partners, including in the form of divestment of state-owned assets. - Proceeds from certain purchases of equity stakes in state-owned assets will go towards increasing international reserves and closing the financing gap. - GCC countries have committed to roll over deposits at the Central Bank of Egypt and to bring in fresh financing through such investments. ### Program objectives and core policy package - Overarching goals: preserve macroeconomic stability, restore buffers, and pave the way for sustainable, inclusive, and private-sector-led growth. - Core policy components: - A permanent shift to a flexible exchange rate regime to increase resilience against external shocks and to rebuild external buffers. - Monetary policy aimed at gradually reducing inflation in line with the central bank’s targets together with strengthening policy transmission, including by transitioning away from subsidizing lending schemes. - Fiscal consolidation and debt management to ensure downward trajectory in public-debt-to-GDP and contain gross financing needs, while increasing social spending and strengthening social safety net to protect the vulnerable, and managing national investment projects in a manner consistent with external sustainability and economic stability. - Wide-ranging structural reforms to reduce the state footprint, level the playing field across all economic agents, facilitate private-sector-led growth, and strengthen governance and transparency in the public sector. ### Expected macroeconomic and policy effects - Exchange rate policy: - Permanent shift to a flexible exchange rate regime intended to mitigate external shocks, prevent re-emergence of imbalances, and allow monetary policy to focus on price stability. - Monetary policy: - Upfront monetary tightening was implemented (policy rates increased by 100 bps to 9.25 percent on March 21). - Transition away from subsidizing lending schemes and efforts to strengthen policy transmission and deepen the foreign exchange market. - Fiscal policy: - Fiscal consolidation aimed at ensuring medium-term debt sustainability and reducing gross financing needs. - Expansion of social spending and strengthening of the social safety net to alleviate poverty and protect the vulnerable (government package of social protection and food security measures worth EGP 130 billion (1.7 percent of GDP)). - Structural reforms: - Reduce the state footprint, level playing field between public and private sectors, enhance governance and transparency, reduce trade barriers, and facilitate private-sector-led growth and job creation. ### Recent developments and context affecting the program - COVID-19 period and aftermath: - FY2020/21 primary surplus: 1.4 percent of GDP. - General government debt rose to 89.9 percent of GDP from 86.2 percent in the prior year. - CBE FX buffers (Tier 1 + Tier 2) recovered to $50 billion as of end-FY2020/21 (Tier 1 $39.4 billion; Tier 2 $10.1 billion). - Inflation contained at 4.9 percent at end-FY2020/21. - Pre-war and war-related pressures: - By end-February 2022, banks’ net foreign assets (NFAs) stood at -$11.8 billion, a decrease of more than $18 billion since February 2021 peak. - Between January and March, gross international reserves (Tier 1 + Tier 2) declined by $12.1 billion to $36.9 billion. - Nonresident outflows of about $20 billion pressured the EGP and local currency debt market during February–March. - CBE response included FX market interventions, $13 billion in short-term FX deposits from GCC partners, and allowing the EGP to devalue by around 15 percent on March 21. - State-owned banks issued 1-year high-yield (18 percent) certificates of deposit (CDs) to tighten liquidity and stem EGP pressure. - Government social measures included expansion of Takaful and Karama and temporary increases in benefits for poorest ration card holders; additional expansion of 1 million households under Takaful and Karama announced in July. ### Exceptional access, capacity to repay, and risks - Exceptional access justification: Egypt already exceeded the cumulative access limit of 435 percent of quota under the 2020–21 SBA; staff assesses that Egypt meets criteria for exceptional access. - Capacity to repay: assessed as adequate, albeit with some risks. - Risks to program implementation: - Durability of shift to a flexible exchange rate remains to be proven; CBE may face political and social pressure to reverse course. - Fiscal consolidation amid rising living costs could face political and social pushback. - Structural reforms will take time and may encounter resistance from vested interests. - Global outlook risks weigh on pace of rebuilding reserves and unwinding imbalances. - Mitigating factors: - Authorities’ favorable track record under previous Fund-supported programs, strong ownership, frequent and candid communication, and political support at the highest level. ### Operational and procedural notes - The authorities requested RSF access (up to SDR 1 billion); RSF discussions expected during future EFF reviews. - Staff supports the authorities’ request for the EFF arrangement. *ARAB REPUBLIC OF EGYPT — REQUEST FOR EXTENDED ARRANGEMENT UNDER THE EXTENDED FUND FACILITY (Executive Summary, December 2, 2022). International Monetary Fund.* ### 4. Notwithstanding higher oil and food prices and restrictions on imports, the pace of ### 4. Notwithstanding higher oil and food prices and restrictions on imports, the pace of ### Recent developments and macro performance - Growth outturn for FY2021/22: 6.6 percent. - Inflation at end of the fiscal year (FY2021/22): 13.2 percent. - By end-August (FY2022/23 reference): international reserves (Tier 1 + Tier 2) = $32.2 billion; banks’ NFAs = -$12 billion. - Inflation reached 16.2 percent (y/y) in October (FY2022/23). - Exchange rate: one-off adjustment in March; subsequent crawling depreciation trend with greater volatility but “much lower than EM peers.” - CBE policy actions: tightened liquidity, increased interest rates by another 200 bps in May, raised reserve requirement from 14 percent to 18 percent in September. - Delays in processing letters of credit (LCs) created a backlog, compressing imports and contributing to product shortages. - Domestic debt market: issuances skewed towards short maturities at elevated rates. - Sovereign external spreads: declined from their peak in July but remained higher than pre-war period; authorities have not tapped international market after March 2022. ### Policy actions taken in October (National Economic Conference and subsequent measures) - National Economic Conference (Oct 23–25): highlighted need for exchange rate flexibility, elimination of import backlogs, reinvigorate private-sector-led growth and attract FDI. - Ministry of Finance announced social protection package increase: EGP 70 billion (to be accommodated within the budget envelope). - CBE on October 27: - Raised interest rates by 200 bps. - Announced shift to a durably flexible exchange rate regime where FX supply and demand determine the EGP. - Exchange rate depreciated by 16.2 percent on first day of trading and further some 6 percent by early November. - Increased import value threshold for exemption from the LC requirement to US$500,000 from US$5,000. - Announced that Letter No. 49 of February 13th, 2022 (mandating use of LCs for import finance) would be repealed by December 2022. - Allowed banks to immediately begin offering FX forwards to corporate clients for commercial transactions and signaled intention to develop the FX derivatives market. - State-owned banks (NBE and Banque Misr) announced issuance of 3-year certificates of deposits at 17.25 percent. ### Fiscal and statistical developments - Adoption of new GDP statistics (with IMF Statistics Department TA) led to upward revaluation of nominal GDP by around 5 percent. - General government debt-to-GDP at end of fiscal year: 88.5 percent. - Sales of minority stakes in four state-owned companies to Saudi Arabia's Public Investment Fund: $1.3 billion (August). - Draft state ownership policy and state divestment program progressing; decision to enhance independence of the Economic Competition Authority. ### Financial sector indicators and vulnerabilities - Aggregate financial soundness indicators as of June 2022: - Liquidity coverage ratios: 990 percent in local currency and 197.1 percent in foreign currency. - Ratio of tier 1 capital to risk weighted assets: 17.1 percent. - Non-performing loans: 3.2 percent of total loans. - Large exposure to the public sector: around 50 percent of banking system’s total assets. - Local currency deposit growth: monthly growth of 21–25 percent (y/y) since early 2020. - Foreign currency deposits: around 15 percent of total deposits as of July 2022. ### Program objectives and policy pillars (46-month EFF-supported program) - Program aims: sustainably address macroeconomic vulnerabilities and promote private-sector-led growth and job creation. - Three broad pillars: - Exchange rate and monetary policies: restore external resilience and maintain price stability; improve functioning of FX market; rebuild reserve buffers; anchor inflation. - Continued fiscal discipline and fiscal structural policies: maintain market confidence; ensure downward trajectory of debt-to-GDP; strengthen budgetary process; improve budget composition to make room for social spending. - Broad-based structural reforms: reduce state footprint; increase private sector role; gradual exit of public sector from non-strategic sectors; level playing field between SOEs and private firms; remove barriers to trade; enhance transparency and governance. ### Macroeconomic outlook and projections under the program - Growth projection under program: gradually rise to between 5½ and 6 percent. - Current account deficit: improve towards 2 percent of GDP over the medium term. - Inflation: expected to converge back to around 7 percent by FY2024/25. - Primary surplus targets: sustained primary surplus of around 2.1 percent of GDP by FY2023/24 and towards 2½ percent thereafter. - General government debt projection: reduce to around 78 percent of GDP by FY2026/27. - Reserve rebuilding: projected NIR accumulation assumed: - Gradual accumulation of $6.0 billion in FY2022/23 (quantitative performance criterion (QPC)). - US$10.1 billion in FY2023/24. - NIR projected to increase to $41.5 billion by end of the Fund-supported program, raising gross reserves to around 120 percent of the ARA metric. - Baseline assumes modest return of portfolio flows with nonresident holdings of local currency debt converging back to end-2020-21 SBA levels only by end-FY2025/26. - Program includes an adjustor to increase the NIR target if nonresident inflows are larger than projected. ### Risks and uncertainties - Near-term major risks: - Greater exchange rate misalignment than assumed in baseline. - Prolonged inflationary pressures undermining social cohesion. - Financing costs remaining high, further shortening of domestic debt maturities, and limited external market access. - Medium-term risks to debt sustainability: - Lower growth and tighter domestic and external financing conditions. - Challenging external market conditions reducing reserve build-up. - Potential reversion to limiting exchange rate flexibility. - Slower-than-expected progress on structural reforms. - COVID-19 risk: - Vaccination rates: 38 percent fully vaccinated, 51 percent with at least one dose. ### Monetary and exchange rate policy framework and safeguards - CBE commitments and operational rules: - Flexible exchange rate that reflects FX supply and demand; cease direct provision of FX from reserves for government entities’ imports (MEFP ¶9). - No recourse to foreign exchange interventions or use of banks’ net foreign assets to stabilize or guarantee exchange rate level; interventions guided by a volatility-based intervention framework. - Strict application of limits on commercial banks’ net FX open position without granting exemptions; early corrective actions for banks approaching limits (continuous structural benchmark (SB)). - CBE to monitor individual banks’ net open position, net foreign assets, and foreign exchange transactions; consult with Fund staff if aggregate banks’ NFAs show a cumulative decline of $2 billion over a three-month period. - Repeal of instructions in Letter No. 49 by end-December 2022 (SB) to alleviate import delays. - CBE will not introduce or intensify restrictions on making payments and transfers for current international transactions, multiple currency practices, and import restrictions for balance of payments reasons (continuous performance criteria; see TMU). - One identified exchange restriction remains: 100 percent cash margin requirement on import payments (long-standing since late 1990s); authorities do not plan to remove it and are not requesting Board approval of this exchange restriction. - NIR and reserve objectives: - At end-June 2022, gross international reserves (Tier 1 + Tier 2) = 62.2 percent of the ARA metric. - Fund-supported program targets NIR accumulation via market FX purchases rather than transactions with nonresident investors to avoid creating an expectation investors could tap the buffer on exit. - Monetary policy stance: - Since March, CBE cumulatively raised interest rates by 500 bps; policy rate (overnight deposit) at 13.25 percent as of October. - Reserve requirements increased by 4 percent in September. - CBE’s inflation target central value: 7 percent with initial consultation bands: - Inner bands: 5 to 9 percent — staff engagement if inflation falls outside. - Outer bands: 3 to 18 percent in December 2022, and 3 to 15 percent in June 2023 — consultation with Executive Board if inflation falls outside. - Monetary policy consultation clause (MPCC) to monitor inflation performance; bands set wide initially and narrow over time. *Source: ARAB REPUBLIC OF EGYPT — INTERNATIONAL MONETARY FUND (excerpt provided).* ### 15. The CBE will further strengthen monetary policy transmission by ensuring full pass- ### 1egyea2023001 - 15. The CBE will further strengthen monetary policy transmission by ensuring full pass- ### Monetary policy and CBE actions - The CBE will ensure full pass-through of the policy rate to the interbank market and discontinue subsidized lending. - The CBE will conduct open market operations such that the daily overnight interbank rate remains within 50 bps of the mid-corridor rate (indicative target (IT)). - Transition away from subsidized lending schemes—which account for a substantial portion of credit to the private sector—to allow lending rates in the economy to be anchored to the policy rate. - The CBE has issued a circular to discontinue the CBE’s subsidized lending initiative for the industrial, construction, and agricultural sectors and the current balance for this scheme will be on a liquidation basis according to the run off of loans. - The Prime Minister has issued a decree to move the decision making, recording, supervision, and costs of the remaining initiatives going forward to the budget sector to more transparently reflect the use of public resources for these subsidies (prior action). - Going forward, the CBE will also refrain from extending, renewing, or introducing any subsidized lending schemes (continuous SB). ### Fiscal policy: objectives and targets - Fiscal policy will aim to reduce Egypt’s high public debt and gross financing needs through fiscal consolidation and active debt management; Egypt’s debt is assessed to be sustainable but not with high probability, and overall risks of sovereign stress are high, with the interest burden taking up sizable budget space (Annex II). - Agreed targets to reduce general government debt to around 78 percent of GDP by end of the Fund-supported program in FY2026/27: - Achieve a primary balance of 1.7 percent of GDP in FY2022/23, 2.1 percent in FY2023/24, and 2.3 percent of GDP during the remainder of the EFF (QPCs). - A ceiling on gross debt of the budget sector (IT). - The primary balance target will be adjusted up (and the budget sector debt target adjusted down) by the divestment proceeds flowing to the budget to capture upside risks from the government’s IPO program. - Debt maturity and issuance targets: - Authorities rolled over about EGP 245 billion (2.6 percent of GDP) of 2-year non-marketable debt held by local banks into marketable debt with a maturity of 5 years. - Started issuing 3-year variable rate bonds to develop debt markets beyond the short end. - Program IT on average maturity of gross local-currency debt issuances: reach 0.97 years by end of FY2022/23. - Issuance maturity is projected to reach around 2 years by end of the program. - Authorities should continue efforts to improve debt management with IMF technical assistance. ### Revenue mobilization and tax measures (potential yields in percent of GDP) - Tax policy and revenue administration measures based on the Medium-Term Revenue Strategy aim to increase tax-to-GDP ratio by around 2 percentage points over the medium term. - Authorities plan to identify tax policy measures to be implemented in FY2023/24 to ensure an increase of 0.3 p.p. in the tax-to-GDP ratio (end-February 2023 SB). - Ministry of Finance aims to publish by April 2023 an annual tax expenditure report (SB). - Property tax reforms: advance through digitalization (end-August 2023 SB), removal of exemptions, and revision of the valuation model; plan to reform income tax to eliminate loopholes and steepen the tax schedule (MEFP ¶14). - Potential Tax Policy and Revenue Administration Measures and Estimated Yields (In percent of GDP): - Phase out CIT exemptions in free zones: 0.16 - Introduce WHT on external long-term debt: 0.04 - Tax dividends and interest of listed firms: 0.04 - Reform property tax: 0.13 - Simplify VAT by subjecting all goods, other than basic foodstuffs, to standard VAT and adjusting excise rates as needed.: 0.46 - Increase the annual license fee on motor vehicles to about 1% of the value of the vehicle: 0.05 - Compliance Improvement Strategy - VAT: 0.02 - Compliance Improvement Strategy - PAYE: 0.03 - Compliance Improvement Strategy - Large and Professionals Segments: 0.06 - Compliance Improvement Strategy - Real Estate Transaction Tax: 0.03 - Compliance Improvement Strategy - Customs: 0.04 - Compliance Improvement Strategy - International Tax: 0.13 - Total: 1.19 - Note: Table sources and notes cited: IMF staff estimates based on February 2020 Tax Policy Report and July 2021 Revenue Administration Report. The table excludes policies already enacted whose implementation will yield higher tax revenues over the medium-term contributing to the 2 percentage point goal under the MTRS. ### Fuel pricing and social compensation - The fuel price indexation mechanism will be fully implemented, with targeted compensation for the most vulnerable. - Continuous implementation of the indexation mechanism throughout the Fund-supported program (continuous SB) will protect the budget and preserve the integrity of the reform under the 2016-19 EFF. - Authorities will refrain from implementing any formulaic decreases in fuel prices until fuel subsidies (for each product subject to the mechanism) have been eliminated in the previous fiscal year (MEFP ¶16). - To mitigate the impact, targeted support can be delivered via existing programs such as Takaful and Karama. - To offer temporary relief to the middle class, an increase in the personal income tax exemption (with a cost of 0.1 percent of GDP) was submitted to Parliament. ### Poverty, social protection, and spending commitments - Expand Takaful and Karama conditional cash transfer program to cover 5 million households by end-January 2023 (SB). - Committed at least EGP 153 billion to social spending in FY2022/23 (IT). - Expand coverage of the social registry to 50 million people by end-December 2023 to introduce targeting in other social protection schemes (MEFP ¶18). ### Public Financial Management (PFM) and transparency - Ministry of Finance will publish the three most recent annual audit reports (FY2018/19, FY2019/20, and FY2020/21) of fiscal accounts by the Central Auditing Organization (CAO) and introduce a binding requirement for timely publication of future audit reports (end-January 2023 SB). - Enact by end-June 2023 the executive regulations of the PFM law, including: - key elements of the budget calendar starting with submission and approval of the fiscal strategy paper; - process to update and publish the medium-term budget framework; - requiring all entities to separate baseline and new policy initiatives; - a climate section to provide a clear mandate for climate-related activities (SB). - Ministry of Finance will compile and publish an annual report on payment arrears, including those owed to key SOEs (continuous SB). - Transition both the budget sector and general government fiscal and public debt accounting to GFSM 2014 standards during the Fund-supported program (MEFP ¶20). ### Financial sector policies and safeguards - Authorities confident the banking system can withstand the more depreciated exchange rate but will remain vigilant for emerging stress. - Exchange rate movements: - March devaluation of around 15 percent. - By early November, nominal exchange rate had depreciated by a further 32 percent. - Foreign currency exposure limits: 10 percent of regulatory capital for any one currency and 20 percent for all foreign currency exposures. - CBE regulatory stress tests reportedly point to adequate capital and liquidity buffers under large, combined exchange rate and interest rate shocks. - Financial deepening and inclusion measures: - Initiative requiring 25 percent of banks’ lending to be directed towards SMEs. - Monthly monitoring of bank-by-bank NFAs under the program. - Over the next year, CBE will develop a program to reduce its exposure to public banks through subordinated debt holdings and its ownership in the Credit Guarantee Company (MEFP ¶21). - CBE will publish semi-annual financial stability reports, including translation to English. - Ensure all instructions and guidance to banks are issued through formal written notification channels. - Following IMF technical assistance, establish a dedicated bank resolution unit at the CBE. ### Structural reform agenda - Aim to increase annual growth to 6 percent over the medium term through structural reforms reducing the role of the state, leveling the playing field, and strengthening the business climate. - State ownership and SOE reforms: - A comprehensive state ownership policy endorsed by the President will cover all SOEs and articulate objectives, rationale, and principles; define strategic sectors; develop governance framework for gradual withdrawal from non-strategic sectors (end-December 2022 SB). - Develop measures to ensure competitive neutrality in line with OECD principles (MEFP ¶23, 1st bullet). - Strengthen transparency and governance of SOEs: biannual submission of financial accounts to Ministry of Finance; publish data and quantify subsidies; introduce performance contracts and benchmarking (MEFP ¶23, 3rd and 4th bullets). - Move towards more centralized oversight of SOEs over the medium term. - Level playing field and procurement transparency: - Publish within 30 days of the end of each month information on all procurement contracts exceeding EGP 20 million, including bids and winners (continuous SB). - Clarify conditions for direct contracting under Law No. 182 on Regulating Public Procurement; align SOE procurement rules with government procurement law; remove tax exemptions for SOEs; strengthen treatment of SOEs under competition law (MEFP ¶23, 5th bullet). - Competition policy: - Seek parliamentary approval of amendments to the competition law adding a chapter on mergers and acquisitions (end-December 2022 SB). - Amendments to empower the Egyptian Competition Authority (ECA) to regulate mergers and acquisitions that meet certain thresholds in all sectors outside banking and financial services. - Banking and financial services remain under CBE and Financial Regulatory Authority oversight, with the ECA able to suggest measures to protect competition. - Obtain approval of competition law amendments submitted to Parliament in January 2019 to strengthen ECA independence (MEFP ¶23, 5th bullet). - Trade facilitation and business climate: - Adopt risk-based customs procedures to reduce time for release of imports at Port of Alexandria from 16 days in August 2021 to 12 days in March 2023 (Time Release Study) (end-May 2023 SB). - Publish government support provided to exporters and streamline land allocation process to improve investment attractiveness (MEFP ¶23, 6th bullet). - Governance and anticorruption: - Digitalize and automate submission and processing of asset declaration forms; submission required at least once every three years during EFF, with intent to move to annual submissions and widen coverage to top officials in all SOEs; publish annual report showing compliance rate by group of public-sector employees (MEFP ¶23, 6th bullet). ### Program modalities and financing - Access under the 46-month EFF proposed at SDR 2,350.17 million (115.4 percent of quota, equivalent to about US$ 3 billion), with prospective additional access of up to SDR 1 billion under the requested Resilience and Sustainable Facility (RSF). - Staff projects a financing gap of around US$17 billion over the next 46 months with the policies outlined in the MEFP. - Staff proposes that access be evenly distributed over the program. - Authorities have requested financing under the RSF, which could unlock up to an additional SDR 1 billion (about US$1.3 billion). RSF discussions will take place in the context of upcoming EFF reviews. *Source: IMF staff summary of the Memorandum on Economic and Financial Policies (MEFP) as provided in the supplied content.* ### 26. An ambitious divestment plan underpins the authorities’ financing strategy under the ### 1egyea2023001 - 26. An ambitious divestment plan underpins the authorities’ financing strategy under the ### Divestment plan and financing strategy - Authorities will list state-owned companies on the Egyptian Exchange and offer stakes in the Sovereign Fund of Egypt’s (SFE’s) pre-IPO fund to monetize state-owned assets. - An initial group of companies for the pre-IPO fund has been identified, with an objective to raise $2.5 billion in the first phase of pre-IPO stake sales by June 2023. - Proceeds from sales of state-owned assets through the SFE and direct sales to regional sovereign wealth funds will be deposited in an earmarked account at the CBE and will accrue to international reserves, helping to fill the financing gap under the program (MEFP ¶23). - Divestment proceeds through the SFE and sales to sovereign wealth funds are included in financing to fill the financing gap; once divestments and sales have taken place, these will be recorded in the balance of payments as FDI. ### Program financing and commitments - The Fund-supported program is fully financed with firm commitments for the first 12 months of the arrangement, including contributions from the World Bank, AIIB, AfDB, AMF, and China Development Bank, as well as proceeds from sales of state-owned assets through the SFE and to sovereign wealth funds. - Staff assesses good prospects for the remainder of the arrangement to be fully financed, including through multilateral support, additional external issuances, and larger policy adjustments, given GCC partners’ public support, demonstrated initial interest, and a substantial pipeline of identified state assets. ### Egypt’s capacity to repay and Fund exposure - Fund credit outstanding as a share of gross reserves peaked at 60.7 percent in FY2021/22 and is projected to decline to around 7 percent by the end of the Fund-supported program. - Debt service to the Fund as a ratio of exports of goods and services would rise to 8.1 percent in FY2024/25 before declining. - The proposed EFF arrangement would have a modest impact on the Fund’s liquidity position; risks to Fund income are high initially but expected to decline gradually. - Near-term increase in the Fund’s high credit exposure to Egypt is expected to decrease over the medium term when including past arrangements. - Failure of the program due to partial implementation would pose reputational risks for the Fund; conversely, not supporting Egypt through an EFF would also raise reputational risks given pronounced balance-of-payments difficulties. ### Monitoring, targets, and safeguards - The Fund-supported program will be monitored through semi-annual reviews: the first review expected in March 2023 and the second in September 2023, requiring observance of end-December 2022 and end-June 2023 performance criteria respectively. - Quantitative targets and timelines: - Test dates: December 2022 and June 2023, with indicative targets for the intermediate quarter. - Performance criteria: net international reserves, the primary balance, and non-accumulation of external debt payment arrears. - Indicative targets: tax revenues, social spending, average maturity of gross local currency debt issuances, gross debt of the budget sector, and the overnight interbank rate. - An updated safeguards assessment of the CBE has been initiated and will be completed by the first review. The 2020 assessment found strong governance and control environment but noted the need to fully align the CBE’s financial reporting with Egyptian Accounting Standards/IFRS. ### Exceptional access: criteria assessment - Criterion 1 (exceptional BOP pressures): Met. Estimated financing gap of $17 billion will need to be closed with official financing, including from the Fund. Egypt already exceeded normal access limit under the SBA. - Criterion 2 (debt sustainability): Met. Staff assesses public debt to be sustainable but not with high probability under the program’s baseline and policy framework. Adequate safeguards are judged to be in place to meet EA2; sufficient restructurable private sector debt could be available after the program if adverse shocks materialize. Mitigating factors include the high share of domestic currency debt and GCC members’ commitment to roll over $28 billion in official deposits at the CBE. Assessment hinges critically on steadfast implementation of fiscal consolidation and policies to strengthen growth, exports, and extend debt maturities. - Criterion 3 (prospect of market access): Met. Egypt regained market access after COVID-19 with total issuances of $11¾ billion during May 2020–September 2021; placed a Samurai Bond of $½ billion in March 2022. Close Fund engagement is expected to reinforce investor confidence and restore market access adequate to meet Fund obligations. - Criterion 4 (prospect of program success): Met. Authorities demonstrate strong program ownership and track record from the 2016–19 EFF and 2020–21 SBA. Commitment at the highest political level and ongoing institution building, including IMF capacity development, support the program’s prospects. Managing socio-economic impacts is important to maintain social cohesion. ### Staff appraisal: policy mix, objectives, and risks - Macroeconomic context and challenges: - The war in Ukraine exacerbated existing external pressures from limited exchange rate flexibility and high public debt vulnerabilities, leading to rising current account deficits, falling banks’ NFAs, use of letters of credit to constrain imports, capital outflows, reserve depletion, and higher borrowing costs. - Bold policy actions by the CBE in October and government measures to shield the population are positive steps; global uncertainty and the need for sustainable, inclusive, job-rich growth remain major challenges. - Policy package and objectives: - A durably flexible exchange rate to act as an external shock absorber, with efforts to rebuild FX buffers through non-borrowed sources. - CBE focus on maintaining price stability, strengthening the monetary transmission mechanism, and deepening the FX market under an inflation-targeting, flexible exchange rate regime. - Government goal of restoring and sustaining the primary surplus above 2 percent of GDP to place public debt on a downward trajectory. - Revenue mobilization to create room for priority spending in health, education, and the social safety net. - Continued efforts to lengthen debt maturities and develop the domestic debt market to reduce vulnerabilities from high gross financing needs. - Expansion of social spending to increase targeted protection for the vulnerable during adjustment. - Ambitious structural reform agenda targeting the outsized role of the state, uneven playing field, barriers to trade, and corruption vulnerabilities; structural benchmarks are identified for each review. - Program length reflects time needed to rebuild reserves and implement multi-year reforms to raise growth and job creation. - Key risks: - Risk that the shift to a flexible exchange rate may not be durable and could face political and social pressure to reverse. - Fiscal consolidation amid rising living costs could face political and social pushback. - Structural reforms to reduce the role of the state may face resistance from vested interests and take time to deliver results. - Adverse global outlook could slow recovery and test authorities’ commitment. - Risk mitigation includes frequent and candid public engagement and high-level political support. - Financing from partners and investments: - Policy package aims to unlock substantial additional financing from partners, including investment-based financing. - GCC countries have assured rollover of deposits at the CBE through the end of the Fund-supported program and bringing fresh financing through investments is critical. - Authorities are carrying out an ambitious privatization plan where purchases of equity stakes in state-owned assets constitute financing under the program as proceeds will increase international reserves and close the financing gap. - Authorities are working to launch a pre-IPO fund through which interested parties can submit offers for eligible assets to better establish financing amounts. *Source: Excerpt from IMF staff report (1egyea2023001).* ### 36. Staff supports the authorities’ request for a 46-month extended arrangement under ### 1egyea2023001 - 36. Staff supports the authorities’ request for a 46-month extended arrangement under ### Program support and objectives - Staff supports the authorities’ request for a 46-month extended arrangement under the EFF. - The attached LOI and MEFP present a strong set of policies and the authorities’ commitment to pursue the objectives of the Fund-supported program. ### Macroeconomic outlook and projections - Real GDP (market prices): 3.5 (2019/20); 3.4 (2020/21); 6.6 (2021/22); 4.0 (2022/23); 5.3 (2023/24); 5.7 (2024/25); 5.9 (2025/26); 5.9 (2026/27); 6.0 (2027/28). - CPI inflation (end of period): 5.6 (2019/20); 4.9 (2020/21); 13.2 (2021/22); 14.8 (2022/23); 8.7 (2023/24); 7.0 (2024/25); 7.0 (2025/26); 7.0 (2026/27); 7.0 (2027/28). - CPI inflation (period average): 5.7 (2019/20); 4.5 (2020/21); 8.5 (2021/22); 15.8 (2022/23); 11.1 (2023/24); 7.6 (2024/25); 7.0 (2025/26); 7.0 (2026/27); 7.0 (2027/28). - Unemployment rate (period average): 8.3 (2019/20); 7.3 (2020/21) (no further projections shown). ### Public finances (general government and budget sector) - Gross general government debt (percent of GDP): 86.2 (2019/20); 89.9 (2020/21); 88.5 (2021/22); 88.3 (2022/23); 85.5 (2023/24); 83.5 (2024/25); 81.0 (2025/26); 77.9 (2026/27); 74.8 (2027/28). - General government revenue and grants (percent of GDP): 18.2 (2019/20); 18.6 (2020/21); 18.9 (2021/22); 19.2 (2022/23); 19.6 (2023/24); 20.0 (2024/25); 20.4 (2025/26); 20.4 (2026/27); 20.8 (2027/28). - General government expenditure and NAFA (percent of GDP): 24.9 (2019/20); 25.5 (2020/21); 25.0 (2021/22); 26.5 (2022/23); 27.7 (2023/24); 27.1 (2024/25); 26.8 (2025/26); 26.5 (2026/27); 26.4 (2027/28). - Overall balance (general government, percent of GDP): -6.6 (2019/20); -6.9 (2020/21); -6.1 (2021/22); -7.4 (2022/23); -8.1 (2023/24); -7.2 (2024/25); -6.4 (2025/26); -5.7 (2026/27); -5.4 (2027/28). - Budget sector: Revenue and grants (percent of GDP) 15.9 (2019/20) to 18.3 (2027/28); Expenditure (incl. net acquisition of financial assets) 23.4 (2019/20) to 24.0 (2027/28); Overall budget balance (percent of GDP) -7.5 (2019/20); -7.1 (2020/21); -6.2 (2021/22); -7.8 (2022/23); -8.4 (2023/24); -7.3 (2024/25); -6.5 (2025/26); -5.9 (2026/27); -5.7 (2027/28). - Primary balance (budget sector, percent of GDP): 1.7 (2019/20); 1.4 (2020/21); 1.3 (2021/22); 1.7 (2022/23); 2.1 (2023/24); 2.3 (2024/25); 2.3 (2025/26); 2.4 (2026/27); 2.4 (2027/28). - Energy subsidies (budget sector, percent of GDP): 0.3 (2019/20); 0.3 (2020/21); 0.8 (2021/22); 1.0 (2022/23); 0.9 (2023/24); 0.8 (2024/25); 0.7 (2025/26); 0.6 (2026/27); 0.6 (2027/28). ### External sector and balance of payments - Current account (percent of GDP): -2.9 (2019/20); -4.4 (2020/21); -3.5 (2021/22); -3.0 (2022/23); -2.5 (2023/24); -2.4 (2024/25); -2.1 (2025/26); -1.8 (2026/27); -2.2 (2027/28). - Current account in US$ (billions): -11.2 (2019/20); -18.4 (2020/21); -16.6 (2021/22); -12.6 (2022/23); -11.1 (2023/24); -11.2 (2024/25); -10.8 (2025/26); -10.0 (2026/27); -13.5 (2027/28). - Exports of goods and services (US$, percent change): -7.4 (2019/20); 8.7 (2020/21); 53.1 (2021/22); 15.5 (2022/23); 2.2 (2023/24); -2.2 (2024/25); 0.7 (2025/26); 2.7 (2026/27); 3.6 (2027/28). - Imports of goods and services (US$, percent change): -5.5 (2019/20); 12.6 (2020/21); 23.4 (2021/22); 3.1 (2022/23); 4.0 (2023/24); 5.1 (2024/25); 2.7 (2025/26); 4.3 (2026/27); 7.1 (2027/28). - Gross international reserves (billions of US$): 37.2 (2019/20); 39.4 (2020/21); 31.5 (2021/22); 37.1 (2022/23); 47.2 (2023/24); 51.4 (2024/25); 63.9 (2025/26); 77.8 (2026/27); 79.9 (2027/28). - Reserves in months of next year's imports of G&S: 6.0 (2019/20); 6.8 (2020/21); 3.1 (2021/22); 3.7 (2022/23); 4.6 (2023/24); 4.7 (2024/25); 5.8 (2025/26); 6.8 (2026/27); 6.5 (2027/28). - External debt (percent of GDP): 32.3 (2019/20); 32.6 (2020/21); 32.8 (2021/22); 35.8 (2022/23); 34.8 (2023/24); 32.6 (2024/25); 30.3 (2025/26); 27.5 (2026/27); 25.8 (2027/28). ### Monetary sector and financial soundness - Broad money (M2) annual change (percent): 17.5 (2019/20); 18.0 (2020/21); 23.5 (2021/22); 30.4 (2022/23); 20.2 (2023/24); 12.7 (2024/25); 12.4 (2025/26); 13.9 (2026/27); 13.7 (2027/28). - Reserve money (annual change, percent): 25.1 (2019/20); 15.4 (2020/21); 20.8 (2021/22); 23.1 (2022/23); 22.0 (2023/24); 13.6 (2024/25); 13.2 (2025/26); 14.9 (2026/27); 16.2 (2027/28). - Credit to the private sector (annual change, percent): 19.5 (2019/20); 20.5 (2020/21); 24.3 (2021/22); 18.0 (2022/23); 15.0 (2023/24); 14.0 (2024/25); 14.0 (2025/26); 15.0 (2026/27); 15.0 (2027/28). - Central Bank accounts (end-period, in billions of EGP): Net foreign assets: 157 (2019/20); 224 (2020/21); -153 (2021/22); -382 (2022/23); 293 (2023/24); 557 (2024/25); 271 (2025/26); 170 (2026/27); 128 (2027/28). Reserve money (end-period, in billions of EGP): 856 (2019/20); 988 (2020/21); 1,193 (2021/22); 1,468 (2022/23); 1,791 (2023/24); 2,034 (2024/25); 2,304 (2025/26); 2,646 (2026/27); 3,075 (2027/28). - Financial soundness indicators (fiscal year end / end-Jun 2022): - Regulatory capital to RWA: 13.9 (2014); 14.5 (2015); 14.0 (2016); 14.7 (2017); 15.7 (2018); 17.7 (2019); 20.1 (2020); 22.2 (2021); 20.9 (end-Jun 2022). - NPLs to total loans: 8.5 (2014); 7.1 (2015); 6.0 (2016); 4.9 (2017); 4.1 (2018); 4.2 (2019); 4.0 (2020); 3.4 (2021); 3.2 (end-Jun 2022). - Return on assets: 1.3 (2014); 1.5 (2015); 2.0 (2016); 1.5 (2017); 1.4 (2018); 1.8 (2019); 1.2 (2020); 1.2 (2021); 1.2 (end-Jun 2022). ### External financing, EFF financing schedule, and capacity to repay - External financing needs (billions of US$): 26.6 (2021/22); 23.6 (2022/23); 24.2 (2023/24); 29.7 (2024/25); 19.9 (2025/26); 18.4 (2026/27); 20.8 (2027/28). - External financing sources (billions of US$): 21.2 (2021/22); 23.5 (2022/23); 28.3 (2023/24); 30.9 (2024/25); 31.0 (2025/26); 31.3 (2026/27); 22.4 (2027/28). - Financing gap (from Table 11): 6.1 (2023/24); 6.0 (2024/25); 3.0 (2025/26); 1.4 (2026/27); 0.9 (2027/28); 0.5 (2028/29) — as presented in the memorandum (F=E-D). - Proposed EFF schedule (Table 12): Availability dates and amounts: - December 16, 2022: 261.13 (Millions of SDR), 12.8 percent of quota — Board approval of the EFF. - March 15, 2023: 261.13 (Millions of SDR), 12.8 percent of quota — First review and end-December 2022 quantitative targets. - September 15, 2023: 261.13 (Millions of SDR), 12.8 percent of quota — Second review and end-June 2023 quantitative targets. - March 15, 2024: 261.13 (Millions of SDR), 12.8 percent of quota — Third review and end-December 2023 quantitative targets. - September 15, 2024: 261.13 (Millions of SDR), 12.8 percent of quota — Fourth review and end-June 2024 quantitative targets. - March 15, 2025: 261.13 (Millions of SDR), 12.8 percent of quota — Fifth review and end-December 2024 quantitative targets. - September 15, 2025: 261.13 (Millions of SDR), 12.8 percent of quota — Sixth review and end-June 2025 quantitative targets. - March 15, 2026: 261.13 (Millions of SDR), 12.8 percent of quota — Seventh review and end-December 2025 quantitative targets. - September 15, 2026: 261.13 (Millions of SDR), 12.8 percent of quota — Eighth review and end-June 2026 quantitative targets. - Total: 2,350.17 (Millions of SDR), 115.4 percent of quota. - Capacity to repay (Table 10 highlights): - Fund repurchases and charges (Millions of SDR): 263.04 (2019/20); 85.99 (2020/21); 28.11 (2021/22); 1,688.0 (2022/23); 4,109.2 (2023/24); 4,891.9 (2024/25); 2,652.6 (2025/26); 1,539.2 (2026/27); 1,205.7 (2027/28); 826.1 (2028/29); 535.4 (2029/30). - Fund credit outstanding (Millions of SDR): 12,081 (2019/20); 14,233 (2020/21); 13,711 (2021/22); 13,278 (2022/23); 10,455 (2023/24); 6,644 (2024/25); 4,865 (2025/26); 3,836 (2026/27); 2,817 (2027/28); 2,143 (2028/29); 1,741 (2029/30). - Gross international reserves (Millions of US$): 40,769 (2019/20); 49,581 (2020/21); 32,429 (2021/22); 38,393 (2022/23); 48,501 (2023/24); 52,708 (2024/25); 65,205 (2025/26); 79,056 (2026/27); 81,129 (2027/28); 87,350 (2028/29); 99,420 (2029/30). ### Key quantitative targets and indicative performance criteria (FY2022/23 highlights) - Net international reserves ($ million; floor) and other TMU-defined quantitative targets and indicative targets are specified for end-December 2022, end-March 2023, and end-June 2023 (details in the program tables and Technical Memorandum of Understanding). - Program disbursements at completion of review ($ million; cumulative change) and external program financing assumptions are provided (see program tables for exact figures). *Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1egyea2023001.pdf* ### Annex I. Risk Assessment Matrix ### Annex I. Risk Assessment Matrix ### Global Risks: sources, likelihood, impact, and recommended policy responses - Intensifying spillovers from Russia’s war in Ukraine - Relative Likelihood: High - Impact if Realized: High - Description: Further sanctions resulting from the war and related uncertainties exacerbate trade and financial disruptions and commodity price volatility, with Europe, LICs, and commodity-importing EMs among the worst hit. - Recommended Policy Response: - Improve inclusiveness of government policies, via well-targeted measures and strengthened social safety net. - Allow the exchange rate to act as a shock absorber. - Implement structural reforms to diversify economy and increase exports to add sources of FX revenue. - Commodity price shocks - Relative Likelihood: High - Impact if Realized: High - Description: A combination of continuing supply disruptions (e.g., due to conflicts and export restrictions) and negative demand shocks causes recurrent commodity price volatility and social and economic instability. - Recommended Policy Response: - Improve inclusiveness of government policies, via well-targeted measures and strengthened social safety net. - Allow the exchange rate to act as a shock absorber. - Implement structural reforms to diversify economy and increase exports to add sources of FX revenue. - De-anchoring of inflation expectations and stagflation - Relative Likelihood: Medium - Impact if Realized: Medium/High - Description: Supply shocks to food and energy prices sharply increase headline inflation and pass through to core inflation, de-anchoring inflation expectations and triggering a wage-price spiral in tight labor markets. Central banks tighten monetary policy more than envisaged leading to weaker global demand, currency depreciations in EMDEs, and sovereign defaults. Together, this could lead to the onset of stagflation. - Recommended Policy Response: - Implement the MTDS and MTRS to reduce debt vulnerabilities and build fiscal buffers. - Reprioritize spending to reduce financing pressure. - Allow exchange rate flexibility to be the first line of defense against capital outflows. ### Domestic Risks: sources, likelihood, impact, and recommended policy responses - Abrupt adjustment in the exchange rate - Relative Likelihood: Medium - Impact if Realized: High - Description: A build-up of external imbalances eventually leads to a sudden and large exchange rate adjustment, with implications on sovereign borrowing and debt service costs and pass-through to inflation. - Recommended Policy Response: - Refrain from FX intervention and allow the exchange rate to find its market-clearing equilibrium so it can act as a shock absorber, with two-way movements that reflect FX demand and supply conditions. - Limited resumption in tourism revenue amidst the war in Ukraine - Relative Likelihood: High - Impact if Realized: Medium/High - Description: Lower remittance and tourism inflows impact economic activity and dampen the growth outlook, while reduced FX revenue puts pressure on the exchange rate. - Recommended Policy Response: - Allow the exchange rate to act as a shock absorber. - Implement structural reforms to diversify economy and increase exports to add sources of FX revenue. - Slower-than-expected structural reform implementation - Relative Likelihood: Medium - Impact if Realized: Medium/High - Description: Lack of reform leads to re-accumulation of imbalances, lowering growth potential and leaving country vulnerable to shocks. - Recommended Policy Response: - Re-invigorate the structural reform agenda focusing on priority areas such as SOE reform, competition and the investment climate, trade facilitation, and health and education reform to address key constraints to growth. - Materialization of fiscal contingent liabilities - Relative Likelihood: Medium - Impact if Realized: Medium/High - Description: Loss-making SOEs require government’s recapitalization or repayment of government-guaranteed debt, putting pressure on public expenditure while increasing public debt. - Recommended Policy Response: - Improve transparency, governance, and financial reporting of SOEs. - Develop SOE ownership and reform strategy. - Clearly define and separate commercial and non-commercial activities of SOEs. - Social discontent fueled by rising prices and inequality - Relative Likelihood: Low - Impact if Realized: Medium/High - Description: Social discontent and political instability could weaken support for structural reforms, reduce investment and negatively impact growth. - Recommended Policy Response: - Maintain prudent macroeconomic policies. - Promote inclusive growth and strengthen social safety nets. - Facilitate job creation in the private sector. *Italicized source attribution removed per overlay rules.* --- ### Annex II. Sovereign Risk and Debt Sustainability Framework ### Sovereign Risk Assessment: summary signals and final assessment - Overall final assessment: High - Near term: n.a. / n.a. (Not applicable) - Medium term: - Mechanical signal: High - Final assessment: High - Comments: Medium-term risks are assessed as high, given the high risk signals from both the debt fanchart and GFN modules. The GFN module signals high average gross financing needs over the forecast horizon and large claims of the domestic banking sector on the government. The debt fanchart module signals high risk due to a high level of debt at the end of the forecast horizon and large uncertainty about the debt trajectory reflected in a large fanchart width. - Long term: (not specified) ### Debt Sustainability Assessment - Sustainability assessment: Sustainable but not with high probability - Rationale: Public debt is assessed as sustainable but not with high probability. This assessment is based on the considerable risks due to high debt and gross financing needs, but it reflects consideration for the mitigating impact from the country’s track record of sustaining high gross financing needs, supported by stable financing by domestic banks. - Debt stabilization in the baseline: Yes ### DSA Summary commentary - Staff commentary: Public debt is assessed as sustainable but not with high probability, and overall risks of sovereign stress are assessed as high. Over the medium term, risks are assessed as high given high risk signals from both the GFN and debt fanchart modules. The GFN module signals a high risk given high average gross financing needs over the medium term and the large claims of the domestic banking sector on the government. The debt fanchart module signals high risk because of the high level of debt at the end of the forecast horizon and large uncertainty about the debt trajectory. --- ### Debt Coverage, Structure, and Public Debt Indicators ### Debt coverage and disclosures (coverage and subsectors) - Coverage in this SRDSA: general government (budget sector, National Investment Bank, and Social Insurance Funds). Official creditor deposits at the Central Bank are included in the public debt stock for the purposes of this analysis. - Subsector inclusion: - Budgetary central government: Yes - Extra budgetary funds (EBFs): No - Social security funds (SSFs): Yes - State governments: Yes - Local governments: Yes - Public nonfinancial corporations: No - Central bank: Yes - Other public financial corporations: No ### Staff commentary on public debt structure - Public debt is mainly domestic. - Consequently, most debt is denominated in local currency, held by domestic banks, and is subject to local law. - Debt is primarily in marketable instruments, including a large share of T-Bills, resulting in a relatively short maturity of public debt. --- ### Baseline Scenario (selected figures and projections) Note: Percent of GDP unless indicated otherwise. - Public debt (actual/projections): - Actual 2022: 95.2 - 2023: 95.6 - 2024: 92.1 - 2025: 89.5 - 2026: 86.5 - 2027: 83.0 - 2028: 79.5 - 2029: 75.8 - 2030: 72.2 - 2031: 68.7 - 2032: 65.3 - 2033: 61.9 - Change in public debt (year-on-year): - 2022: 1.8 - 2023: 0.4 - 2024: -3.5 - 2025: -2.6 - 2026: -3.0 - 2027: -3.5 - 2028: -3.5 - 2029: -3.7 - 2030: -3.6 - 2031: -3.5 - 2032: -3.4 - 2033: -3.4 - Contribution of identified flows: - 2022: -5.4 - 2023: -4.5 - 2024: -2.4 - 2025: -2.0 - 2026: -2.7 - 2027: -3.2 - 2028: -3.2 - 2029: -3.4 - 2030: -3.3 - 2031: -3.2 - 2032: -3.2 - 2033: -3.1 - Primary deficit (percent of GDP): - 2022: -0.4 - 2023: -1.5 - 2024–2033: -1.7 (2024–2026), -1.9 (2027–2033) with -1.9 repeated annually from 2027 through 2033 - Noninterest revenues (percent of GDP): - 2022: 18.0 - 2023: 19.0 - 2024: 19.5 - 2025: 19.8 - 2026: 20.3 - 2027: 20.7 - 2028: 20.8 - 2029–2033: 20.8 (repeated) - Noninterest expenditures (percent of GDP): - 2022: 17.6 - 2023: 17.5 - 2024: 17.8 - 2025: 18.2 - 2026: 18.5 - 2027: 18.8 - 2028–2033: 18.9 (repeated) - Automatic debt dynamics (percent of GDP): - 2022: -5.0 - 2023: -4.2 - 2024: -1.3 - 2025: -0.6 - 2026: -1.1 - 2027: -1.4 - 2028: -1.4 - 2029: -1.5 - 2030: -1.5 - 2031: -1.4 - 2032: -1.3 - 2033: -1.3 - Real interest rate and relative inflation (percent): - 2022: 0.0 - 2023: -1.1 - 2024: 3.1 - 2025: 4.0 - 2026: 3.6 - 2027: 3.1 - 2028: 3.1 - 2029: 2.7 - 2030: 2.6 - 2031: 2.5 - 2032: 2.3 - 2033: 2.2 - Real interest rate (percent): - 2022: -1.7 - 2023: -4.9 - 2024: 0.5 - 2025: 2.5 - 2026: 2.4 - 2027: 2.0 - 2028: 2.0 - 2029: 1.8 - 2030: 1.7 - 2031: 1.6 - 2032: 1.5 - 2033: 1.5 - Relative inflation (percent): - 2022: 1.7 - 2023: 3.8 - 2024: 2.6 - 2025: 1.5 - 2026: 1.2 - 2027: 1.1 - 2028: 1.0 - 2029: 0.9 - 2030: 0.9 - 2031: 0.8 - 2032: 0.8 - 2033: 0.7 - Real growth rate (percent): - 2022: -5.2 - 2023: -3.2 - 2024: -4.4 - 2025: -4.6 - 2026: -4.6 - 2027: -4.5 - 2028: -4.4 - 2029: -4.2 - 2030: -4.0 - 2031: -3.8 - 2032: -3.6 - 2033: -3.5 - Real exchange rate: 0.2 (2022); subsequent values not shown in provided excerpt. - Other identified flows (percent of GDP): - 2022: 0.0 - 2023: 1.2 - 2024: 0.6 - 2025: 0.3 - 2026–2033: 0.1 (repeated) - Contingent liabilities: 0.0 for 2022–2033 (repeated) - Other transactions (percent of GDP): same as other identified flows (0.0, 1.2, 0.6, 0.3, 0.1…) - Contribution of residual (percent of GDP): - 2022: 7.2 - 2023: 4.8 - 2024: -1.1 - 2025: -0.6 - 2026: -0.4 - 2027: -0.3 - 2028: -0.3 - 2029: -0.3 - 2030: -0.3 - 2031: -0.3 - 2032: -0.2 - 2033: -0.2 - Gross financing needs (GFN) (percent of GDP): - 2022: 28.8 - 2023: 30.2 - 2024: 36.9 - 2025: 40.6 - 2026: 39.2 - 2027: 35.4 - 2028: 33.2 - 2029: 30.8 - 2030: 29.0 - 2031: 28.3 - 2032: 27.0 - 2033: 25.9 - Of which: debt service (percent of GDP): - 2022: 30.1 - 2023: 31.8 - 2024: 38.7 - 2025: 42.4 - 2026: 41.0 - 2027: 37.4 - 2028: 35.3 - 2029: 32.9 - 2030: 31.1 - 2031: 30.3 - 2032: 29.1 - 2033: 28.0 - GFN by currency (percent of GDP): - Local currency (selected years where provided): 2023: 26.4; 2024: 32.4; 2025: 34.7; 2026: 35.9; 2027: 32.4; 2028: 31.2; 2029: 29.3; 2030: 28.0; 2031: 27.0; 2032: 26.1; 2033: 25.0 (note: 2022 local currency n.a.) - Foreign currency (percent of GDP): 2023: 5.4; 2024: 6.4; 2025: 7.7; 2026: 5.2; 2027: 5.0; 2028: 4.1; 2029: 3.5; 2030: 3.1; 2031: 3.3; 2032: 3.0; 2033: 3.0 (note: 2022 foreign currency n.a.) ### Memo projections (selected macro variables) - Real GDP growth (percent): - 2022: 6.6 - 2023: 4.0 - 2024: 5.3 - 2025: 5.7 - 2026–2033: 5.9 (2026), 6.0 (2027–2033 repeated as 6.0) - Inflation (GDP deflator; percent): - 2022: 10.4 - 2023: 17.0 - 2024: 11.0 - 2025: 7.7 - 2026–2033: 7.1 (repeated) - Nominal GDP growth (percent): - 2022: 17.7 - 2023: 21.7 - 2024: 16.9 - 2025: 13.9 - 2026: 13.4 - 2027–2033: 13.5–13.6 range with repeated values (see table) - Effective interest rate (percent): - 2022: 8.9 - 2023: 11.4 - 2024: 12.1 - 2025: 11.2 - 2026: 10.6 - 2027: 10.2 - 2028: 10.4 - 2029–2033: 10.1 (repeated) ### Staff commentary on baseline - After increasing in FY2022/23 (2023 in the table and the chart) mainly due to exchange rate depreciation (captured by the residual in 2023), public debt is projected to decline and be on a downward trend. - Over the medium term, both the interest-rate growth differential and sustained primary surpluses contribute to the steady decline in debt. --- ### Realism and Medium-term Risk Analysis (selected diagnostics and indicators) ### Realism of baseline assumptions: staff commentary - Analysis from the realism tools does not signal major concerns. - The forecast error track record does not signal a pattern of optimistic forecast errors. - Debt drivers are projected to largely follow past experience, except for the real interest rate which is expected to be less favorable. - The projected fiscal adjustment is within norms. - The interest rate spread is projected to decrease over the medium term. - Notes: - (i) The primary balance surplus contributes to debt reduction in the next five years by more than the last five years. - (ii) The projected debt reduction is at 75th percentile. - (iii) The baseline growth projection is higher than that suggested by the multiplier tool, due to recovery from the COVID crisis. - The growth projection over the medium term is above the past average, but the latter is affected by several major Egypt-specific and global shocks during that period. ### Medium-term risk analysis (selected index values) - Fanchart width: 55.8 - Probability of debt not stabilizing (pct): 2.0 - Terminal debt level x institutions index: 60.3 / 1.3 (two-part value shown) - Debt fanchart index: ... 2.1 (as presented) - Average GFN in baseline: 35.9 / 12.3 (two-part value shown) - Bank claims on government (pct bank assets): 50.4 / 16.4 (two-part value shown) - Change in claims on govt. in stress (pct bank assets): 8.3 / 2.8 (two-part value shown) - GFN financeability index: ... 31.4 (as presented) - Medium-term index (MTI): High (final assessment) - Commentary: Medium-term risks are assessed as high, given the high risk signals from the debt fanchart and GFN modules. The high GFN signal reflects high average gross financing needs over the forecast horizon and the large claims of the domestic banking sector on the government. The high debt fanchart signal reflects a high level of debt at the end of the forecast horizon and large uncertainty about the debt trajectory (large fanchart width). --- ### Annex III. External Sector Assessment (summary findings) - The external position of Egypt in FY2021/22 was weaker than the level implied by medium-term fundamentals and desirable policies, taking into account the relatively low reserve level. - Nominal exchange rate movements: - Depreciated by around 16 percent in March and an additional 33 percent by early November 2022. - Real exchange rate: somewhat depreciated relative to the appreciation trend observed over the past 6 years. - Reserves: declined below adequate levels in 2022Q1, as the central bank intervened to stem pressure from capital outflows triggered by the war in Ukraine. - Most recent depreciation (Oct/early Nov) has helped with external adjustment, but reserves need to be steadily rebuilt over the medium term. - Policy recommendations: - Maintain exchange rate flexibility. - Increase domestic savings through expenditure consolidation to reduce external imbalances. - Implement structural reform to boost the economy’s capacity to generate foreign exchange through a stronger and more diversified export base. _Italicized source attribution removed per overlay rules._ ### 1. The pound depreciated by 55 percent between end-February and early November ### 1. The pound depreciated by 55 percent between end-February and early November ### Exchange rate developments and REER - The pound depreciated by 55 percent between end-February and early November 2022. - The U.S. dollar exchange rate had been 15.7 dollars per Egyptian pound between July 2021 and March 21, 2022. - On March 21, 2022, the pound depreciated by 16 percent. - Relative to the appreciation trend over the past 6 years, the REER depreciated by 3.0 percent (y/y) through June 2022. - On October 27, 2022, the CBE announced a move to a durably flexible exchange rate regime; the pound depreciated by 23 percent (October 26 to November 7). - The REER remains about 8 percent below the October-2016 level. ### Current account balance and external position (EBA analysis) - Current account developments: - Current account deficit in FY2021/22 narrowed to 3.5 percent of GDP, compared with 4.4 percent in FY2020/21. - Drivers: decompression of imports as the economy gained momentum in FY2021/22; backlog and reduced imports from delays in processing letters of credit in Q2/2022; recovery in tourism receipts starting Q3/2021 but still below pre-COVID levels; improvement in oil-related trade driven by robust LNG exports at high international prices. - EBA current account model results (percent of GDP unless otherwise indicated): - Current account outturn, 2022: 3.5 - Cyclically adjusted current account: -4.3 - Cyclically adjusted norm: -3.2 - Current account gap: 1.1 - Contribution from policies: 0.5 - Fiscal contribution: 0.7 - Other policy gaps: -0.2 - Contribution from residual: -1.5 - Implied overvaluation: 6% - Memo: Semi-elasticity of CA/GDP to REER: 0.17 - Interpretation: - The external position in FY2021/22 is assessed as moderately weaker than implied by fundamentals and desirable policy settings, subject to substantial uncertainty. - Staff view overall external position as weaker than implied by medium-term fundamentals and desirable policies, taking into account relatively low reserves. - Recent nominal exchange rate depreciation in Oct/early Nov 2022 is expected to support external adjustment by reducing Egypt’s CA deficit towards its norm. - Policy measures such as increasing LNG exports and becoming a regional bunkering hub are expected to help improve the current account. - The issuance of CBE instructions to move to letters of credit as the only means of import facilitation in February 2022 significantly compressed imports; staff assess that absent this, Egypt’s current account deficit would have been larger. - External sustainability approach (percent of GDP unless otherwise indicated): - Current account outturn, 2021: -3.5 - Cyclically adjusted current account: -4.3 - Cyclically adjusted norm: -4.0 - CA Gap: -0.3 - Implied overvaluation: 1.8% - Memo: Semi-elasticity of CA/GDP to REER: 0.17 - Interpretation: This approach implies a current account gap of about -0.3 percent of GDP and an implied overvaluation of 1.8 percent; staff consider this approach less informative for ensuring external sustainability which requires reductions in public debt rather than stabilization at current levels. ### International investment position, international reserves, and intervention - NIIP and balance-sheet changes: - Negative NIIP narrowed to -49 percent of GDP in FY2021/22, from -51 percent in FY2020/21. - Total assets declined to 15 percent of GDP (4 percentage points of GDP lower than in FY2020/21), driven primarily by the reduction in reserves assets from the decline in Tier 1 and Tier 2 reserves. - Liabilities declined to 64 percent of GDP (6.0 percentage points of GDP lower than in FY2020/21), driven primarily by declining portfolio investment and FDI liabilities. - Foreign reserves and ARA metric: - Prior to the shock, the CBE maintained overall foreign reserves of $49 billion consisting of official reserve assets (Tier 1 reserves) and deposits in the banking system (Tier 2 reserves). - Tier 1 reserves averaged around $40 billion since the end of the SBA in June 2021; Tier 1 reserves fell by almost $5 billion in March 2022. - Tier 2 reserves had accumulated a balance of over $9 billion and fell by $7.6 billion in March 2022. - Reserves continued to decline until June, by $4.4 billion. - Total reserves of $32 billion at end-June 2022 corresponded to about 62 percent of the ARA metric for flexible exchange rate regimes. - Based on exchange rate movements since March, including the October depreciation, and the authorities’ resolve to maintain a flexible exchange rate regime during the EFF arrangement, staff view the flexible metric as appropriate for Egypt. ### Exceptional access criterion analysis and debt sustainability considerations - Context: - When sovereign debt is assessed as sustainable but not with high probability (as for Egypt), the Fund can approve an arrangement with exceptional access if the member also receives financing from non-Fund sources on a scale and terms that improve debt sustainability and enhance safeguards for Fund resources. - Options include reprofiling of existing claims (short extension of maturities falling due during the program) if the member has lost market access and significant private claims fall due during the program, or maintaining sufficient private sector exposure if market access is retained. - Case of Egypt: - Debt sustainability under the baseline in 2022-27 is “sustainable but not with high probability”; margins to maneuver are very limited and dependent on firm commitment to extend maturity of GCC deposits beyond the program period. - Debt service projected during 2022-26, including to the Fund, is substantial. - Under the baseline, private sector exposure by the end of the program period is projected to remain high enough to sufficiently enhance safeguards to Fund resources, maintaining the option to implement a more definitive debt restructuring later if needed. - Staff tests: - Debt sustainability test: Analysis shows debt sustainability could be maintained in the face of a “large shock” through a debt reprofiling in 2027. - FX availability test: The proposed reprofiling would keep the share of debt to GDP held by domestic private creditors from exceeding 2022 levels, implying Egypt will have access to sufficient FX to repay the Fund even if international capital market access is lost. A “large shock” is defined as one which would propel debt to the 80th percentile of the debt fan chart under the preliminary program baseline by 2032. ### Program request and policy commitments (Letter of Intent / MEFP highlights) - Financing request and program parameters: - Request for a 46-month extended arrangement under the IMF's Extended Fund Facility (EFF) in the amount equivalent to SDR 2,350.17 million (115.4 percent of quota and about $3 billion). - International partners have committed adequate additional funds to help ensure the proposed program is fully financed. - First review expected to be completed on or after March 31, 2023; second review on or after September 30, 2023. - Main policy goals and commitments: - Durable shift to a flexible exchange rate, supported by appropriate monetary and fiscal policy settings and frameworks, and deepening the structural reform agenda to rebuild international reserves over the course of the program. - Monetary policy calibrated to keep inflation expectations well-anchored and reduce inflation back to within the target band of the Central Bank of Egypt (CBE) over the medium-term. - Transition away from subsidized lending schemes and ensuring the interbank rate remains tied to the CBE’s interest rate corridor to enhance monetary policy transmission. - Fiscal policies focused on bringing down public debt, reducing gross financing needs through continued fiscal consolidation and active debt management, and creating space for increased spending on social and human development sectors. - Domestic revenue mobilization emphasized to create fiscal space for priority spending and targeted support for the most vulnerable, including expansion of the Takaful and Karama conditional cash transfer program. - Use of an important share of proceeds from the ongoing privatization program to strengthen fiscal position and reduce government debt. - Structural reforms to increase the role of the private sector, level the playing field between public and private institutions, strengthen governance and the business climate, and detail state-ownership policy to reduce state role in non-strategic sectors. - Safeguards: an updated safeguards assessment of the central bank initiated and to be completed by the time of the first review; CBE and Ministry of Finance to sign a memorandum of understanding clarifying responsibilities for timely servicing of obligations to the Fund related to the agreement. *Source: IMF staff report and attachments as provided in the supplied content.* ### 3. Prior to the war in Ukraine, a swift recovery from the pandemic was underway. Thanks ### 3. Prior to the war in Ukraine, a swift recovery from the pandemic was underway. Thanks ### Recovery from the pandemic and pre-war position - Growth was maintained, with an expansion of 3.3 percent in FY 2020/21. - A primary surplus of 1.4 percent of GDP was achieved in FY 2020/21. - The Central Bank of Egypt’s (CBE) foreign exchange reserves (Tier 1 and Tier 2) increased to $50 billion. - Egypt was supported by IMF financing through the Rapid Financing Instrument (RFI) and Stand-By Arrangement (SBA). - Following the conclusion of the SBA in June 2021, tourism flows improved rapidly, and real GDP growth was 9 percent in the first half of FY 2021/22. ### Emerging pressures during the recovery - The COVID-19 crisis led to a rise in public debt and delayed structural reforms. - Fuel price indexation mechanism was not fully implemented when oil prices increased in 2021 and early 2022. - Expansion of subsidized lending schemes at rates substantially below market rates led to distortions in the credit market and muted transmission of the policy rate to the interbank rate. - Vulnerabilities on the external side built up in the context of a stable exchange rate. - The pick-up in imports contributed to a widening of the current account deficit to 4.4 percent of GDP in FY 2020/21. - The current account deficit was funded by a substantial drawdown of banks’ net foreign assets (NFAs) after the SBA. - CBE instructions to banks to move to letters of credit for import facilitation affected trade prior to the outbreak of the war. ### Impact of the war in Ukraine and CBE policy response - The CBE intervened in the foreign exchange market and sought new short-term deposits from GCC partners to shore up reserves. - Over $30 billion of FX sales took place during February-March leading to a net drop in gross international reserves (Tier 1 and 2) of $12.4 billion to $36.9 billion. - On March 21, the CBE raised interest rates by 100bp and the exchange rate initially depreciated by around 15 percent. - State-owned banks issued on a temporary basis 1-year high-yield (18 percent) certificates of deposits (CDs); by end-May, EGP 755 billion (around 10 percent of GDP) had been issued before collections were suspended. - In response to mounting inflationary pressures, the CBE raised rates by a further 200bp in May and increased the reserve requirement by 400bp in September. - Reserves declined by a further $4.1 billion since March to $32.7 billion in September. ### Social protection and fiscal support measures - Accompanying the March monetary measures, the government announced a fiscal and social protection package worth EGP 130 billion. - Measures included expanding the coverage of the Takaful and Karama cash transfer program and a strategic plan to support food security. - Additional social support was announced in September and is being rolled out. ### Near-term outlook and macro projections - Growth is expected to slow to 4.0 percent in FY2022/23. - Headline inflation reached 16.2 percent in October 2022. - Elevated imported commodity prices and passthrough of exchange rate depreciation are expected to keep inflation high in the near term, partially countered by recent policy rate increases. - The current account deficit is projected to be 3.0 percent of GDP in FY2022/23. - Fiscal position expected to remain strained in the near term. - Medium-term projections: growth projected to increase to between 5½ and 6 percent; inflation expected to converge back to around 7 percent. ### Economic program objectives and financing - Main objectives: alleviate near-term pressures, safeguard fiscal and external sustainability, deepen structural reform agenda for sustainable, job-rich growth. - Policies aim to rebuild buffers, strengthen resilience to external shocks, and put debt on a downward trajectory. - Commitment to slow down implementation of public investment projects, including national projects, to ensure consistency with macro policy and limit pressures on FX market and inflation. - Structural reform agenda focuses on enhancing private sector role, reducing state footprint, leveling playing field, strengthening governance and business climate. - With IMF support and mobilization of funds from international partners, the financing gap for the next four years (the program period) amounts to about $17 billion. ### Monetary and exchange rate policies - CBE committed to a durably flexible exchange rate regime since October to allow two-sided flexibility. - Letter No. 49 (of February 13, 2022) requiring letters of credit for import financing will be repealed (structural benchmark). - CBE ceased direct provision of FX from reserves to government entities; demand to be reflected in the FX interbank market. - No recourse to FX interventions or use of banks’ NFAs to stabilize or guarantee the level of the exchange rate, except occasionally to address excessive volatility under a volatility-based intervention framework. - Continuous structural benchmark: CBE will not grant exemptions for commercial banks that breach net foreign exchange open position limits and will apply sanctions for violations. - CBE will provide data to the IMF team on individual banks’ net open position, net foreign assets, and FX transactions as defined in the TMU. - CBE will consult IMF staff if aggregate banks’ NFAs show a cumulative decline of $2 billion over a three-month period (see TMU). - CBE will ensure the interbank FX market functions effectively with market volumes reflecting demand and supply. ### Monetary policy stance and transmission - Monetary policy anchored to CBE's medium-term inflation objective. - Shift to flexible exchange rate in October accompanied by a 200 bps increase in policy rates. - Despite a 500 bps increase in policy rates so far this year, elevated food and energy prices and depreciation expected to keep headline inflation above the CBE’s target of 7 percent (±2 percentage points) on average in 2022 Q4. - CBE will tolerate elevated inflation temporarily to accommodate first-round supply shock effects but will act further if inflationary pressures persist. - Monetary Policy Consultation Clause (MPCC): consultations with IMF staff triggered when headline urban CPI inflation (y/y) falls outside 7 ±2 percent (i.e., outside 5 to 9 percent), and with the Executive Board if inflation falls outside: - 3 to 18 percent in December 2022, - 3 to 16 percent in March 2023, - 3 to 15 percent in June 2023. - Indicative target: daily overnight interbank rate to remain within 50 bps of the mid-corridor rate to strengthen transmission. ### Phasing out subsidized lending schemes - Transition away from subsidized lending schemes so that lending rates are anchored to the policy rate. - CBE issued circular to discontinue subsidized lending initiative for industrial, construction, and agricultural sectors; current balance on a liquidation basis according to run off of loans. - Prime Minister issued decree to move decision making, recording, and supervision of remaining initiatives into the budget and specify entities bearing costs (structural benchmark). - Continuous structural benchmark: CBE will refrain from extending, renewing, or introducing any subsidized lending schemes. ### Reserve rebuilding targets and strategy - Target definition of net international reserves includes Tier 1 and Tier 2 assets and other foreign currency assets usable for reserve management (see TMU). - Goal: net international reserves to increase by $6.0 billion to reach $23.0 billion in FY 2022/23 (performance criterion) and $10.6 billion in FY 2023/24. - During FY 2024/25 and FY 2025/26 target an increase of $16.9 billion so that reserves are on track to reach 120 percent of the Fund’s reserve adequacy metric for flexible exchange rate regimes by end of program. - If nonresident holdings of local currency T-bills and T-bonds rebound more strongly than anticipated, target level of net international reserves will be adjusted up by 50 percent of any excess relative to baseline and met through purchasing FX transparently from the market (see TMU). - In FY 2022/23 the target level for international reserves will be adjusted downwards by 50% of any shortfall in external bond placements denominated in foreign currency. - Continuous performance criterion: will not accumulate any general government external debt payment arrears. - CBE will not purchase FX directly from investors (portfolio and FDI investors) and will instead operate through the market. ### Fiscal policy stance and targets - Fiscal policy focused on putting debt on a declining path to strengthen resilience and reduce risks. - Primary surplus outcomes: - 1.4 percent of GDP in FY 2020/21. - 1.3 percent of GDP in FY 2021/22. - Target primary surplus of 1.7 percent of GDP in FY 2022/23 (performance criterion), a fiscal adjustment of 0.4 percent of GDP compared to previous year. - Ceiling on gross debt of the budget sector (indicative target) of 92.1 percent of GDP by end-June 2023. - Medium-term primary surplus targets: - 2.1 percent of GDP in FY 2023/24, - 2.3 percent of GDP in FY 2024/25 and FY 2025/26. - Aim to reduce gross budget sector debt to around 83 percent of GDP by FY 2026/27. - If debt target exceeded, government will take corrective measures including stronger fiscal adjustment through expenditure rationalization, additional revenue mobilization, and sale of public assets with proceeds to the budget. ### Revenue mobilization and tax policy measures - Continue implementation of Medium-Term Revenue Strategy (MTRS) to increase tax revenue in FY2022/23 (indicative target) and raise tax-to-GDP ratio by around 2 percentage points over the medium term. - Identify and quantify specific tax policy measures to be implemented in FY 2023/24 for at least 0.3 percent of GDP, contributing to an increase in tax-to-GDP ratio by at least 0.5 percentage points in FY2023/24 (structural benchmark). - Measures to bolster fiscal transparency, improve revenue administration, and raise tax revenues include: - Publishing a comprehensive annual tax expenditure report with details and estimates of tax exemptions and tax breaks broken down by classification, including those for companies in free economic zones and all state-owned enterprises (structural benchmark). Report to be updated annually and included in budget documentation. - Amending the income tax law submitted to Parliament to increase progressivity, remove withholding tax exemption for interest on future cross-border debt with maturities greater than three years, adjust international tax definitions (including ‘permanent establishment’ and ‘associated persons’), and tighten capitalization rule to limit interest deduction levels. Over the medium-term, enact a revenue-increasing new income tax law to address loopholes, consolidate amendments, streamline taxation of various income items, and eliminate tax exemptions. - Simplifying VAT by subjecting all goods, other than basic foodstuffs, to standard VAT and adjusting excise rates as needed, with Fund TA. - Enhancing risk-based revenue administration tools by undertaking a segment refresh for Large and Medium Taxpayers and Large Free Professionals; completing implementation of the new Integrated Tax Core System and integrated tax administration structure of the Egyptian Tax Authority; setting up a Data Warehouse; developing tailored compliance improvement strategy for high-wealth individuals. - Accelerating property taxation reform: converting records to electronic register with geo-coded identifiers (structural benchmark); revising valuation model and streamlining exemptions. - Adjusting customs to greater emphasis on risk-based compliance verification and Post Clearance Audit, expanding use of risk profiles for border compliance verification. ### Implementation governance for MTRS - An implementation master plan has been developed. - Governance framework to be set up including a steering committee and program management office. - Establish a capacity development provider working group to align donor activities and timelines. ### Fuel price indexation and social mitigation - Continuous full implementation of the retail fuel price indexation mechanism. - When indexation suggests a reduction in fuel prices, the government will refrain from reductions until the level of fuel subsidies for products covered by the mechanism (all products except LPG and fuel oil for bakeries) in the previous fiscal year has been eliminated (continuous structural benchmark, see TMU for formula). - Fiscal accounts will record full extent of any fuel subsidies and any liabilities to the Egyptian General Petroleum Corporation will be published as part of the annual report on payment arrears (paragraph 20). - To alleviate impact of higher fuel prices on vulnerable groups: - Strengthen targeted support through Takaful and Karama and ration cards. - Parliament expected to approve amendment to income tax law increasing personal income tax exemption threshold. - Additional measures to support households are being developed within available budget space. *Source: 1egyea2023001* ### 17. We will continue to lengthen the maturity of local currency debt to strengthen fiscal ### 17. We will continue to lengthen the maturity of local currency debt to strengthen fiscal ### Debt management and gross financing needs - Objective: reduce gross financing needs to safeguard debt sustainability and protect investor confidence. - Active debt management measures: - Target average maturity of new gross local currency debt issuance through public placements in FY 2022/23 of 0.97 years (indicative target). - Develop variable rate, longer maturity debt instruments, with support from IMF technical assistance. - Recently reprofiled two-year nonmarketable debt held by local banks to a marketable debt with a maturity of five years. - Ongoing efforts to reprofile existing domestic debt to contain gross financing needs. ### Targeted social support and human capital - Expand Takaful and Karama conditional cash transfer program to 5 million households by end-January 2023 (structural benchmark). - Emergency fund interventions deliver food and provide access to education and health for the most vulnerable. - Temporary additional benefits provided to more than half of the families holding ration cards, reaching 36.6 million people. - Expand coverage of the social registry to 50 million people by end-December 2023 to enable targeting in other social protection schemes. - Publish a report evaluating the social housing program, outlining potential reform options and explore efficiency gains in food subsidies. - Continue rollout of universal health insurance scheme and COVID-19 vaccination program. - Commit to a minimum level of social spending in FY 2022/23 (indicative target). - Social sector measures to be based on recently completed and published Public Expenditure Reviews (PER) on social assistance, health, and education. ### Climate mitigation fiscal measures - Updated Nationally Determined Contribution and commitment to reducing greenhouse gas emissions by 2030 relative to a business-as-usual scenario. - Implement in full the fuel price indexation mechanism. - Considering introducing an indexation mechanism for the domestic price of natural gas to reflect international prices. - Considering forms of green taxation to increase the effective carbon price and support emission reductions. ### Public financial management (PFM) enhancements and governance - Promoting transparency: - Publish monthly budget outturns on the budget sector in open data format, including by functional and administrative classification, within 60 days after the end of the reporting month. - Publish the three most recent annual audit reports (FY 2018/19, FY 2019/20, and FY2020/21) of fiscal accounts by the Central Auditing Organization (CAO). - Introduce a binding requirement to ensure timely publication of future audit reports (structural benchmark). - Transition fiscal and public debt accounting to GFSM 2014 standards for budget sector and general government over the next two years. - Managing fiscal risks: - Report annually the payment arrears of the budget sector, including to critical SOEs and EAs. - Ministry of Finance to publish an annual report within 90 days of the end of the fiscal year (continuous structural benchmark) on stocks of commitments, overdue payments, and overdue transactions. - Annual report to include stock of gross liabilities and due payments to and from the Ministry of Finance with named entities (Egyptian General Petroleum Corporation, General Authority for Supply Commodities, New Urban Communities Authority, National Postal Authority, National Authority for Egyptian Railways, National Investment Bank, Central Bank of Egypt, Egyptian Electricity Holding Company, Holding Company for Drinking Water and Sanitation, and EgyptAir). - Prepare this report quarterly and share it with IMF staff. - Publish an annual fiscal risk statement as part of the budget documentation, in line with IMF technical assistance. - PFM law executive regulations (supported by IMF technical assistance) to include: - Key elements of the budget calendar starting with submission and approval of the fiscal strategy paper. - Process to update and publish the medium-term budget framework. - Requirement for all entities to separate baseline and new policy initiatives. - A climate section to provide a clear mandate for climate-related activities (structural benchmark). ### Financial sector policy and resilience - Aim to strengthen financial sector resilience while promoting financial deepening and inclusion. - Banking system described as well capitalized with ample liquidity and resilient to pandemic and recent pressures. - Recent initiative requires 25 percent of banks’ lending to be directed towards SMEs to support financial deepening. - Central Bank of Egypt (CBE) actions: - Monitor vulnerabilities at system and individual bank level, including risks from rapid growth in SME lending. - Develop a program to reduce CBE exposure to public banks through subordinated debt holdings and ownership in the Credit Guarantee Company over the next year. - Publish semi-annual financial stability reports, including translation to English. - Ensure all instructions and guidance to banks are issued through formal written notification channels. - Establish a dedicated bank resolution unit at the CBE, following IMF technical assistance. - Ensure state-owned banks’ growth and operations remain within their risk bearing capacity and address any shortfalls. ### Structural reforms to boost growth and private sector participation - Medium-term growth objective: boost growth to 6 percent. - Reform priorities: reduce role of the state, level playing field between public and private sectors, strengthen business climate, increase exports and industrial production, and secure well-paid jobs. - State ownership policy (structural benchmark) to be published and endorsed by the President, covering: - Clarification of the definition of the state to include public sector companies, public business sector companies, military-owned companies, economic authorities, and joint ventures and partnerships. - Principles of state-ownership and criteria for determining strategic sectors. - Commitment to competitive neutrality in line with eight priority areas outlined by the OECD (2012). - Monitoring and evaluation framework for reduction of the state’s footprint; commit to publish within 60 days of the end of each fiscal year an annual report evaluating each divestment, and a separate annual summary report on policy implementation. - Ambitious divestment plan and mechanisms to reduce state footprint: - Listing state-owned companies on the Egyptian Exchange and sale of stakes in the Sovereign Fund of Egypt’s (SFE’s) pre-IPO fund. - Identified initial group of assets to be transferred to the SFE and launched global roadshow to market them. - Aim to raise $2.5 billion in the first phase of pre-IPO stake sales by end FY 2022/23. - Sales through SFE and to sovereign wealth funds to be deposited in an earmarked account at the CBE to support increasing net international reserves. - Proceeds from divestment of SOEs owned directly by the Ministry of Finance (except those under Law 203 of 1991) to flow to the budget. - At least 25 percent of proceeds from divestment of SOEs established under Law 203 of 1991 to be channeled to the budget. - At least 50 percent of proceeds from divestment of all other SOEs to flow to the budget. - CAO to exercise oversight over all divestment transactions. - Establishment of new SOEs to be transparently based on the state ownership policy. - Transparency and governance of SOEs: - All SOEs legally required to submit financial accounts to the Ministry of Finance on a biannual basis and provide information on quasi-fiscal activities. - Provide open access to this data within 90 days of the reporting period and quantify subsidies to commercial and non-commercial activities of SOEs. - Adopt new policies and procedures to strengthen governance, including performance contracts for SOE management, guidelines for board selection, and qualifications and remuneration of board members. - Move towards more centralized oversight of SOEs where appropriate. - Leveling the playing field and competition: - Public procurement transparency: publish on the procurement portal website in open access format all procurement contracts exceeding EGP 20 million, including bids and winning bidders, without need to set up an electronic account (continuous structural benchmark). Publication to be monthly with one month lag. - Clarify conditions for direct contracting in regulations of Law No. 182 of 2018 on Regulating Public Procurement. - Empower Egyptian Competition Authority (ECA) to act independently; restore direct reporting to the Prime Minister and obtain parliamentary approval of amendments to competition law to add a chapter on mergers and acquisitions and empower ECA to regulate M&A meeting certain thresholds (structural benchmark). - Publish opinion on any draft law, regulation, or government strategy document related to regulation of competition in line with Article 11 (5) of the competition law. - Remove all SOE tax exemptions and ensure same price for water and electricity for both public and private companies. - Over the medium-term amend competition law to specify conditions for exemptions for SOEs and align SOE procurement rules with Law No. 182 of 2018 and international best practice. - Strengthening business climate and trade facilitation: - Implement National Single Window (Nafeza) and Advance Cargo Information (ACI) system; adopt risk-based approach to customs. - Reduce time required for release of imports at the Port of Alexandria by 25 percent from 16 days in August 2021 to 12 days in March 2023, measured using a Time Release Study (structural benchmark). - Target a further 25 percent reduction to 9 days by December 2023. - Publish annually a report detailing all subsidies, guarantees, and tax exemptions provided to exporters. - Restructure industrial land allocation system and, by end-June 2023, consolidate processes under one authority; create an integrated information system outlining steps in land allocation and prepare legislative amendments to facilitate use of land under investment as collateral. - Continue progress on anticorruption reforms: issue amendment to Law 62 of 1975 and executive regulations to digitalize and automate asset declaration submission and processing; require submission at least once every three years with objective of moving to annual submission; widen coverage to include top officials in all state-owned enterprises; publish annual report showing compliance rates with submission of asset declarations by group of public-sector employees. ### Financing and program monitoring - Remaining financing gap for 2022/23 projected at $5.04 billion after accounting for $0.7 billion from the IMF. - Planned sources to close the gap: - $1.1 billion from the World Bank. - $0.4 billion from the Asian Infrastructure Investment Bank. - $0.3 billion from the African Development Bank. - $0.3 billion from the Arab Monetary Fund. - $1.0 billion from the China Development Bank. - $2.0 billion in committed purchases of public sector assets, including from partners in the GCC. - Secured assurances from GCC partners that the $28 billion in official deposits from GCC members at the CBE (at end-September 2022) do not mature until after the completion of the four-year Extended Fund Facility in September 2026 and will not be used for the purchase of equities or debt. *Source: ARAB REPUBLIC OF EGYPT — IMF program memorandum excerpts.* ### 25. The program will be monitored through prior action, quantitative performance criteria, ### 1egyea2023001 - 25. The program will be monitored through prior action, quantitative performance criteria, ### Monitoring framework and timetable - The program will be monitored through prior action, quantitative performance criteria, indicative targets, and structural benchmarks. - Semi-annual program reviews will be based on December and June test dates. - Review schedule: - The first review is expected to be completed in March 2023 and will require observance of the end-December 2022 performance criteria. - The second review is expected to be completed in September 2023 and will require observance of the end-June 2023 performance criteria. - All quantitative performance criteria and indicative targets are listed in Table 1; prior action and structural benchmarks are detailed in Table 2. - The Technical Memorandum of Understanding (TMU) describes definitions of quantitative performance criteria, consultation and data provision requirements. ### Quantitative targets and key figures (selected, as presented) - Program disbursements (projections for cumulative external program disbursements from September 30, 2022): - $1,591 million as of end-December 2022 - $3,183 million as of end-March 2023 - $5,696 million as of end-June 2023 - Program assumptions for the stock of local-currency T-bills and T-bonds held by nonresidents (used for the NIR adjustor): - $4,352 million for end-December 2022 test date - $4,977 million for end-March 2023 test date - $5,602 million for end-June 2023 test date - Foreign reserve assets (as of September 30, 2022, as defined for the program): $32,671 million. - Foreign reserve-related liabilities (as of September 30, 2022, as defined for the program): $15,429 million. - Program exchange rates for FY2022/23 (those prevailing on September 30, 2022): - SDR per US$: 0.781323 - Euro per US$: 1.0293 - British Pound per US$: 0.9213 - Japanese Yen per US$: 144.7094 - Saudi Riyal per US$: 3.7576 - Chinese Yuan per US$: 7.1305 - The program exchange rate of the Egyptian pound against the U.S. dollar for FY2022/23 is 19.4970 (the CBE’s official buy rate on September 30, 2022). - Monetary gold is valued at $1654.80 per troy ounce (the rate on September 30, 2022). - For FY2021/22, the primary balance of the budget sector thus defined was EGP 100 billion. ### Net International Reserves (NIR) floor: definition and adjustors - NIR definition: - NIR of the CBE under the program = foreign reserve assets minus reserve-related liabilities. - For program monitoring, non-U.S. dollar assets/liabilities are converted into U.S. dollar equivalents using the program exchange rates (paragraph 2). - Foreign reserve assets include monetary gold, SDRs, foreign currency cash and securities, CBE deposits abroad, the country’s reserve position at the Fund, CBE foreign currency deposits at local banks, and other CBE foreign currency assets usable for reserve management. - Exclusions from foreign reserve assets: frozen, pledged, collateralized, or otherwise encumbered assets; assets from short-term currency swaps with original maturity < 360 days; claims on residents; precious metals other than gold; assets in nonconvertible currencies; and illiquid assets. - Foreign reserve-related liabilities include all short-term foreign exchange liabilities of the CBE with original maturity < 360 days, except deposits at the CBE with original maturity < 360 days owed to official GCC member creditors. It includes government foreign currency deposits with original maturity < 360 days, banks’ required reserves in foreign currency, and all credit outstanding from the Fund on the CBE balance sheet. It excludes deposits owed to official GCC partners with original maturity < 360 days. - Adjustors to the NIR floor (summary of rules): - Adjustor for deviations in program disbursements relative to projections: - NIR floor adjusted up by the full amount of any excess in cumulative program disbursements relative to projections. - NIR floor adjusted down by the full amount of any shortfall in cumulative program disbursements relative to projections. - Projections: $1,591 million (end-Dec 2022), $3,183 million (end-Mar 2023), $5,696 million (end-Jun 2023). - Adjustor for deviations in external commercial borrowings (private creditors in foreign currency, including Eurobonds, Sukuk, Panda bond, Samurai bond, and syndicated loans): - NIR floor adjusted up by the full amount of any excess in net external borrowings from private creditors relative to BOP baseline projections. - NIR floor adjusted down by 50 percent of the amount of the shortfall in external commercial borrowings relative to baseline BOP projections. - Adjustor for deviations in the stock of government local-currency T-bills and T-bonds held by nonresidents: - NIR floor adjusted up by 50 percent of any excess in the stock held by nonresidents relative to program assumptions. - This adjustor uses holdings one month before the test date (e.g., for end-December 2022 test date, use end-November 2022 actual holdings and end-December 2022 projections). - Program assumptions for the stock: $4,352 million (end-Dec 2022), $4,977 million (end-Mar 2023), $5,602 million (end-Jun 2023). - Adjustor for repo margin calls: - NIR floor adjusted down (up) by any margin call payments (receipts) associated with the CBE’s repo facilities. - Adjustor for FX intervention: - NIR floor adjusted down by the amount of FX intervention (sales) undertaken by the CBE, provided the intervention is consistent with a volatility-based intervention framework. - Program disbursements: defined to include - Disbursements of loans denominated in foreign currency (excluding external borrowings from private creditors that are part of baseline BOP projections, but including T-bonds and other government securities denominated in foreign currency), grants, and deposits for budget support in foreign currency. Loans must constitute new financing (not conversions of deposit liabilities existing at end-September 2022 or conversions of official bilateral loans to the government). - Net issuance of T-bills in foreign currency. - Purchases under the IMF’s Extended Fund Facility. - Foreign reserve-related loans and deposits to the CBE with original maturity > 360 days except for official creditor deposits at the CBE which are included regardless of maturity. - Rollovers by more than 360 days of existing foreign loans and foreign reserve-related liabilities from official multilateral creditors, official bilateral creditors, and private creditors, including external bond placements denominated in foreign currency. - Sales of state-owned assets through the Sovereign Fund of Egypt to official bilateral partners, sovereign wealth funds, and the private sector, and sales of state-owned assets to sovereign wealth funds — provided proceeds are deposited at the CBE in an earmarked account and reported as FX inflows to the CBE. - Exclusions: program disbursements do not include project loans and project grants. State-owned asset sales that are conversions of deposit liabilities existing at end-September 2022 or conversions of official bilateral loans to the government do not qualify as program disbursements. ### Primary fiscal balance and fiscal monitoring - The budget sector comprises the central government (administration), governorates (local administration), and public service authorities, including the General Authority for Government Services, regulatory authorities, funds, universities, and hospitals. - Primary fiscal balance under the program = overall balance minus total interest payments of the budget sector. - Overall balance = total revenue minus total expenditure and net acquisition of financial assets, measured cumulatively from the beginning of the fiscal year. - For FY2021/22, the primary balance of the budget sector thus defined was EGP 100 billion. - Off-budget funds: the authorities will immediately inform IMF staff of the creation of any new off-budgetary funds or programs (including new funds and special budgetary and extra-budgetary programs carrying out fiscal operations as defined in the IMF’s Government Finance Statistics Manual 2014). ### Selected prior actions and structural benchmarks (selected items and deadlines) - Prior action: - Issue a CBE circular to discontinue the CBE’s subsidized lending initiative for the industrial, construction, and agricultural sectors, with the current balance on a liquidation basis according to loan run-off; and issue a PM decree to move decision-making, recording, and supervision of the remaining initiatives within the budget and detail specific entities to bear the costs. - Objective: Strengthen transparency and enhance monetary policy transmission. - Structural benchmarks (examples with timing): - CBE will refrain from extending, renewing, or introducing any subsidized lending schemes. Status: Continuous (SB). - Repeal CBE instructions (Letter No. 49 of February 13, 2022) that require the use of Letters of Credit to finance imports. Timing: End-December 2022. - CBE will not grant exemptions for commercial banks to breach net FX open position limits and will apply sanctions for violations. Timing: Continuous (SB). - MoF will monitor and report payment arrears, including to critical SOEs and EAs, and publish an annual report within 90 days of the end of the fiscal year on stocks of commitments, overdue payments, and gross liabilities to/from specified entities. Timing: Continuous (SB). - Publish all public procurement contracts that exceed EGP 20 million on the E-tenders government procurement portal monthly, with contracts from a month published within 30 days of month-end and accessible without needing an electronic account. Timing: Continuous (SB). - Continuous implementation of the retail fuel price indexation mechanism according to the formula (see TMU); if indexation suggests price reductions, prices will not be reduced until the level of fuel subsidies for covered products in the previous fiscal year has been eliminated. Timing: Continuous (SB). - Publish a comprehensive annual tax expenditure report (broken down by classification and including companies in free economic zones and all state-owned enterprises). Timing: End-April 2023. - Identify tax policy measures for at least 0.3 percent of GDP to be implemented in FY2023/24 to contribute to an increase of at least a 0.5 pp in the tax-to-GDP ratio. Timing: End-February 2023. - Publish CAO’s three most recent annual audit reports on the fiscal accounts (FY 2018/19, FY 2019/20, FY 2020/21) and introduce a binding requirement for timely publication going forward. Timing: End-January 2023. - Obtain parliamentary approval of amendments to the competition law adding a chapter on mergers and acquisitions as outlined in paragraph 23 of the MEFP. Timing: End-December 2022. - Expand number of households benefiting from Takaful and Karama to 5 million. Timing: End-January 2023. - Finalize conversion of records to the new electronic register with geo-coded identifiers to enhance property taxation efficiency. Timing: End-August 2023. - Enact executive regulation of the PFM law including main elements of the budget calendar, MTBF update and costing, requirement to separate baseline and new policy initiatives, and a section on climate mandate for climate-related activities. Timing: End-June 2023. - Publish a state ownership policy endorsed by the President covering public sector companies, public business sector companies, military-owned companies, economic authorities, and joint ventures/partnerships, including commitments to competitive neutrality and publication requirements for divestment reports within 60 days of fiscal year-end. Timing: End-December 2022. - Adopt a risk-based approach to customs procedures and reduce time required for release of imports at the Port of Alexandria from 16 days in August 2021 to 12 days in March 2023 (measured using a Time Release Study). Timing: End-May 2023. *Source: Attachment II. Technical Memorandum of Understanding; Table 1; Table 2 (November 30, 2022).* ### 12. Adjustor. The floor on the primary balance of the budget sector will be adjusted up by the ### 12. Adjustor. The floor on the primary balance of the budget sector will be adjusted up by the ### A. Adjustor on the Primary Balance and Divestment Proceeds - The floor on the primary balance of the budget sector will be adjusted up by the full amount of the excess of divestment proceeds flowing to the budget relative to program assumptions. - Program assumptions for divestment proceeds flowing to the budget are: - zero for the test dates of end-December 2022 and end-March 2023, - EGP 10 billion for end-June 2023. - Total divestment proceeds are the resources raised from the sale of state-owned assets. - For divestment proceeds flowing to the budget: - if the state-owned assets belong to the Ministry of Finance, proceeds are recorded as net acquisition of financial assets; - otherwise, they could be recorded as dividends or other revenues. ### B. Floors on Specific Budget Aggregates - Floor on Tax Revenues (IT): - Tax revenues include both sovereign and non-sovereign taxes such as personal income tax, corporate income tax, value-added tax, excises, international trade taxes, and other taxes. - Floor on Health and Social Spending of the Budget Sector (IT): - Health and social spending includes spending related to the budget of the Ministry of Health and the Ministry of Social Solidarity. - Floor on Average Original Maturity of Newly Issued Local Currency Tradable Debt of the Budget Sector (IT): - Target defined as the weighted average original maturity of local currency tradable debt of the budget sector issued through public placements after July 1, 2022. - Weights are the volumes of issuance under each maturity. - Weighted average original maturity is calculated on a cumulative basis from the beginning of the fiscal year. - Local currency tradable debt defined as local currency tradable securities (tradable T-bills and T-bonds) denominated in Egyptian Pounds, including those issued by the budget sector to the Pension Fund and other public entities. ### C. Ceiling for Gross Debt of the Budget Sector (IT) - Gross debt defined per IMF’s Government Finance Statistics Manual 2014; includes debt issued to the pension fund and other public entities; Sukuk issued by the budget sector treated as debt. - Gross debt of the budget sector for end-June 2022, evaluated at end-June 2022 exchange rate, was EGP 7,183 billion. - For monitoring, U.S. dollar amounts of foreign currency debt will be converted to Egyptian pound equivalents using the program exchange rate indicated in paragraph 2. - Adjustor: the ceiling for gross debt of the budget sector will be adjusted down by the full amount of the excess of divestment proceeds flowing to the budget compared to program assumptions (program assumptions: zero for end-December 2022 and end-March 2023; EGP 10 billion for end-June 2023). ### D. Interest Rate Targeting and Monetary Policy Consultation - Overnight interbank rate (CONIA) requirement: - CONIA must stay within 50 bps of the mid-corridor rate (50 bps above and 50 bps below the mid-corridor rate). - Mid-corridor rate = midpoint between the interest rate on the CBE’s overnight lending facility and the interest rate on the CBE’s overnight deposit facility. - Inflation definition: - Inflation is the year-on-year change in the end-of-period headline urban consumer price index (average FY2018/19 = 100), as measured and published by CAPMAS. - Consultation triggers: - Consultation with IMF Board triggered if inflation falls outside of the upper outer band or the lower outer band (bands indicated in Table 1 of the MEFP). Consultation topics include reasons for deviations, monetary stance, inflation outlook, program track, and CBE remedial actions before further EFF purchases. - Consultation with IMF staff triggered if inflation falls outside of the upper inner band or the lower inner band (bands indicated in Table 1 of the MEFP). Consultation topics include reasons for deviations, monetary stance, inflation outlook, and CBE remedial actions. ### E. Commercial Banks’ Net Foreign Assets (NFA) Consultation Clause - NFA of commercial banks defined as claims on nonresidents (including foreign currency holdings) minus liabilities to nonresidents of other depository corporations. - NFA measured using monetary data reported in the standardized report form. - Consultation with IMF staff triggered if banks’ NFA at the aggregate level decline by cumulative $2 billion over any past three-month period. - The cumulative change in banks’ NFA assessed at the end of every month. - Consultation will examine reasons for the decline and whether: (i) there were imbalances in the FX market; and (ii) corrective actions by the CBE are necessary. ### F. Continuous Performance Criteria - Prohibition on accumulation of external debt payments arrears by the general government (general government = budget sector, Social Insurance Funds (SIFs), and National Investment Bank (NIB)). - External debt payments include principal, interest, and payments on long-term leases. New external debt payments arrears cannot be accumulated during the program period. - External debt payments arrear defined as payment obligation (principal and interest) due to nonresidents by the general government and the CBE, not made when due under contract, including any applicable grace period. - Standard continuous performance criteria include prohibitions on: - imposition or intensification of restrictions on payments and transfers for current international transactions; - introduction or modification of multiple currency practices; - conclusion of bilateral payments agreements inconsistent with Article VIII; - imposition or intensification of import restrictions for balance of payments reasons. ### G. Structural Benchmarks - Definition of State-owned companies (SOEs) for structural benchmarks: - All public corporations, regardless of legal framework and oversight agency, including public sector companies, public business sector companies, military-owned companies, economic authorities, and joint ventures and partnerships. - Retail fuel indexation mechanism (structural benchmark): - Continuous implementation defined as enacting increases in retail fuel prices each quarter in line with the indexation mechanism formula. - The mechanism: retail price of all fuels (excluding LPG and fuel oil for bakeries) must be changed by the computation specified within a month of the end of the quarter. - Formula components: - 퐵퐵푃푃푃푃푚푚푡푡 푡푡−1 is the average Brent crude oil price in the U.S. dollar in the previous quarter. - 퐹퐹퐹퐹 푡푡−1 is the average exchange rate of the Egyptian pound against the U.S. dollar in the previous quarter. - 0.8 is the share of oil in the production cost of fuel products. - For gasoline and diesel, the change is rounded to multiples of 25 piasters. - Annual adjustment due to other direct and indirect costs included in second quarter of the fiscal year; adjustments due to other costs are zero in remaining quarters. - Catchup adjustment: - Changes in retail fuel price capped at 10 percent in absolute value; any adjustments not fully implemented in one quarter result in additional adjustment the following quarter, represented by 퐶퐶푚푚푡푡푃푃 ℎ푓푓푝푝 퐴퐴푎푎푎푎푓푓푎푎푡푡푚푚푃푃푚푚푡푡 푡푡−1. - Catchup adjustment is taken to be zero for the adjustment in the third quarter of FY2022/23. - During a transition period (until fuel subsidies for covered products in the previous fiscal year have been eliminated), retail fuel prices will not be reduced and the catchup adjustment will not be negative. - CBE subsidized lending initiatives (structural benchmark definition): - Schemes where the CBE provides subsidies to financial institutions based on loans extended to predefined sectors or households at predefined interest rates. - Existing schemes include mortgage finance initiative for middle-income class; industrial, agricultural, and construction private sectors initiative; tourism sector initiative; initiative aimed at substituting cars to work with dual fuel. - As of September 1, 2022, total amount of loans utilized under the subsidized lending schemes is 361 billion EGP. ### H. Monitoring and Reporting Requirements (selection of key items) - Performance monitored using data reported by the Ministry of Finance and the CBE to the IMF; frequency and submission lag indicated in Table 1A and Table 1B. CAPMAS will report inflation with submission lag of no more than 10 business/working days after each test date. - Selected reporting requirements for the Ministry of Finance (Table 1A): - Overall deficit of the budget sector: M, 30 calendar days. - Summary of budget sector accounts (revenues, expenditures, net acquisition of financial assets on a cash basis): M, 30 calendar days. - Budget sector expenditures by the ministries of health and social solidarity: M, 30 calendar days. - Total divestment proceeds and divestment proceeds flowing into the budget: M, 30 calendar days. - Domestic debt stock and debt service costs of the general government and budget sector: Q, 30 calendar days (60 days for the general government). - Auctions of T-bills and T-bonds via primary dealers (including bid data and interest rates): W, 7 working days. - Average original maturity of newly issued local currency tradable debt issued through public placements and underlying issuance data: M, 30 calendar days. - Selected reporting requirements for the Central Bank of Egypt (Table 1B): - Program net international reserves at the CBE and its components: M, 7 working days. - Breakdown of gross foreign assets and liabilities of the CBE by currency: M, 15 calendar days. - Program disbursements as defined in the TMU, including purchases of state-owned assets in foreign currencies by official bilateral partners and sovereign wealth funds: M, 7 working days. - Stock of government T-bills and T-bonds denominated in local currency and held by nonresidents: W, 7 working days. - Central bank daily purchases and sales of foreign exchange by counterparts: W, 2 working days. - Daily official exchange rates EGP/$ (submitted once a week for the previous week): W, 5 working days. - Bank-by-bank net foreign assets, as defined in this TMU: M, 30 calendar days. - Daily overnight interbank rate (CONIA) and the daily mid-corridor rate: W, 2 working days. - Note: Q = quarterly; M = Monthly; W = Weekly. *Source: 1egyea2023001 - 12. Adjustor. The floor on the primary balance of the budget sector will be adjusted up by the* ### 4. Credit Outstanding in the GRA Around Peak Borrowing_______________________________ 11 ### 4. Credit Outstanding in the GRA Around Peak Borrowing ### Program request and access - The Egyptian authorities requested a four-year extended arrangement under the Extended Fund Facility (EFF) of 115.4 percent of quota (SDR 2,350.18 million). - Equal phasing of access under the EFF is proposed, with the last and final disbursement to take place by end-2026. - Financing under the EFF requires exceptional access as Egypt’s outstanding credit with the Fund (text truncated in source). ### Program objectives and pillars - The program aims to sustainably address macroeconomic vulnerabilities and promote private-sector-led growth and job creation. - It is based on three broad pillars: - Exchange rate and monetary policies focused on restoring external resilience and maintaining price stability. - Continued fiscal discipline and implementation of fiscal structural measures. - Broad-based structural reforms to reduce the state footprint and increase the role of the private sector in the economy. ### Implementation and timeline - Duration: four-year EFF arrangement. - Access phasing: equal phasing with final disbursement by end-2026 (see Table 1 in source). *Source: ARAB REPUBLIC OF EGYPT – IMF staff report (December 2, 2022).* ### 669.4 percent of quota as of October 31st, 2022) exceeds the cumulative normal access limit ### 669.4 percent of quota as of October 31st, 2022) exceeds the cumulative normal access limit ### Proposed EFF access and phasing - The proposed access under the EFF will cover around 17.5 percent of the estimated financing gap. - Remaining financing is expected to be filled by other multilateral and bilateral creditors, including the World Bank, the Asian Infrastructure Investment Bank, as well as by the proceeds from sales of state-owned assets, including divestment to Egypt’s regional partners and their sovereign wealth funds. - Table 1. Egypt: Proposed EFF-Access and Phasing (Availability Date / SDR millions / Purchase / Cumulative / Credit Outstanding): - 2022 December: 261.13 / 12.8 / 12.8 / 662.0 - 2023 March: 261.13 / 12.8 / 25.6 / 672.0 - 2023 September: 261.13 / 12.8 / 38.4 / 634.0 - 2024 March: 261.13 / 12.8 / 51.3 / 561.0 - 2024 September: 261.13 / 12.8 / 64.4 / 475.0 - 2025 March: 261.13 / 12.8 / 76.9 / 382.0 - 2025 September: 261.13 / 12.8 / 89.7 / 309.0 - 2026 March: 261.13 / 12.8 / 102.6 / 266.0 - 2026 September: 261.13 / 12.8 / 115.4 / 236.0 - Total: 2,350.21 / 115.4 - Note 1/: After approval of the arrangement, all subsequent purchases will depend on the completion of a review and compliance with performance criteria and the consultation clause to be established under the arrangement. This will be updated. ### Past Fund arrangements - Recent arrangements: - A three-year EFF arrangement (SDR 8,597 million, 422 percent of quota) approved in November 2016; arrangement was fully drawn and completed in 2019. - In May 2020, Rapid Financing Instrument (RFI) approved (SDR 2,037.10 million, 100 percent of quota); RFI purchase lifted credit outstanding above the cumulative exceptional access limit. - In June 2020, a 12-month exceptional access Stand-by Arrangement (SBA) approved (SDR 3,763.64 million, 184.75 percent of quota); SBA helped address COVID-19 shock and preserve macro stability. - 1990s arrangements: - May 1991 SBA: SDR 234 million (51 percent of quota), of which Egypt purchased SDR 147 million. - September 1993 EFF: SDR 400 million (59 percent of quota) treated as precautionary. - October 1996 two-year precautionary SBA: SDR 271 million (40 percent of quota). - Table 2. Egypt: IMF Financial Arrangements and Fund Exposure, 1991–2036 (selected entries preserved in source): - 1991 SBA 17-May-1991 to 31-May-1993: Amount 234.4 / Drawn 147.2 / Exposure 89.0 - 1993 EFF 20-Sep-1993 to 19-Sep-1996: Amount 400.0 / Drawn 0.0 / Exposure 147.2 - 1996 SBA 11-Oct-1996 to 30-Sep-1998: Amount 271.4 / Drawn 0.0 / Exposure 10.9 - 2016 EFF 11-Nov-2016 to 29-Jul-2019: Amount 8,596.6 / Drawn 8,596.6 / Exposure 1,970.1 - 2020 RFI 11-May-2020 to 13-May-2020: Amount 2,037.1 / Drawn 2,037.1 - 2020 SBA 26-Jun-2020 to 25-Jun-2021: Amount 3,763.6 / Drawn 3,763.6 - 2022 EFF December 2022 to September 2026: Amount 13,494.3 (figures including transactions under the proposed program are in italics in source) ### Debt situation and outlook - External debt levels: - Total external debt (in millions of U.S. dollars): 2015/16 55,764; 2016/17 79,033; 2017/18 92,644; 2018/19 108,699; 2019/20 123,491; 2020/21 137,860; 2021/22 155,709. - Medium and long-term: 48,747; 66,758; 80,360; 97,644; 112,625; 124,144; 129,089 (same years). - Short-term: 7,018; 12,274; 12,284; 11,055; 10,866; 13,716; 26,620 (same years). - External debt as percent of GDP: - Total external debt: 2015/16 15.9; 2016/17 30.8; 2017/18 35.2; 2018/19 34.2; 2019/20 32.3; 2020/21 32.6; 2021/22 32.8. - Medium and long-term: 13.9; 26.0; 30.5; 30.7; 29.4; 29.3; 27.2. - Short-term: 2.0; 4.8; 4.7; 3.5; 2.8; 3.2; 5.6. - Composition and shares: - In FY 2021/2022, Eurobonds accounted for 22.5 percent, IMF credit 14.0 percent, and other general government loans 32.6 percent of medium- and long-term external debt. - Debt of the CBE amounted to 5.5 percent of GDP or 20.2 percent of medium- and long-term external debt, of which deposits accounted for 57.5 percent. - External debt service: - Total external debt service (in millions of U.S. dollars): 2017/18 20,957; 2018/19 24,011; 2019/20 26,985; 2020/21 31,382; 2021/22 42,187; 2022/23 48,911; 2023/24 51,016; 2024/25 54,612. - Total external debt service (in percent of GDP): 2017/18 8.0; 2018/19 7.6; 2019/20 7.1; 2020/21 7.4; 2021/22 8.9; 2022/23 11.6; 2023/24 11.7; 2024/25 11.6. - Short-term share of total external debt service in FY2021/2022: around 37 percent. - Under the proposed EFF, external debt service projected to remain elevated in 2022-25, at about 12 percent of GDP on average. - Obligations due to the Fund in the next three years are about 1 percent of GDP per year on average, mainly reflecting repurchases under the 2016-2019 EFF and 2020-2021 SBA. - Public debt and financing needs: - Gross public debt for the general government estimated at 88.5 percent of GDP in FY2021/22. - Gross financing needs projected to average around 36 percent of GDP in the medium term. - Financing assurances for the medium-term include expected divestment of state-owned assets and investment from GCC partners; $6.7 billion expected from GCC partners for FY23/24-FY25/26. - Risks tied to the materialization and timing of these financing assurances. ### Financial implications of the proposed extended arrangement for the Fund - Current IMF credit exposure to Egypt: SDR 13.6 billion. - Purchases under prior instruments totaled SDR 14.4 billion; scheduled repurchases from May 2021 to October 2022 were SDR 0.8 billion. - Remaining scheduled repurchases until 2025: - SDR 0.4 billion in remainder of 2022 (November-December) - SDR 1.9 billion in 2023 - SDR 4.0 billion in 2024 - SDR 3.5 billion in 2025 - Projected debt service to the Fund in FY2022/2023 represents 3.9 percent of Egypt’s total projected external debt service. - Access and exposure: - Access under proposed EFF is moderate and, in percent of quota, below recent exceptional access arrangements and below the median since 2008. - Purchases under the 2020-2021 SBA brought Egypt above the normal cumulative GRA access limit of 435 percent of quota, with total credit outstanding at the end of October 2022 amounting to 669 percent of quota. - Assuming proposed purchases are made as scheduled and repurchases occur, outstanding use of GRA resources would peak at SDR 13.7 billion (672 percent of quota) in March and April of 2023. - Credit outstanding would remain elevated for an extended period and only fall below the EA threshold in December 2024. - Capacity to repay and exposure metrics (Table 5 highlights): - GRA credit to Egypt (In SDR millions): 2022/23 13,277.9; 2023/24 10,454.9; 2024/25 6,644.1; 2025/26 4,865.0; 2026/27 3,835.8; 2027/28 2,816.6. - GRA credit to Egypt (In percent of quota): (651.8); (513.2); (326.2); (238.8); (188.3); (138.3). - Charges due on GRA credit (In SDR millions): 2022/23 428.2; 2023/24 799.4; 2024/25 588.0; 2025/26 374.5; 2026/27 268.2; 2027/28 203.0. - Debt service due on GRA credit (In SDR millions): 2022/23 1,144.5; 2023/24 4,144.6; 2024/25 4,921.2; 2025/26 2,675.7; 2026/27 1,558.6; 2027/28 1,222.2. - Total external debt (In percent of GDP): 2022/23 35.8; 2023/24 34.8; 2024/25 32.6; 2025/26 30.3; 2026/27 27.5; 2027/28 25.8. - Total external debt service (In percent of GDP): 2022/23 11.6; 2023/24 11.7; 2024/25 11.6; 2025/26 8.9; 2026/27 8.7; 2027/28 7.1. - GRA credit to Egypt (In percent of Gross International Reserves): 2022/23 44.4; 2023/24 27.7; 2024/25 16.2; 2025/26 9.6; 2026/27 6.2; 2027/28 4.5. - Memorandum items (Table 6): Current one-year Forward Commitment Capacity (FCC) 157,713.7 (In millions of SDR). Impact on FCC on approval: -2,350.2 (in percent of current one-year FCC) -1.5. - Fund GRA credit outstanding to Egypt at time of approval 3/: 13,494.3 (In percent of current precautionary balances) 63.1; (In percent of total GRA credit outstanding) 14.5. - Fund's precautionary balances (as of end-July 2022): 21,382. Fund's residual burden-sharing capacity: 888.9. - Implications for Fund liquidity and concentration: - The proposed EFF would reduce the Fund’s FCC by about 1.5 percent from its current level of SDR 157,713.7 billion (table uses 157,713.7). - Since Egypt is not a member of the Financial Transactions Plan (FTP), no additional second-round impact on the FCC. - After the scheduled first purchase, Egypt would remain the Fund’s second largest GRA borrower after Argentina, with its credit outstanding accounting for 14.5 percent of total Fund credit. - Credit concentration measured by exposure to the top five borrowers would remain roughly stable at 69.4 percent. - Total Fund credit outstanding to Egypt after the scheduled first purchase would amount to 63.1 percent of precautionary balances (PBs). ### Assessment and risks - Program objectives and macro outlook: - The proposed EFF and underlying economic program aim to alleviate immediate economic challenges, strengthen policy frameworks, and deepen structural reforms. - Growth is expected to recover gradually and inflation, anchored by data-dependent monetary policy, is expected to converge to around 7 percent. - A return to a sustained primary surplus of above 2 percent of GDP over the medium term would ensure reduction of general government debt to around 78 percent of GDP by FY2026/2027. - Gross financing needs projected to amount to around 35 percent of GDP in FY2026/27. - Fund financing is expected to be catalytic, with the proposed arrangement covering slightly less than one-fifth of the projected financing gap. - Repayment capacity and risks: - Egypt’s capacity to repay the Fund is adequate, albeit with some risks, contingent on the materialization of projected financing. - Capacity to repay indicators are broadly in line with those for other recent exceptional access arrangements, but indicators are weaker when scaled against net international reserves. - Key risks: - Insufficient exchange rate flexibility following potential shocks could lead to reserve losses in years of large repurchases. - Failure of projected financing from other IFIs, bilateral partners, and portfolio inflows to materialize. - Global monetary tightening and spillovers from the war in Ukraine pose significant downside risks. - Risk mitigants: - Regular reviews to ensure program implementation and adjust policies. - Authorities' public statements committing to exchange rate flexibility. - Program adjustors for the NIR target to capture upside surprises and partially accommodate shortfalls. - Impact on the Fund and contingency measures: - The proposed EFF would prolong the Fund’s high credit exposure to Egypt, though sizable net repurchases would allow for significant decline in credit outstanding during the program. - Credit outstanding will remain above 435 percent of quota until December 2024 and drop to 236 percent of quota by the end of the program if all purchases and repurchases occur as scheduled. - The proposed EFF will have a modest upfront impact on the Fund’s liquidity (FCC decline by 1.5 percent on approval). - Program implementation is key to mitigate financial risks to the Fund; recourse to the burden sharing mechanism and precautionary balances could cover residual risks, though the absorptive capacity of these buffers would be substantially depleted if used. *Source: IMF staff report content provided in the supplied PDF excerpt.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1egyea2023001.pdf_