## 1egyea2024001 ## Source details **Canonical URL:** [1egyea2024001](https://www.imf.org/-/media/files/publications/cr/2024/english/1egyea2024001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2024/english/1egyea2024001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2024/english/1egyea2024001.pdf.json) --- ### Recent developments and context - Egypt’s 46-month EFF arrangement approved on December 16, 2022. - In completing the review, the Executive Board assessed that all but one of the quantitative performance targets for end-June 2023 were met. - Board approved a waiver for non-observance of the June performance criterion on Net International Reserves on the basis of corrective actions. - Macroeconomic environment since program approval: rising inflation, foreign exchange shortages, elevated debt levels, and financing needs. - External shocks cited: Russia’s war in Ukraine, the conflict in Gaza and Israel, and tensions in the Red Sea. - Growth path: - FY2022/23: 3.8 percent - FY2023/24: projected 3.0 percent - FY2024/25: projected 4.4 percent (about 4½ percent noted elsewhere) - Inflation profile: - Headline urban inflation reached 38 percent in September 2023, declined to 29.8 percent in January 2024. - Expectations: inflation remains high but expected to ease over the medium term as policy tightening takes hold. - Large investment financing announced: US$35 billion deal from an Abu Dhabi-based investor in Ras El-Hekma noted; structured implications and use of proceeds emphasized to rebuild buffers and clear FX backlogs. ### Executive Board and IMF staff highlights: major policy actions and priorities - Major policy actions taken: - Unification of the exchange rate (March 6, 2024). - Clearance of foreign exchange demand backlogs (banks’ backlogs cleared). - Significant tightening of monetary and fiscal policies. - Policy priorities emphasized: - Central Bank of Egypt (CBE) focus on reducing inflation and tightening further if necessary. - Implement framework to monitor and control public investment to manage excess demand. - Pursue revenue-based fiscal consolidation and replace untargeted fuel subsidies with targeted social spending as part of a sustained fuel price adjustment package. - Accelerate structural reforms: withdraw state and military from economic activity, level playing field between public and private sectors. - Key risks noted: - External uncertainty and regional conflicts. - Failure to sustain a liberalized foreign exchange system. - Monetary policy too loose to bring inflation down. - Failure to transparently integrate off-budget investment into macroeconomic policymaking. - Managing resumption of capital inflows to contain inflationary pressures and limit future external pressures. ### Program design, augmentation, and financing - Original EFF: USD 3 billion, 46-month arrangement approved December 2022. - Authorities requested augmentation of the original program by US$5 billion (requested augmentation equivalent to SDR3,761.52 million or about US$5 billion; augmentation request stated as 184.70 percent of quota SDR3,761.52 million). - Large ADQ/Ras El-Hekma references: - ADQ deal total investment value: US$35 billion. - ADQ to provide US$24 billion in new financing to NUCA (noted variously as US$24 billion and US$35 billion in the text). - Program assumption: US$24 billion in new financing, with US$15 billion sold by NUCA to the CBE (captured in international reserves) and US$6 billion sold by NUCA to the banking system to facilitate clearance of arrears. - Ministry of Finance to receive local currency equivalent of US$12 billion from the transaction and record this in the primary balance. - Authorities reported receipt of US$10 billion as of March 1; an additional US$14 billion anticipated by April 30. - Remaining financing gap for the remainder of the program after accounting for Ras El-Hekma and reserve strengthening: US$28.5 billion. - Total projected program financing increased to US$7.8 billion in FY2023/24 and US$28.5 billion for the program period. - Fund financing: Total financing needed to reach revised NIR targets for FY2023/24 is US$6.2 billion after accounting for US$1.6 billion from the IMF. ### Exchange rate unification and liberalized FX system - Official unification date: March 6, 2024. - Official EGP depreciation on unification: 38 percent (closing the spread to parallel market rate). - Pre-unification FX backlogs: accumulated foreign exchange demand backlogs at banks of US$7-8 billion. - External arrears surfaced at EGPC: estimated US$4.5 billion. - Post-unification outcomes and program assessment indicators: - Backlogs cleared at banks (prior action). - Structural benchmark indicators to assess liberalized FX system: - demand backlogs cleared; - spread between official and market-clearing rates essentially closed; - interbank FX turnover increased relative to pre-unification period. - Interbank FX turnover increased to US$ 300-900 million (compared to US$ 20-40 million before unification). - FX intervention (FXI) rules: - Limited FXI allowed if (i) all intermediaries have access; (ii) no constraints on bid prices; (iii) CBE allotment based solely on bid prices. - Immediate aftermath: scope for limited FXI in the 48 hours following unification (authorities did not intervene). - Reporting requirements: full array of bids (prices and volumes) reported to Fund and published same day with offered volume, total bids, accepted bids, cut-off price, weighted average accepted price. ### Monetary policy tightening and transmission - Policy rate actions: - 200-bps hike on February 1, 2024. - 600-bps increase on March 6, 2024; main operation rate to 27.75 percent. - Cumulative: since February 2024, policy rates increased by 800 bps (prior action); since March 2022 cumulative by 1,900 bps (800 bps in 2022, 300 bps in 2023, 800 bps in 2024 noted in Annex). - Objectives: - Contain inflation and bring forward-looking real rates toward positive territory. - Data-dependent approach; tighten further if necessary. - Sterilization and balance sheet controls: - CBE committed to sterilizing EGP liquidity associated with Ras El-Hekma foreign exchange purchases and conversion of dollar deposits. - Performance criteria and structural benchmarks: - Maintain government overdraft at CBE within statutory limit (performance criterion). - Prevent further CBE lending to public agencies excluding the Ministry of Finance (performance criterion). - Develop plan to reduce claims on public sector agencies excluding the Ministry of Finance to zero over the medium term (structural benchmark). - Move to fixed-rate full-allotment auction for 7-day deposit operations (structural benchmark). - Refrain from extending, renewing, or introducing subsidized lending schemes (structural benchmark). ### Fiscal policy, debt dynamics, and consolidation - FY outcomes and targets: - Overall budget sector deficit narrowed to 5.9 percent of GDP in FY2022/23 (from 6.2 percent in FY2021/22). - FY2023/24 primary surplus target: 2.5 percent of GDP (inclusive of expected divestment inflows). - FY2024/25 primary surplus target: 3.5 percent of GDP excluding expected divestment flows (prior action). - Budget sector debt for FY2022/23 increased to about 98 percent of GDP. - Fiscal mechanics tied to Ras El-Hekma: - MOF to secure local currency equivalent of US$12 billion; will boost primary balance by 4.6 percent of GDP and reduce debt by 4.6 percent of GDP, bringing surplus to 7.1 percent of GDP for FY2023/24 (memorandum figures). - Medium-term fiscal goals: - Increase primary surplus to 5.0 percent of GDP by FY2026/27 (excluding divestment proceeds). - Staff assesses public debt as sustainable but not with high probability; overall risk of sovereign stress assessed as high. - Decomposition of fiscal consolidation (change of primary balance, percent of GDP): - FY23/24: 0.5 - FY24/25: 1.4 - FY25/26: 1.0 - FY26/27: 0.5 - Memorandum primary balance (without divestment proceeds): - FY23/24: 2.1; FY24/25: 3.5; FY25/26: 4.5; FY26/27: 5.0 - Divestment proceeds (memorandum): - FY23/24: 0.4; FY24/25: 1.0; FY25/26: 0.8; FY26/27: 0.5 ### Outlook, projections, and key macroeconomic indicators (selected) - Real GDP growth (%): - 2022/23: 3.8 - 2023/24: 3.0 - 2024/25: 4.4 - Unemployment (%): - 2022/23: 7.2 - Inflation (%, end of period): - 2022/23: 35.7 - 2023/24: 32.1 - 2024/25: 15.3 - Inflation (%, period average): - 2022/23: 24.4 - 2023/24: 32.5 - 2024/25: 25.7 - Revenue and grants (% GDP): - 2022/23: 15.4 - 2023/24: 15.3 - 2024/25: 16.2 - Expenditure (% GDP): - 2022/23: 21.4 - 2023/24: 21.7 - 2024/25: 24.7 - Overall balance (% GDP): - 2022/23: -6.0 - 2023/24: -6.3 - 2024/25: -8.5 - Primary balance including divestment proceeds (% GDP): - 2022/23: 1.6 - 2023/24: 7.1 - 2024/25: 4.5 - Gross debt, general government (% GDP): - 2022/23: 95.9 - 2023/24: 96.4 - 2024/25: 82.6 - Broad money (M2, % change): - 2022/23: 24.7 - 2023/24: 38.6 - 2024/25: 18.5 - Credit to the private sector (% change): - 2022/23: 25.4 - 2023/24: 30.0 - 2024/25: 25.0 - Current account (% GDP): - 2022/23: -1.2 - 2023/24: -6.3 - 2024/25: -2.4 - FDI, net (% GDP): - 2022/23: 2.5 - 2023/24: 9.3 - 2024/25: 2.5 - Reserves (months imports): - 2022/23: 5.3 - 2023/24: 7.3 - 2024/25: 6.9 - External debt (% GDP): - 2022/23: 41.8 - 2023/24: 43.0 - 2024/25: 45.4 - Real Effective Exchange Rate (% change; appreciation +): - 2022/23: -22.1 ### External sector, reserves, and Ras El-Hekma assumptions - Current account narrowed to 1.2 percent of GDP in FY2022/23 due to compressed imports. - Import backlog estimated: US$6.0 billion at end-June 2023. - NIIP deteriorated to -65 percent of GDP in FY2022/23 (from -49 percent in FY2020/21). - Foreign reserves: - Reserves partially recovered to US$37 billion at end-June 2023 (foreign reserve assets defined amount $39,517 million as of December 31, 2023). - NIR projected to increase to US$49.2 billion by end-June 2024 (115 percent of ARA metric) benefiting from Ras El-Hekma inflows. - Program external assumptions related to Ras El-Hekma: - US$24 billion in new financing assumed in FY2023/24; US$15 billion sold to CBE; US$6 billion to banking system; MOF receives local currency equivalent of US$12 billion. - Current account projection includes clearance of FX backlog and arrears and income balance totaling US$10.5 billion in FY2023/24. - Secured assurances: US$19 billion of official deposits from Arab countries at the CBE will remain at the CBE until after EFF expiration in September 2026 and will not be used for purchase of equities or debt. ### Divestments, asset sales, and ADQ Ras El-Hekma deal - Divestment progress to January 2024: - Equity stakes sold in five companies; net US$1.5 billion in deposits at CBE so far this fiscal year. - Total announced/closed/anticipated divestment net value: 3,254 (USD equivalent-millions). - Total USD inflows (millions): 3,060. - Total USD deposited at CBE (Millions): 2,810. - ADQ Ras El-Hekma deal specifics: - Total deal value: US$35 billion. - ADQ to provide US$24 billion in new financing to NUCA for development rights. - Egyptian government retains a 35 percent stake. - Authorities estimate project may generate US$150 billion in investment in the medium term. - Work expected to commence in early 2025. - ADQ to convert existing dollar-denominated deposits at the CBE of about US$11 billion into local currency deposits for future investments across Egypt. - Divestment targets and conservative estimates: - Another US$600 - US$700 million in USD flows from further divestments in FY2023/24 possible; bringing total USD divestment flows from non-residents in FY2023/24 to about US$2.8 billion excluding Ras El-Hekma. - FY2024/25 identified opportunities to generate US$3.6 billion in dollar inflows, plus another 0.5 percent of GDP in additional divestment flows. ### Public investment management and off-budget activity - Prime Minister decree requires all public entities to report annual projected and executed investment spending, including off-budget projects. - Target ceilings: - Value of total public investment for January – June 2024: EGP 350 billion (indicative target). - Target for FY2024/25: EGP 1,000 billion (indicative target), aiming to achieve real reduction in total public investment under baseline. - Near-term actions: - Cut funding for budget sector investment in second half of FY2023/24 by 15 percent relative to prior year and postpone new budget sector projects. - Share of off-budget investment high: example shares shown 44; 66; 72; 61.6; 62.6 (percent in public investment table entries). ### Social protection, fuel pricing, and mitigation - Social measures: - Expanded Takaful and Karama to more than 5 million households. - Increased average monthly payments by 15 percent in FY2022/23. - Raised minimum public sector wage from EGP 3,000 to EGP 6,000 (noted elsewhere as almost 17 percent increase in 2023). - Additional social protection package announced: EGP 180 billion for FY2024/25 (February 2024 announcement), including 50 percent increase in public sector minimum wage, 15 percent pension increase, increase in personal income tax exemption threshold by more than 30 percent, and allowances increases for teachers and health experts. - Fuel price and subsidy reform: - Prior action: increase price of gasoline grade fuels to align with automatic fuel price mechanism, including catch-up for missed adjustments. - Diesel price increase implemented (diesel +21.2 percent; fuel oil (Mazut) +25.0 percent noted). - Fuel subsidy pressures noted due to exchange rate depreciation and missed adjustments. - Program maintains a floor of social spending (indicative target). ### Financial sector health, vulnerabilities, and supervision - System-wide indicators: - Overall banking system financial health described as sound through September 2023, but vulnerabilities noted. - Capital adequacy ratios of some banks have declined due to depreciation inflating risk-weighted assets. - Banks’ net foreign asset (NFA) position weakened; banks’ NFAs decreased by more than US$2 billion over a three-month period, prompting consultation with staff. - Banks remain compliant with regulatory limits but have large negative aggregate NFA position (NFA at end-December 2023 was -$16.2 billion). - FX exposure and monitoring: - Banks’ foreign exchange liabilities balanced by FX lending (particularly to public sector entities) implying susceptibility to exchange rate depreciation. - Consultation clause: authorities will consult with IMF staff if banks’ aggregate NFA decline by cumulative US$2 billion over a three-month period. - Stress testing and safeguards: - CBE regulatory stress tests reportedly point to adequate capital and liquidity buffers; CBE committed to complete stress tests and share detailed results with IMF staff by end-September 2024 (structural benchmark). - Safeguards assessment of the CBE completed April 2023; quasi-fiscal lending to public sector agencies excluding MOF reached around EGP 765 billion by February 2023, reduced to EGP 661 billion as of end-January 2024. - Policy commitments: prohibit new development lending to public agencies excluding MOF (performance criterion); develop plan to reduce claims to zero (structural benchmark); assess CBE recapitalization needs and develop recapitalization plan (structural benchmark). ### Structural benchmarks, conditionality, and program monitoring - Performance under program monitored via prior actions, quantitative performance criteria (PC), indicative targets (IT), and structural benchmarks (SB); TMU defines details. - Status of structural benchmarks: authorities met 7 of 15 structural benchmarks (examples met: repeal required use of Letters of Credit; published state-ownership policy; expanded social assistance; identified tax measures; abstained from exemptions for FX open position breaches; refrained from subsidized lending schemes). - Missed / rephased benchmarks: publication of CAO audits on time but binding requirement not introduced; other benchmarks on release times at ports and conversion of land records rephased as no longer critical. - New and reset structural benchmarks include: - CBE fixed-rate full allotment 7-day deposit auction — Timing: End-April 2024. - CBE plan to reduce lending to public agencies to zero — Timing: End-April 2024 / end-FY2025/26 for implementation. - Repayment strategy to clear EGPC arrears — Timing: End-April 2024. - Publish comprehensive annual tax expenditure report — Timing: End-April 2024 (reset). - Sector classification of all 59 economic authorities in accordance with GFSM 2014 — Timing: End-September 2024. - CBE to complete banking stress tests and share results with IMF staff — Timing: End-September 2024. - Publish procurement contracts > EGP 20 million on E-tenders portal monthly — recurring structural benchmark (Not met previously; reset and ongoing). - TMU program exchange rates and NIR definitions provided; as of December 31, 2023: - Foreign reserve assets: $39,517 million. - Foreign reserve-related liabilities: $18,199 million. ### Risks, scenarios, and staff recommendations - Key downside risks (significant): - Failure to sustain liberalized FX system. - Monetary policy too loose to reduce inflation. - Failure to transparently integrate off-budget investment. - Failure to execute divestment strategy, build buffers from Ras El-Hekma, address EGPC arrears, and meaningfully reduce state role. - Delays in boosting tax revenue, implementing fuel pricing formula, and generating divestment proceeds. - Larger-than-expected exchange rate depreciation, weaker growth, higher interest rates, intensification of regional conflicts, and disruptions in the Red Sea. - Upside scenarios: - External financial conditions ease and large capital inflows return. - Markets responded positively: spread on Egypt’s sovereign bonds tightened by almost 300 bps since Ras El-Hekma announcement. - Significant FDI associated with the deal is an upside risk. - Inflation could fall quicker if prices had already adjusted to parallel market or confidence returns lead to appreciation. - Staff recommendations and support: - Staff supports completion of first and second reviews, waiver for missed NIR criterion, augmentation of access, and rephasing of availability dates of purchases. - Staff proposes third review on a quarterly cycle then return to semiannual reviews. - Critical policy priorities: sustain exchange rate liberalization, tight monetary and fiscal policy, targeted social protection, public investment control, accelerate structural reform to reduce state and military footprint. ### Sovereign risk and debt sustainability assessment (selected) - Overall assessment: Risk of sovereign stress — Overall: High; Medium term: High; Long term: Moderate. - Public debt projection (baseline, percent of GDP): - Actual 2023: 105.3 - 2024: 109.8 - 2025: 89.7 - 2026: 83.5 - 2027: 76.5 - 2028: 70.5 - 2029: 65.0 - 2030: 59.1 - 2031: 53.2 - 2032: 47.3 - 2033: 41.3 - 2034: 35.5 - Gross financing needs (GFN, percent of GDP): - Series example: 28.5; 39.2; 41.9; 38.2; 31.9; 27.6; 24.6; 21.7; 19.9; 18.7; 15.3; 12.5 (2023–2034 series). - Debt assessment commentary: public debt sustainable but not with high probability given high gross financing needs and concentration of domestic bank claims on government; final DSA line: Sustainable but not with high probability. ### Monitoring, reporting, and data requirements - Performance monitored using data reported by MOF and CBE; TMU specifies frequency and submission lags. - Selected reporting requirements: - CAPMAS inflation data: submission lag no more than 10 business days after each test date. - MOF monthly summary of budget sector accounts: 30 calendar days. - CBE program NIR and components: monthly, submission lag 7 working days. - Weekly end-week government overdraft at CBE: submission lag 5 working days. - Weekly end-week bank-by-bank FX demand backlogs for eight identified banks: submission lag 5 working days. - Daily interbank FX turnover and daily official exchange rates: reported with specified lags. - Consultation triggers: - Monetary Policy Consultation (MPCC) clause triggers when headline urban CPI inflation (y/y) falls outside target bands; MPCC consultations with IMF staff or Executive Board per defined outer/inner bands and dates. *ARAB REPUBLIC OF EGYPT — FIRST AND SECOND REVIEWS UNDER THE EXTENDED ARRANGEMENT UNDER THE EXTENDED FUND FACILITY, MONETARY POLICY CONSULTATION, AND REQUESTS FOR WAIVER OF NONOBSERVANCE OF A PERFORMANCE CRITERION, AND AUGMENTATION AND REPHASING OF ACCESS (IMF staff report).* ### 3.76 billion). This enables the authorities to immediately draw about US$820 million (SDR ### 1egyea2024001 - 3.76 billion). This enables the authorities to immediately draw about US$820 million (SDR ### Recent developments and context - Egypt’s 46-month EFF arrangement was approved on December 16, 2022. - In completing the review, the Executive Board assessed that all but one of the quantitative performance targets for end-June 2023 were met. - The Board approved the authorities’ request for a waiver for non-observance of the June performance criterion on Net International Reserves on the basis of corrective actions. - Macroeconomic conditions since program approval have been challenging, with rising inflation, foreign exchange shortages and elevated debt levels and financing needs. - External environment shocks: Russia’s war in Ukraine, the conflict in Gaza and Israel, and tensions in the Red Sea increased complexity of macroeconomic challenges. - External shocks and delayed policy adjustment weighed on economic activity: Growth slowed to 3.8 percent in FY2022/23 due to weak confidence and foreign exchange shortages and is projected to slow to 3 percent in FY2023/24 before recovering to about 4½ percent in FY24/25. - Inflation remains high but is expected to ease over the medium term as policy tightening takes hold. - A recently announced US$35 billion investment deal from an Abu Dhabi-based investment and holding company in Ras El-Hekma has alleviated near-term balance of payment pressures and, if used judiciously, will help Egypt rebuild buffers. - The authorities committed to use a large part of the new financing from the Ras El-Hekma deal to improve reserves, fast-track clearance of foreign currency backlogs and arrears, and reduce government debt upfront. ### Executive Board and MD statement highlights - Major policy actions taken: - Unification of the exchange rate. - Clearance of the foreign exchange demand backlog. - Significant tightening of monetary and fiscal policies. - Policy priorities emphasized: - Central Bank of Egypt’s focus on reducing inflation and tightening further if necessary to protect purchasing power. - Implement a newly established framework to monitor and control public investment to manage excess demand. - Pursue revenue-based fiscal consolidation and replace untargeted fuel subsidies with targeted social spending as part of a sustained fuel price adjustment package. - Accelerate structural reforms: withdraw state and military from economic activity, level playing field between public and private sectors to attract investment. - Key risks noted: - External uncertainty and regional conflicts. - Failure to sustain a liberalized foreign exchange system. - Monetary policy being too loose to bring inflation down. - Failure to transparently integrate off-budget investment into macroeconomic policymaking. - Managing resumption of capital inflows to contain inflationary pressures and limit future external pressures. ### Program design, augmentation, and financing - Original EFF: USD 3 billion, 46-month arrangement approved December 2022. - Large development deal: US$24 billion (6.9 percent of GDP) for Ras El-Hekma resources (noted in body as US$24 billion; elsewhere a US$35 billion figure for an Abu Dhabi-based investor was referenced). - Remaining financing gap for the remainder of the program after accounting for Ras El-Hekma and reserve strengthening: US$28.5 billion. - Authorities requested an augmentation of the original program by US$5 billion. - Additional multilateral and bilateral assistance secured to fully close the financing gap (amounts not itemized in the provided text). ### Strengthened policy package and prior actions - Prior actions and commitments: - Foreign exchange rate unified in early March. - Shift to a flexible exchange rate regime and a liberalized foreign exchange system (prior action). - Significant tightening of monetary policy. - Substantial fiscal consolidation. - Increase price of gasoline grade fuels to align with the automatic fuel price mechanism, including catching up for missed adjustments since program approval (prior action). - Announced additional social protection package of EGP 180 billion for FY2024/25. - Commitments to address: - Central bank lending to public agencies, - Government recourse to the central bank’s overdraft facility, - Off-budget public sector activity, including issuing a prime ministerial decree to establish a framework to monitor and control overall public investment spending. - Elimination of preferential tax treatment and exemptions for state-owned enterprises and commitments to increase transparency of state-owned enterprise activity and develop an indicator to monitor implementation of the State Ownership Policy. ### Outlook, projections, and key macroeconomic indicators (selected) - Real GDP growth (%) - 2022/23: 3.8 - 2023/24: 3.0 - 2024/25: 4.4 - Unemployment (%) - 2022/23: 7.2 - 2023/24: -- - 2024/25: -- - Inflation (%, end of period) - 2022/23: 35.7 - 2023/24: 32.1 - 2024/25: 15.3 - Inflation (%, period average) - 2022/23: 24.4 - 2023/24: 32.5 - 2024/25: 25.7 - Revenue and grants (% GDP) - 2022/23: 15.4 - 2023/24: 15.3 - 2024/25: 16.2 - Expenditure (% GDP) - 2022/23: 21.4 - 2023/24: 21.7 - 2024/25: 24.7 - Overall balance (% GDP) - 2022/23: -6.0 - 2023/24: -6.3 - 2024/25: -8.5 - Primary balance including divestment proceeds (% GDP) - 2022/23: 1.6 - 2023/24: 7.1 - 2024/25: 4.5 - Gross debt, general government (% GDP) - 2022/23: 95.9 - 2023/24: 96.4 - 2024/25: 82.6 - Broad money (M2, % change) - 2022/23: 24.7 - 2023/24: 38.6 - 2024/25: 18.5 - Credit to the private sector (% change) - 2022/23: 25.4 - 2023/24: 30.0 - 2024/25: 25.0 - Current account (% GDP) - 2022/23: -1.2 - 2023/24: -6.3 - 2024/25: -2.4 - FDI, net (% GDP) - 2022/23: 2.5 - 2023/24: 9.3 - 2024/25: 2.5 - Reserves (months imports) - 2022/23: 5.3 - 2023/24: 7.3 - 2024/25: 6.9 - External debt (% GDP) - 2022/23: 41.8 - 2023/24: 43.0 - 2024/25: 45.4 - Real Effective Exchange Rate (% change; appreciation +) - 2022/23: -22.1 - 2023/24: -- - 2024/25: -- ### Recent sectoral and financial developments - Growth drivers: Growth slowdown to 3.8 percent in FY2022/23 attributed to weak confidence and FX shortages; non-oil private sector PMI has been in contractionary territory since 2021. - Suez Canal revenues: fell almost 50 percent yoy in January 2024, a loss of around US$375 million relative to January 2023. - Remittances: sharp fall through banks; foreign exchange being diverted away from the official market. - Current account: narrowed to 1.2 percent of GDP in FY2022/23 as imports were compressed due to limited foreign exchange availability. - Inflation dynamics: headline urban inflation reached 38 percent in September 2023; headline inflation declined for four consecutive months to 29.8 percent in January 2024, driven by decline in food inflation and base effects. - Central Bank lending and overdraft: CBE lending to government agencies worth 7.5 percent of GDP (predominantly 2021–2022) and sharp increase in Ministry of Finance use of CBE overdraft facility beyond statutory limit contributed to loose monetary stance and exchange rate pressure. ### Staff recommendations, support, and program monitoring - IMF staff supports completion of the first and second reviews under the EFF Arrangement, a waiver of nonobservance of the end-June 2023 performance criterion for net international reserves based on corrective actions, augmentation of access, and rephasing of availability dates of purchases. - Staff proposes the third review be undertaken on a quarterly cycle, returning to semiannual reviews thereafter, and recommends completion of the MPCC consultation with the Executive Board. - Staff highlighted critical policy priorities to restore macroeconomic stability, strengthen investor confidence, and enable private-sector-led growth, including sustaining exchange rate liberalization, tight monetary and fiscal policies, targeted social protection, public investment control, and accelerated structural reform to reduce state and military economic footprint. *Source: ARAB REPUBLIC OF EGYPT — FIRST AND SECOND REVIEWS UNDER THE EXTENDED ARRANGEMENT UNDER THE EXTENDED FUND FACILITY, MONETARY POLICY CONSULTATION, AND REQUESTS FOR WAIVER OF NONOBSERVANCE OF A PERFORMANCE CRITERION, AND AUGMENTATION AND REPHASING OF ACCESS (IMF staff report).* ### 3. The exchange rate was unified in March 2024 as part of a shift to a flexible exchange ### 1egyea2024001 - 3. The exchange rate was unified in March 2024 as part of a shift to a flexible exchange ### Exchange rate unification and foreign exchange system - The official exchange rate was unified beginning on March 6, 2024, with the official exchange rate of the Egyptian pound against the U.S. dollar depreciating by 38 percent, closing the spread to the parallel market rate. - Prior to unification: - A large local parallel market premium had persisted. - Limited foreign exchange availability led to accumulated foreign exchange demand backlogs at banks of US$7-8 billion. - External arrears estimated at US$4.5 billion surfaced at the Egyptian General Petroleum Company (EGPC), a public-sector petroleum entity outside of the general government. - Post-unification outcomes and measures: - Foreign exchange demand backlogs at banks have since been cleared following unification. - Authorities issued a circular mandating banks to cancel FX requests if clients do not accept prevailing market exchange rates. - Structural benchmark for the shift to a flexible exchange rate regime and a liberalized FX system will be assessed using indicators: (i) demand backlogs cleared; (ii) spread between official and market-clearing rates essentially closed; (iii) interbank FX turnover increased relative to the pre-unification period. - The structural benchmark will be assessed once for each program review, based on information over a period of time between program reviews. ### Monetary policy tightening - Monetary policy actions: - CBE delivered a 200-bps hike on February 1, 2024. - CBE delivered a 600-bps increase on March 6, 2024, bringing the main operation rate to 27.75 percent. - The Ministry of Finance’s outstanding balance on the CBE’s overdraft facility has been lowered. - Objective: contain inflation and bring real rates towards positive territory. - The authorities have undertaken the required Monetary Policy Consultation after annual urban inflation exceeded the upper outer band under the program. ### Fiscal policy and debt dynamics - Fiscal outcomes and projections: - Overall budget sector deficit narrowed to 5.9 percent of GDP in FY2022/23 from 6.2 percent of GDP in FY2021/22. - Performance in the first six months of FY2023/24 is in line with reaching a primary surplus of 2.5 percent of GDP for the full fiscal year. - Budget sector debt for FY2022/23 increased to about 98 percent of GDP, reflecting the impact of the depreciation and higher interest payments. - Domestic financing composition over the past 12 months: - Relied heavily on short-term Treasury bills (T-bills), private placements of T-bills, Treasury bonds (T-bonds), and Ministry of Finance notes—primarily absorbed by domestic banks—and borrowing through the CBE’s overdraft facility. - Program fiscal mechanics tied to Ras El-Hekma deal: - From the US$24 billion in new financing, US$15 billion is sold by NUCA to the CBE and is captured in international reserves. - US$6 billion is assumed to be sold by NUCA to the banking system to facilitate the clearance of arrears. - The Ministry of Finance will receive the local currency equivalent of US$12 billion from the transaction and this will be recorded in the primary balance, reducing debt by the same amount. - The authorities reported receipt of US$10 billion as of March 1. An additional US$14 billion is anticipated by April 30. - Debt trajectory: - While half of the new financing is applied to debt reduction, the large depreciation at unification and the increase in the policy rate lead to a temporary increase in the debt-to-GDP ratio in FY2023/24. - The debt ratio is projected to follow a downward trajectory after FY2024/25, with assumed divestment flows larger than initial projections by 0.5 percent of GDP each fiscal year starting in FY2024/25 and sustained primary balance surpluses reaching 5 percent of GDP by FY2026/27. ### Financial system health and banking sector vulnerabilities - System-wide indicators: - Available data through September 2023 suggests the overall banking system’s financial health is sound. - Capital adequacy ratios of some banks have declined, partly reflecting depreciation since March 2022 which inflated risk-weighted assets. - Banks’ net foreign asset (NFA) position continued to weaken reaching close to historic lows (last datapoint end-December 2023). - Commercial banks’ NFAs decreased by more than US$2 billion over a three-month period, triggering consultation with staff. - FX exposure: - Banks remain compliant with regulatory limits, but foreign exchange liabilities balanced by foreign exchange lending, particularly to public sector entities, imply potential susceptibility to an exchange rate depreciation. - Policy response and monitoring: - The shift to a flexible exchange rate should help contain further NFA deterioration. - Authorities will consult with IMF staff if banks’ aggregate NFA decline by a cumulative US$2 billion over a three-month period. ### Divestments, asset sales, and ADQ investment deal - Divestment progress: - Authorities sold equity stakes in five companies through January 2024, netting US$1.5 billion in deposits at the central bank so far this fiscal year. - Overall divestment flows from asset sales, excluding the Ras El-Hekma deal, are lower than initially programmed to date. - Foreign exchange market uncertainty and spillovers from the conflict in Gaza and Israel have impacted ongoing divestment deals; no new deals announced since October. - Divestment table highlights (Text Table 1 totals as presented): - Total announced/closed/anticipated divestment net value: 3,254 (USD equivalent-millions). - Total USD inflows (millions): 3,060. - Total USD deposited at CBE (Millions): 2,810. - ADQ Ras El-Hekma deal announced in late February: - Total investment deal value: US$35 billion. - ADQ to provide US$24 billion in new financing to Egypt (to NUCA) to acquire development rights for Ras El-Hekma. - Egyptian government will retain a 35 percent stake in the development project. - Authorities estimate the project may generate US$150 billion in investment in the medium term. - UAE will convert existing dollar-denominated deposits at the CBE of about US$11 billion into local currency deposits for future investments across Egypt. - Work expected to commence in early 2025. - The economic implications of Ras El-Hekma development will be incorporated into the macroeconomic framework once there is greater clarity on the medium-term investment program. ### Outlook and risks - Macroeconomic projections and drivers: - Real growth for FY2023/24 is projected to slow to 3.0 percent reflecting FX shortages on private sector activity prior to unification, the conflict in Gaza and Israel, and an anticipated decline in external receipts due to disruptions in the Red Sea. - A recovery is anticipated in FY2024/25 assuming pressures from the conflict and Red Sea disruptions abate and foreign exchange market conditions improve. - Over the medium term, growth is projected to increase to around 5½ percent as structural reforms strengthen the business climate and the state footprint is gradually replaced with private activity. - Headline urban inflation is projected to increase in the months following unification as the depreciation passes through to prices, before falling over the medium term toward the CBE’s target as base effects unwind and policy tightening takes hold. - Specific program assumptions: - The framework incorporates the anticipated receipt of US$24 billion in new financing from Ras El-Hekma in FY2023/24 and conversion of existing UAE dollar deposits into local currency. - From the new financing, US$15 billion sold to the CBE is captured in international reserves; US$6 billion sold to the banking system to clear arrears; Ministry of Finance receives local currency equivalent of US$12 billion recorded in the primary balance. - Current account projection includes clearance of foreign exchange backlog and arrears in non-oil imports and the income balance totaling US$ 10.5 billion in FY2023/24. - Key risks (significant): - Failure to sustain the liberalized foreign exchange system. - Monetary policy being too loose to bring inflation down. - Failure to integrate the off-budget investment program transparently and comprehensively into macroeconomic decision making. - Failure to execute divestment strategy, build buffers from Ras El-Hekma, address payment delays to international oil companies, and demonstrate meaningful reduction of the state's role would keep investors sidelined and pressure the external position. - Delays in boosting tax revenue, implementing the fuel pricing formula, and generating divestment proceeds for debt reduction would limit fiscal space and increase debt vulnerability. - Larger-than-expected exchange rate depreciation, weaker growth, and higher interest rates would increase sovereign risks. - Intensification of regional conflicts and continued disruption in the Red Sea could further undermine growth and the external position; prolonged inflationary pressures would hurt the vulnerable. - Upside scenarios: - External financial market conditions could ease more than expected and large capital inflows could return. - Markets have responded positively: spread on Egypt’s sovereign bonds tightened by almost 300 bps since the Ras El-Hekma deal announcement. - A significant increase in foreign direct investment associated with the deal is an upside risk to the growth outlook. - Inflation could fall back more quickly than projected if prices had already adjusted to the parallel market rate or if confidence returns resulting in a material appreciation. ### Program performance, conditionality, and structural benchmarks - Quantitative targets and performance: - Under combined reviews, targets for end-June 2023 are controlling. - Authorities met the quantitative performance criterion for the primary balance for end-June 2023. - Continuous performance criteria met: non-accumulation of external arrears by the general government; prohibition on imposition or intensification/modification of exchange restrictions, multiple currency practices, and import restrictions. - Net international reserve (NIR) criterion was missed, explained by a decline in international oil prices, diversion of some domestic natural gas production away from exports to domestic consumption, and lack of portfolio and remittance flows. - Corrective actions: shift to a flexible exchange rate regime, liberalized foreign exchange system, tightening of monetary and fiscal policies, implementation of planned divestments, and program financing to ensure future NIR targets remain achievable. - Structural benchmarks: - Authorities met 7 of 15 structural benchmarks: - Repealed required use of Letters of Credit (though repeal did not fully remove instrument for rationing import demand). - Published a state-ownership policy. - Amended aspects of competition law governing M&As (executive regulation yet to be approved by Cabinet). - Expanded the number of households eligible for social assistance. - Identified tax policy measures for FY2023/24 budget. - Abstained from granting exemptions for commercial banks that breach net FX open position limits. - Refrained from introducing subsidized lending schemes through the CBE. - Authorities published the CAO’s audits of the fiscal accounts on time but have not introduced a binding requirement to publish annual fiscal audits regularly. - All missed structural benchmarks have been reset except two (release times at the ports and conversion of land records to an electronic register) as they are no longer critical for the Fund-supported program. ### Policy objectives going forward - Core program objectives remain unchanged: - Sustain a flexible exchange rate regime and a liberalized foreign exchange system. - Reduce inflation. - Reduce debt and build buffers to withstand future shocks. - Contain fiscal pressures including those from large national infrastructure projects. - Reduce the state’s footprint in the economy and deliver a business environment where the private sector can compete on equal terms with state entities. - The updated Memorandum of Economic and Financial Policies (MEFP) reflects authorities’ continued commitment to these objectives. *ARAB REPUBLIC OF EGYPT — INTERNATIONAL MONETARY FUND.* ### 14. The program allows for some foreign exchange market intervention (FXI) following ### 1egyea2024001 - 14. The program allows for some foreign exchange market intervention (FXI) following ### Foreign Exchange Intervention (FXI) - Program allows limited FXI following unification, through mechanisms that satisfy three criteria: - (i) all intermediaries have access to the mechanism; - (ii) no constraints should be placed on bid prices; - (iii) the CBE should make FX allotment solely on the basis of bid prices. - Two layers of FXI described: - Immediate aftermath of unification: - Scope for limited FXI provided in the 48 hours following the unification. - Authorities did not intervene during this 48-hour period. - Existing FXI framework under the program: - The existing intervention framework would continue to be available to the CBE. - The NIR target in the program will be adjusted for interventions within this framework. - Reporting and transparency requirements for interventions (both layers): - CBE will report to the Fund the full array of bids, both prices and volumes on the day of intervention. - CBE will publish on its website by the end of the day of the intervention: - offered volume by CBE, - total volume of bids, - total volume of accepted bids, - cut-off price for accepted bids, - weighted average price for accepted bids. ### Monetary Policy and Balance Sheet Measures - Tightening stance: - Since February 2024, the CBE has increased policy rates by 800 bps (prior action). - Main operation rate raised to 27.75 percent. - Authorities view this move as sufficient to bring the forward-looking real interest rate into positive territory. - Authorities committed to a data-dependent approach and to tighten further if necessary. - Authorities intend to track a wide range of indicators on economic activity, money and credit growth, financial conditions, and price pressures. - Sterilization and liquidity actions: - Authorities committed to sterilizing the injection of EGP-liquidity associated with the Ras El-Hekma deal, both from foreign exchange purchases and from the conversion of dollar deposits at the CBE into local currency. - Reducing CBE balance sheet and controlling net domestic assets: - Commitments include: - Maintaining the balance of the government’s overdraft account at the CBE within the statutory limit (performance criterion). - Preventing further CBE lending to public agencies excluding the Ministry of Finance (performance criterion). - Developing a plan to reduce claims on public sector agencies excluding the Ministry of Finance to zero over the medium term (structural benchmark). - Strengthening monetary transmission: - CBE plans to move to a fixed-rate full-allotment auction for its 7-day deposit operations (structural benchmark). - CBE will continue to refrain from extending, renewing, or introducing any subsidized lending schemes (structural benchmark). ### Fiscal Policy Targets and FY2023/24 Budget - FY2023/24 budget: - Targets a primary surplus of 2.5 percent of GDP, inclusive of expected divestment inflows. - This is a tightening of 0.4 percent of GDP relative to the initial program projection. - Tightening of 0.9 percent of GDP compared to the primary surplus for FY2022/23. - Drivers of FY2023/24 outcome: - Projected primary expenditure reduction of 0.6 percent of GDP. - Tax revenue projected to increase by 0.2 percent of GDP (reduction due to Suez Canal Authority disruptions). - Non-tax revenue projected to decline by 0.2 percent of GDP (lower Suez Canal dividends). - Anticipated proceeds from planned divestment of state-owned assets contribute 0.4 percent of GDP. - MOF will secure local currency equivalent of US$12 billion from Ras El-Hekma financing, which will: - boost the primary balance by 4.6 percent of GDP, - reduce debt by 4.6 percent of GDP, - bring the surplus to 7.1 percent of GDP for FY2023/24. ### Medium-Term Fiscal Strategy and Debt - Medium-term targets and risks: - Authorities plan to increase the primary surplus to 5.0 percent of GDP by FY2026/27, excluding divestment proceeds. - Staff assesses public debt as sustainable but not with high probability; overall risk of sovereign stress assessed as high. - FY2024/25 prior actions and structural benchmarks: - Cabinet plans to approve the draft budget law for FY2024/25 with a primary surplus target of 3.5 percent of GDP excluding expected divestment flows (prior action). - Increase of tax and dividend revenue of 1.0 percent of GDP in FY2024/25 (prior action). - Cabinet will submit to parliament an amendment to the VAT law to simplify VAT, reduce exemptions, and enhance efficiency and progressivity by November 2024 (structural benchmark). This reform will yield 1.0 percent of GDP tax revenue beginning in FY2024/25. - Financing windfall treatment: - Authorities plan to transfer 1.0 percent of GDP of divestment proceeds to the treasury to reduce public debt in FY2024/25. ### Decomposition of Fiscal Consolidation (Text Table 2) - Fiscal consolidation (change of primary balance): - FY23/24: 0.5 - FY24/25: 1.4 - FY25/26: 1.0 - FY26/27: 0.5 - Tax revenue (net): - FY23/24: 0.2 - FY24/25: 0.4 - FY25/26: 1.1 - FY26/27: 1.5 - Non-tax revenue: - FY23/24: -0.2 - FY24/25: 0.4 - FY25/26: -0.1 - FY26/27: -0.1 - Primary expenditure: - FY23/24: -0.6 - FY24/25: -0.6 - FY25/26: 0.0 - FY26/27: 0.9 - Memorandum: - Primary balance (without divestment proceeds): FY23/24: 2.1; FY24/25: 3.5; FY25/26: 4.5; FY26/27: 5.0 - Divestment proceeds: FY23/24: 0.4; FY24/25: 1.0; FY25/26: 0.8; FY26/27: 0.5 - Note: The MOF will secure US$12bn from the Ras El-Hekma investment deal to reduce public debt, estimated at 4.6 percent of GDP in addition to another 0.4 percent of GDP divestment proceeds from other sales of state assets. ### Tax Policy Measures and Revenue Mobilization (Text Table 3) - Overall: - Total projected tax policy impact across FY23/24–FY26/27: 4.16 (In percent of GDP) - Cumulative increase in tax revenue from identified measures is 4.2 percent of GDP; net projected increase is 3.0 percent because taxes on interest earnings decrease over the projection period with the anticipated decline in interest rates on government securities. - Selected measures and their contributions (In percent of GDP): - Streamlining of VAT law and removing VAT exemptions: 0.20 (FY23/24), 0.80 (FY24/25), 0.57 (FY25/26), 1.57 (FY26/27) — Total 3.19 across period listed as "Tax Policy" cumulative. - Participating the OECD's Automatic Exchange of Information: 0.30 (FY23/24), 0.37 (FY24/25), 0.67 (FY25/26). - Tax administrative measures: 0.07 (FY23/24), 0.20 (FY24/25), 0.20 (FY25/26), 0.21 (FY26/27) — Total 0.68 across period. - Anti-fraud measures: 0.17 (FY23/24), 0.16 (FY24/25), 0.16 (FY25/26) — Total 0.49 across period. - Other identified items include payroll tax automation (total 0.12), eliminating tax exemptions for SOEs (total 0.32), VAT on non-resident e-commerce (total 0.11), withholding tax on turnover of exports from free zones (total 0.11), and several smaller items. ### Energy Prices and Subsidy Reform - Energy price adjustments: - Authorities committed to increase the price of gasoline grade fuels to the level implied by the formula, including catch-up from failure to fully implement January 2023, April 2023, July 2023, and October 2023 adjustments (prior action). - Authorities will develop a plan to adjust diesel prices to be fully in line with the level implied by the full implementation of the formula since the start of the program. - Fuel subsidies increased due to exchange rate depreciation and failure to fully implement the quarterly automatic fuel price mechanism (recurring structural benchmark). ### Social Protection and Social Spending Safeguards - Strengthening social protection: - Expanded Takaful and Karama cash transfer program to more than 5 million households. - Increased average monthly payments by 15 percent in FY2022/23. - Raised minimum public sector wage from EGP 3,000 to EGP 6,000. - Increased public sector wages and topped up allowances for almost 2 million teachers and 0.6 million doctors and health experts. - Strengthening the social registry and improving targeting of food subsidies. - Program will maintain a floor of social spending (indicative target). ### Public Investment Management (Text Table 4 and Policy Actions) - Public investment and targets: - Prime Minister decree requires all public entities to report annual projected and executed investment spending, including off-budget projects. - Target ceiling on value of total public investment for January – June 2024: EGP 350 billion. - Target for FY2024/25: EGP 1,000 billion to achieve a real reduction in total public investment under the baseline. - These targets monitored through a new indicative target with semi-annual reporting. - In the near term, authorities will cut funding for budget sector investment in the second half of FY2023/24 by 15 percent relative to the prior year and have postponed any new budget sector projects. - Public Investment table highlights (EGP billions unless otherwise noted): - Budget Sector: FY23/24 Budget: 587; Outturn: 376; Budget: 289; Outturn: 358; Budget: 318 - Self-financed: 307; 122; 51; 148; 131 - Total investment (selected line): 1050; 1100; 871.3; 393; 850 - In percent of GDP (selected): 8.9; 11.2; 8.6; 11.7; 10.8 - Share of off-budget investment (percent): 44; 66; 72; 61.6; 62.6 - Source noted: Ministry of Planning and Economic Development, Ministry of Finance and IMF staff calculations. ### Fiscal Risks, Guarantees, and Transparency - Managing fiscal risks: - Government guarantees were 22 percent of GDP at end-September 2023. - Authorities will ensure the stock of government guarantees relative to GDP stabilizes for the remainder of the current fiscal year at end-September 2023 level and decline as a percent of GDP starting from end-June 2024 (indicative target). - 59 Economic Authorities will be gradually incorporated into general government fiscal reporting and subject to binding ceilings on their debt in the annual budget law. - A sector classification of the Economic Authorities will be conducted in accordance with GFSM 2014 concepts and principles (structural benchmark). - Authorities will publish an annual fiscal risk statement as part of the budget documentation starting FY2024/25. - Authorities recommitted to fulfill existing unmet fiscal structural benchmarks: monthly procurement activity publication, annual audits of fiscal accounts, tax expenditures, budget sector arrears, and new PFM regulations. ### EGPC Arrears to International Oil Companies - EGPC arrears: - Reported at US$4-5 billion. - Arrears accumulated due to foreign exchange shortages and structural factors (reduced domestic gas production, higher domestic consumption, increased subsidies to electricity sector). - Outstanding claims are in US dollars and are not guaranteed by the general government; to be paid by EGPC. - Ministerial decree established a committee to negotiate deferral agreements with suppliers. - Repayment strategy aims to ensure no new arrears and clearance of existing arrears (structural benchmark). - Foreign exchange liquidity provision in the interbank market can help facilitate timely clearance. ### Financing and Debt Management Adjustments - Key elements of adjusted strategy: - Gradually extend issuance maturity of domestic debt as financing conditions improve (existing indicative target). - Debt management measures to extend maturity of existing domestic debt while containing interest expense. - Agreements with pension funds and insurance funds to extend the maturity of existing debt maturing in the next several years. - Agreements with major state banks to issue new three-year T-bonds when existing T-bonds held by these banks mature. - Any prospective recapitalization of the CBE to be addressed to safeguard CBE balance sheet and bolster price stability mandate, taking into account government debt management and costs related to EAS/IFRS compliance (structural benchmark). - Improve quality of fiscal financing by increasing share of official sector external budget financing and bringing the government’s overdraft account at the CBE gradually under the statutory limit (performance criterion). - Half of the new financing from the Ras El-Hekma investment deal allocated to debt reduction, starting with reducing the overdraft balance at the CBE. ### Financial Sector Resilience and Supervision - Banking sector position and risks: - Some deterioration in capital adequacy; CAR declined relative to 2021 partly due to large foreign exchange depreciation on risk-weighted assets. - Drop in CAR of some banks to close to regulatory limit raises concerns. - Liquidity indicators point to excess liquidity in the system. - On aggregate, banks have a large negative net foreign asset position but have complied with net open position limits. - Bank credit to government and public sector companies has expanded significantly; lending to state and local government in foreign currency increased by over US$8 billion. - Potential higher credit risk from increased FX exposure to public entities; authorities note banks lend to entities with reliable FX sources to service loans. - Possible liquidity risk in foreign exchange due to maturity mismatches and limited CBE backstop capacity for sudden FX deposit withdrawals. - Stress testing and monitoring: - CBE regulatory stress tests reportedly point to adequate capital and liquidity buffers under large, combined exchange rate and interest rate shocks. - CBE committed to completing stress tests of the banking sector and sharing detailed results with IMF staff. - These tests will be prepared in consultation with IMF staff (structural benchmark). *Source: 1egyea2024001 - 14. The program allows for some foreign exchange market intervention (FXI) following* ### 28. Governance practices, particularly at the state-owned banks, remain concerning. The ### 28–45: Governance, Structural Reforms, and Program Modalities ### Governance and state-owned banks - Governance practices, particularly at the state-owned banks, remain concerning. - State-owned banks re-introduced high-yield CD with rates that significantly exceeded the prevailing policy rate, suggesting state-owned banks may not be acting at arm’s length and posing possible negative implications for the financial health of the banking system and for developing a robust market-based transmission mechanism for monetary policy. - The CBE agreed not to issue any new subordinated debt to state-owned banks. - Staff will continue to explore avenues to strengthening the independence of state-owned banks. ### State-Ownership Policy (SOP) and SOE transparency (Structural Reform Policies) - Implementation of the State-Ownership Policy (SOP) will continue to be a key anchor of program reforms. - Authorities issued in February 2024 an executive regulation implementing the provisions of a law passed in July 2023 that aims to eliminate preferential tax treatment and exemptions for state-owned enterprises, including military-owned ones. - New structural benchmarks to enhance SOE transparency and track SOP implementation: - Re-instate regular publication on the appropriate government website of annual aggregate reports on Egypt’s SOE portfolio, with coverage expanded to include all state-owned enterprises (structural benchmark). - Include all procurement opportunities and awards made by the largest 50 state-owned enterprises on the general government’s e-tenders site (structural benchmark). ### Divestment strategy and projected inflows - Authorities plan a more strategic, sector-by-sector approach to divestment, based on IFC advice, focusing on large transactions in sectors appealing to foreign investors (assets that generate foreign exchange flows). - Interim focus: seek closure on already announced sales and pursue sale of state assets where the process is well advanced (examples cited: sale of windfarms, a power plant, and desalinization plants). - Conservative estimates and targets: - Another US$600 - US$700 million in USD flows from further divestments in FY2023/24 is possible, bringing total USD divestment flows from non-residents in FY2023/24 to about US$2.8 billion, excluding the Ras El-Hekma deal. - In FY2024/25, authorities have identified specific divestment opportunities to generate US$3.6 billion in dollar inflows, plus another 0.5 percent of GDP in additional divestment flows either denominated in EGP or USD. ### Business climate and competition reforms - Egypt Competition Authority (ECA) actions and timetable: - Implementing regulations for the December 2022 amendment to the Competition Law drafted; authorities committed to issue them through a Prime Ministerial decree by end-April 2024. - ECA redrafting amendments (initially submitted to Parliament in 2019) to strengthen ECA independence and address constitutional concerns; redrafted amendments to be submitted for Cabinet approval by end-June 2024 (new program commitment). - ECA creating a perception-based competitive neutrality index surveying key stakeholders on tax, capital, regulatory, and public procurement neutrality issues; high-level results will be published. ### Program financing and reserve buffers (EFF modalities) - Total projected program financing increased to US$7.8 billion in FY2023/24 and US$28.5 billion for the program period to allow slightly more reserve accumulation at end-FY2023/24 and further reserve increases over the remainder of the program. - The CBE will purchase US$15 billion of the US$24 billion of new financing from the Ras El-Hekma deal. - Authorities requested an augmentation of access under the EFF arrangement: - Requested augmentation of access is 184.70 percent of quota SDR3,761.52 million (or about US$5 billion). - Augmentation would be made available following completion of the combined 1st and 2nd EFF review; purchases divided in line with balance of payments gaps and augmentation spread over the remainder of the program. - Requested rephasing: availability date of the purchase associated with the second review to March 15, 2024, and of the third review to June 15, 2024. - Arrangement no longer subject to the Fund’s Exceptional Access procedures as Egypt’s exposure, following significant repurchases, is projected to remain below the normal cumulative access threshold of 600 percent of quota. - The Fund-supported program is fully financed: - Total financing needed to reach revised net international reserve targets for FY2023/24 is US$6.2 billion after accounting for US$1.6 billion from the IMF. - Assurances received that US$19 billion of official deposits from Arab countries at the CBE will remain at the CBE until after the expiration of the EFF arrangement in September 2026 and will not be used for purchase of equities or debt. - A rebooted divestment strategy and other external financing sources (multilateral support, additional external issuances, potential further support from the EU) expected to provide financing for the remainder of the arrangement. ### Safeguards, CBE financial position, and performance criteria - Safeguards assessment of the CBE completed in April 2023: - Legislative reforms have enhanced the CBE’s legal framework; audit and risk management processes strengthened. - Significant quasi-fiscal (development) lending to public sector agencies excluding the Ministry of Finance reached around EGP 765 billion by February 2023, appears to contravene the 2020 CBE Law, and compromises the central bank’s autonomy and financial position. - Authorities reported some repayment with the stock of lending at EGP 661 billion as of end-January 2024; outstanding loans are being serviced at the CBE lending rate. - Policy commitments and program conditions: - Prohibit new development lending to public agencies excluding the Ministry of Finance (performance criterion). - Develop a plan to gradually reduce the claims to zero (structural benchmark). - Authorities undertaking a comprehensive assessment of the CBE’s recapitalization needs and developing a recapitalization plan that considers the government’s debt management strategy and the importance of an independent and well-capitalized central bank (structural benchmark). - Recapitalization plan must consider implications of CBE’s full compliance with Egyptian Accounting Standards (EAS) and address deviations in financial statements (fair value measurement, disclosures on material balance sheet items, and related party transactions). ### Program monitoring, targets, and reporting - Next program review scheduled on a quarterly basis; program conditionality and reporting requirements strengthened. - Quantitative program targets agreed for end-March 2024, end-June 2024, end-December 2024, and indicative targets for end-September 2024. - Third review expected to be completed by June 2024; fourth review by December 2024 (based on end-March 2024 and end-June 2024 performance criteria, respectively). - New proposed performance criteria and indicative targets: - Performance criteria on the government’s overdraft at the CBE and central bank development lending to public sector agencies excluding the Ministry of Finance. - New indicative targets on government guarantees and public investment, including national projects. - Monetary policy consultation clause (MPCC) continues to monitor inflation performance and CBE policy stance: - MPCC bands around a central target of 7 percent intentionally set wide in the near term and narrow over time. - Data reporting requirements for the program have been enhanced to address shortcomings and improve monitoring. ### Risks, exposure, and staff appraisal - Enterprise risks elevated; capacity to repay the Fund is subject to high risks and contingent on full program implementation and materialization of all projected financing. - Egypt is the Fund’s third largest exposure in the General Resources Account; total Fund obligations relative to GDP, exports, reserves, and government revenue largely exceed the 75th percentile of comparator countries. - Fund credit outstanding as a share of gross reserves projected to reach 29.5 percent in FY2023/24. - Program failure risks include partial implementation of measures to support sustainable growth, reduce debt risks, and mobilize sufficient financing, which would pose reputational risks for the Fund; other risks include social discontent, escalation of regional conflicts, and materialization of contingent liabilities. - Staff appraisal highlights: - Recent conflict in Gaza and Israel and disruptions in the Red Sea worsen macroeconomic pressures (tourism, FDI, Suez Canal receipts). - New investment deal for Ras El-Hekma eases near-term pressures but could add to future external pressures if not managed properly. - Strengthened reform package under the EFF: unification of the exchange rate, monetary policy tightening (cumulative 800 basis point increase in the policy rate since February), commitment to a flexible exchange rate regime, liberalized FX system, tighter fiscal policy, greater transparency and control over off-budget activities, reformed and expanded divestment program, and measures to improve the business environment and reduce the state’s economic footprint. - Monetary policy and CBE actions to focus on reducing inflation; CBE’s data-dependent approach should be supported by improved monitoring of inflationary pressures and development of measures to track inflation expectations and changes in economic activity at high frequency. - Fiscal consolidation efforts include revenue-based measures, planned submission to parliament of amendments to the VAT law in FY2024/25, a commitment to limit expansion of free zones, full adherence to the automatic fuel price adjustment mechanism, and adjustments to financing and debt management strategy. - Enhanced monitoring and control of broader public sector expenditures, including Prime Ministerial decree establishing framework for monitoring and controlling overall public investment by Economic authorities and military-owned entities; commitments to limit granting of guarantees by the Ministry of Finance and expand fiscal reporting perimeter. - With macroeconomic stabilization policies in place, the stage is set for more aggressive structural reforms and divestments; withdrawal of the state and military from economic activity and improved competition in banking are critical. - Key program risks: sustaining the shift to a flexible exchange rate and liberalized FX system, political and social pushback to fiscal consolidation amid rising living costs, time needed for structural reforms to deliver, resistance from vested interests, frequent external shocks, and the need for timely enhanced reporting. Temporary quarterly monitoring and high-level public consultations are important risk mitigants. *Source: IMF document excerpt (paragraphs 28–45).* ### 46. Staff supports the authorities’ requests for a waiver of the missed June 2023 QPC on ### Staff supports the authorities’ requests for a waiver of the missed June 2023 QPC on NIR, augmentation of access, rephasing of disbursements, and recommends completion of the MPCC consultation with the Executive Board ### Waiver, augmentation, and program support - Staff supports the authorities’ requests for: - a waiver of the missed June 2023 quantitative performance criterion (QPC) on net international reserves (NIR); - augmentation of Fund access and rephasing of disbursements; - completion of the MPCC consultation with the Executive Board. - Staff supports the request for the waiver of nonobservance due to the corrective actions taken by the authorities. - Rationale: the augmentation will facilitate accumulating buffers against the backdrop of highly uncertain, adverse, and continuing economic effects of conflicts to help secure stability. - The attached LOI and MEFP present a strong set of policies and the authorities’ commitment to pursue the objectives of the strengthened Fund-supported program. ### Key macroeconomic projections and outlook (selected indicators) - Real GDP (annual change): 3.6; 3.3; 6.7; 4.0; 3.8; 5.3; 3.0; 4.4; 4.7; 5.1; 5.5; 5.6 (series as shown in Table 1 / Table 8). - CPI inflation (end of period): 5.7; 4.9; 13.2; 14.8; 35.7; 8.7; 32.1; 15.3; 12.9; 9.0; 7.1; 5.2 (series as shown). - Current account (percent of GDP): -2.9; -4.4; -3.5; -3.0; -1.2; -2.5; -6.3; -2.4; -2.4; -2.5; -2.6; -2.6 (Table 2b / Table 8). - Gross international reserves (in billions of US$): 37.2; 39.4; 31.5; 37.1; 32.8; 47.2; 42.8; 45.8; 53.8; 59.2; 60.3; 61.7 (Table 2a / Table 8). - In months of next year's imports of goods and services: 6.0; 6.8; 3.1; 3.7; 5.3; 4.6; 7.3; 6.9; 7.1; 6.9; 6.3; 5.8 (Table 2a / Table 8). - Gross debt, general government (percent of GDP): 86.2; 89.9; 88.5; 88.3; 95.9; 85.5; 96.5; 82.6; 77.3; 71.1; 65.7; 60.8 (Table 1 / Table 8). - Overall budget balance (percent of GDP): -7.5; -7.1; -6.2; -7.8; -6.0; -8.4; -6.3; -8.5; -6.4; -4.1; -2.8; -1.6 (Table 1 / Table 8). - Primary budget balance including divestment proceeds (percent of GDP): 1.7; 1.4; 1.3; 1.7; 1.6; 2.1; 7.1; 4.5; 5.3; 5.5; 5.5; 5.5 (Table 1 / Table 8). ### Fiscal and public finance stance (high-level) - Budget sector revenue and grants (percent of GDP): 15.9; 16.6; 16.9; 16.9; 15.4; 17.3; 15.3; 16.2; 17.3; 18.6; 18.9; 18.6 (Table 1 / Table 3b). - Budget sector expenditure (incl. net acquisition of financial assets) (percent of GDP): 23.4; 23.7; 23.1; 24.8; 21.4; 25.7; 21.7; 24.7; 23.7; 22.7; 21.7; 20.2 (Table 1 / Table 3b). - Energy subsidies (percent of GDP): 0.3; 0.3; 0.8; 1.0; 1.3; 0.9; 1.8; 1.8; 1.1; 1.0; 0.8; 0.4 (budget sector, Table 3b). ### External sector and financing - Current account (in US$, selected levels): -11.2; -18.4; -16.6; -12.6; -4.7; -11.1; -21.8; -7.8; -9.0; -10.7; -12.6; -14.1 (Table 2a). - Exports of goods and services (US$, series): 47.7; 44.7; 70.8; 76.4; 74.4; 79.8; 62.6; 68.3; 74.7; 82.2; 91.2; 100.4 (Table 2a). - Imports of goods and services (US$, series): -75.2; -81.6; -103.1; -107.3; -83.4; -111.3; -84.8; -84.0; -94.1; -105.8; -118.4; -131.0 (Table 2a). - Foreign direct investment (net, in billions of US$): 7.1; 4.8; 8.6; 9.7; 9.7; 12.1; 32.2; 8.4; 9.7; 11.1; 12.8; 14.3 (Table 2a). - External debt (percent of GDP): 32.3; 32.6; 32.8; 35.8; 41.8; 34.8; 43.0; 45.4; 38.2; 32.6; 29.4; 27.0 (Table 2a / Table 8). ### Monetary and financial indicators - Broad money (M2) (annual percent change): 17.5; 18.0; 23.5; 30.4; 24.7; 20.2; 38.6; 18.5; 11.2; 10.3; 11.3; 11.9 (Table 6). - Reserve money (annual percent change): -4.5; 25.1; 15.4; 20.8; 23.1; 28.2; 22.0; 12.6; 2.6; 16.8; 14.1; 6.5; 7.6 (Table 6). - Credit to the private sector (annual percent change): 19.5; 20.5; 24.3; 18.0; 25.4; 15.0; 30.0; 25.0; 18.0; 18.0; 23.0; 24.0 (Table 6). - Banking system indicators (selected): Regulatory capital to risk-weighted assets: 14.5; 14.0; 14.7; 15.7; 17.7; 20.1; 22.2; 20.9; 20.5; 19.0; 17.0; 17.5; 18.1 (Table 9). ### Program financing, augmentation, and schedule (selected) - Original EFF total (Table 12a): Total 2,350.17 million SDR (115.4 percent of quota). - Proposed augmented schedule (Table 12b): Total 6,111.69 million SDR (300.0 percent of quota); first and second reviews combined on March 15, 2024 (first and second reviews combined noted). - External financing needs and sources (Table 11, US$ billions): External financing needs (A) 21.5; 11.3; 23.1; 36.6; 28.6; 26.7; 18.7; 18.9; 17.0; 19.9 (series by year). External financing sources (B) 21.4; 12.6; 27.2; 39.4; 29.7; 20.4; 29.7; 21.7; 29.9; 21.5. Financing gap (F=E-D) examples: 6.1; 3.0; 6.0; 7.8; 3.0; 9.3; 1.4; 5.2; 0.9; 3.8 (Table 11). ### Structural benchmarks, implementation status (selected) - Several continuous and time-bound structural benchmarks are listed with status: - CBE will refrain from extending, renewing, or introducing any subsidized lending schemes — Continuous — SB — Met. - CBE will not grant exemptions for commercial banks to breach net FX open position limits — Continuous — SB — Met. - Publish all public procurement contracts that exceed EGP 20 million on the E-tenders portal (monthly; within 30 days) — Continuous — SB — Not met. - Continuous implementation of the retail fuel price indexation mechanism according to the formula (see TMU) — Continuous — SB — Not Met. - Repeal CBE instructions (Letter No. 49 of February 13, 2022) that requires the use of Letters of Credit to finance imports — End-December 2022 — Met. - Publish a state ownership policy, endorsed by the President, covering public sector companies and related reporting commitments — End-December 2022 — Met. - Obtain parliamentary approval of amendments to the competition law (mergers and acquisitions) — End-December 2022 — Met. - Publish CAO’s three most recent annual audit reports (FY2018/19, FY2019/20, FY2020/21) and introduce a binding requirement for timely publication — End-January 2023 — Not Met (rephased: reports published but binding requirement not introduced). - Expand the number of households benefitting from Takaful and Karama to 5 million — End-January 2023 — Met. - 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 — End-February 2023 — Met. - Publish a comprehensive annual tax expenditure report detailing exemptions and breaks — End-April 2023 — Not met (Rephased). - A number of other PFM, customs, property taxation, and arrears-monitoring benchmarks are recorded as Not met or Rephased (see Table 15 entries). *Source: IMF staff report (excerpts from the published tables and text provided).* ### Annex I. Risk Assessment Matrix ### Annex I. Risk Assessment Matrix ### Global Risks - Intensification of regional conflicts - Relative Likelihood: High - Impact if Realized: High - Description: Escalation or spread of the conflict in Gaza and Israel, Russia’s war in Ukraine, and/or other regional conflicts or terrorism disrupt trade (e.g., energy, food, tourism, supply chains), remittances, FDI and financial flows, payment systems, and increase refugee flows. - 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 volatility - Relative Likelihood: High - Impact if Realized: High - Description: A succession of supply disruptions (e.g., due to conflicts, export restrictions, and OPEC+ decisions) and demand fluctuations causes recurrent commodity price volatility, external and fiscal pressures in EMDEs, cross-border spillovers, 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. - Abrupt global slowdown or recession - Relative Likelihood: Medium - Impact if Realized: Medium - Description: Global and idiosyncratic risk factors cause a synchronized sharp growth downturn, with recessions in some countries, adverse spillovers through trade and financial channels, and market fragmentation triggering sudden stops in EMDEs. - 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. - Social discontent - Relative Likelihood: Medium - Impact if Realized: High - Description: High inflation, real income loss, spillovers from conflicts (including migration), worsening inequality, and disputed elections cause social unrest and detrimental populist policies. This exacerbates imbalances, slows growth, and leads to policy uncertainty and market repricing. - 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. ### Domestic Risks - Failure to allow for exchange rate flexibility - 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 inflation. - Recommended Policy Response: Implement package of consistent reforms including allowing the exchange rate to find its market-clearing equilibrium so it can act as a shock absorber, with two-way movements that reflect foreign exchange demand and supply conditions. - Tourism revenue, remittances, and/or Suez Canal revenue suffer amidst the continued war in Ukraine and the conflict in Gaza and Israel - Relative Likelihood: Medium - Impact if Realized: Medium/High - Description: Lower remittance, tourism, and Suez Canal inflows impact economic activity and dampen the growth outlook, while reduced foreign exchange 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 foreign exchange 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 more 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: Economic Authorities (EAs), SOEs, and central bank 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 EAs and SOEs. Implement state ownership policy. Clearly define and separate commercial and non-commercial activities of Economic Authorities and SOEs. Prohibit central bank lending to public sector agencies excluding the Ministry of Finance. --- ### Sovereign Risk and Debt Sustainability Framework: Summary Assessment ### Overall assessment - Egypt: Risk of sovereign stress — Overall: High - Near term: n.a. - Medium term: High - Long term: Moderate ### Sustainability assessment - Public debt is assessed as sustainable but not with high probability. This is based on high risks related to gross financing needs, while considering the mitigating impact from the country’s track record of sustaining high gross financing needs, supported by stable financing by domestic banks. - The overall risks of sovereign stress are assessed as high, based on the medium term and long term risk assessments. - Long-term risks are assessed as moderate, as the debt ratio and gross financing needs are projected to trend downwards with sustained primary surpluses and favorable interest-growth differentials, while there are risks to public debt related to pension cost increase. - Medium-term risks are assessed as high, given the risk signals from the debt fanchart module and the GFN module. The high risk signal from the GFN module reflects high average gross financing needs over the forecast horizon and the large claims of domestic banks on the government. - Final DSA summary assessment line: Sustainable but not with high probability. --- ### Debt Coverage, Structure, and Reporting Notes - Debt coverage in the DSA: The coverage in this analysis is for the general government, which is comprised of the 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 in baseline: - Budgetary central government: Yes - Extra budgetary funds (EBFs): Yes - Social security funds (SSFs): Yes - State governments: Yes - Local governments: Yes - Public nonfinancial corporations: No - Central bank: Yes - Other public financial corporations: No - Commentary on public debt structure: Public debt is mainly domestic, held by domestic banks, and in local currency, and it is subject to local law. Debt is primarily in marketable instruments, including a large share of T-bills. This results in a relatively short maturity of public debt. Residual maturity: 4.1 years. - Observations from charts (as described): Debt by currency shows composition across Foreign currency, Local currency, Local-linked. Public debt by holder shows concentration with Domestic commercial banks and Domestic other creditors; public debt governed primarily by Domestic law. --- ### Baseline Scenario: Key Projections (percent of GDP unless indicated otherwise) - Public debt 1/: - Actual 2023: 105.3 - 2024: 109.8 - 2025: 89.7 - 2026: 83.5 - 2027: 76.5 - 2028: 70.5 - 2029: 65.0 - 2030: 59.1 - 2031: 53.2 - 2032: 47.3 - 2033: 41.3 - 2034: 35.5 - Change in public debt: 10.1, 4.5, -20.1, -6.3, -7.0, -6.0, -5.5, -5.9, -6.0, -5.9, -5.9, -5.8 (for 2023–2034 respectively) - Contribution of identified flows: 4.2, -11.3, -8.0, -3.8, -4.8, -4.6, -4.6, -5.1, -5.3, -5.3, -5.4, -5.3 - Primary deficit (general government) 2/: -1.1, -1.7, -3.0, -3.9, -4.4, -4.3, -4.3, -4.3, -4.3, -4.3, -4.3, -4.3 - Noninterest revenues: 16.7, 17.3, 18.2, 19.3, 20.6, 20.9, 20.7, 20.7, 20.7, 20.7, 20.7, 20.7 - Noninterest expenditures: 15.6, 15.7, 15.3, 15.4, 16.3, 16.6, 16.3, 16.3, 16.3, 16.3, 16.3, 16.3 - Automatic debt dynamics: -0.5, -6.1, -4.6, 0.8, 0.1, 0.3, 0.3, -0.2, -0.4, -0.4, -0.5, -0.4 - Real interest rate and relative inflation: -6.1, -3.0, 0.0, 4.8, 4.1, 4.2, 4.1, 3.3, 2.8, 2.4, 2.0, 1.8 - Real interest rate: -11.1, -12.3, -10.4, 1.5, 1.8, 2.9, 3.2, 2.5, 2.1, 1.8, 1.5, 1.3 - Relative inflation: 5.1, 9.2, 10.5, 3.3, 2.3, 1.4, 0.9, 0.8, 0.7, 0.6, 0.6, 0.5 - Real growth rate: -3.5, -3.0, -4.7, -4.1, -4.0, -4.0, -3.8, -3.5, -3.2, -2.8, -2.5, -2.2 - Other identified flows: 5.7, -3.6, -0.4, -0.7, -0.6, -0.6, -0.6, -0.5, -0.5, -0.5, -0.5, -0.5 - Contingent liabilities: 0.0 for all years 2023–2034 - Other transactions: 5.7, -3.6, -0.4, -0.7, -0.6, -0.6, -0.6, -0.5, -0.5, -0.5, -0.5, -0.5 - Contribution of residual: 5.9, 15.8, -12.1, -2.4, -2.2, -1.4, -0.9, -0.8, -0.7, -0.6, -0.6, -0.5 - Gross financing needs: 28.5, 39.2, 41.9, 38.2, 31.9, 27.6, 24.6, 21.7, 19.9, 18.7, 15.3, 12.5 - of which: debt service: 29.9, 41.1, 45.0, 42.3, 36.5, 32.2, 29.1, 26.2, 24.4, 23.2, 19.8, 17.0 - Local currency GFN: 24.1, 32.6, 32.8, 34.0, 28.8, 26.9, 23.9, 21.9, 20.0, 19.3, 16.5, 13.8 - Foreign currency GFN: 5.8, 8.5, 12.3, 8.3, 7.7, 5.2, 5.2, 4.3, 4.5, 3.9, 3.3, 3.1 Memo: - Real GDP growth (percent): 3.8, 3.0, 4.4, 4.7, 5.1, 5.5, 5.6, 5.6, 5.6, 5.6, 5.6, 5.6 - Inflation (GDP deflator; percent): 24.8, 32.5, 27.8, 12.8, 10.4, 7.7, 5.8, 5.8, 5.8, 5.8, 5.8, 5.8 - Nominal GDP growth (percent): 29.5, 36.4, 33.5, 18.1, 16.0, 13.6, 11.8, 11.8, 11.8, 11.8, 11.8, 11.8 - Effective interest rate (percent): 9.7, 16.6, 15.1, 14.7, 13.0, 11.9, 10.9, 10.1, 9.8, 9.7, 9.3, 9.2 Commentary: After increasing in FY2022/23 and FY2023/24 (2023 and 2024 in the table and the chart) mainly due to exchange rate depreciation (for 2024 this is captured by the residual), public debt is projected to be on a downward trend, with sustained primary surpluses and favorable interest-rate growth differential. --- ### Medium-term Risk Assessment: Indicators and Signals - Debt fanchart module: - Fanchart width: 62.1 0.9 (percent of GDP) - Probability of debt non-stabilization (percent): 1.6 0.0 - Terminal debt-to-GDP x: 46.8 1.0 - Debt fanchart index (DFI): 1.9 - Debt fanchart signal: Moderate - Gross financing needs (GFN) module: - Average baseline GFN (percent of GDP): 33.9 11.6 - Banks' claims on the gen. govt (pct bank assets): 51.5 16.7 - Chg. in banks' claims in stress (pct banks' assets): 4.5 1.5 - GFN financeability index (GFI): 29.8 - Risk signal: High - Medium-term index: Combination of normalized Debt fanchart index and GFN financeability index results in a medium-term index indicating High risk. - Final assessment: Medium-term risks: High. - Probabilities: Prob. of missed crisis, 2024-2029, if stress not predicted: 72.7 pct. Prob. of false alarms, 2024-2029, if stress predicted: 3.4 pct. Commentary: Medium-term risks are assessed as high, given the risk signals from the debt fanchart and GFN modules. The high risk signal from the GFN module reflects high average gross financing needs and the large claims of the domestic banking sector on the government. --- ### Long-term Risk Analysis and Pensions - Long-term amortization module: does not trigger an overall risk indication. Long-term risks are assessed as moderate, as the debt ratio and gross financing needs are projected to trend downwards with sustained primary surpluses and favorable interest-growth differentials, while there are risks to public debt related to pension cost increase. - Selected long-run projection summary (variables cited): - Baseline extension of fifth projection year: Real GDP growth 5.6%, Primary Balance-to-GDP 4.3%, Real depreciation -5.5%, Inflation (GDP deflator) 5.8% - Custom baseline: Real GDP growth 4.5%, Primary Balance-to-GDP 2.0%, Real depreciation 0.0%, Inflation (GDP deflator) 4.5% - Pension financing needs: To keep pension assets positive for: - 50 years: Permanent adjustment needed in the pension system = 2.1% (pp of GDP per year) - Until 2100: Permanent adjustment needed = 3.1% (pp of GDP per year) - 30 years: Permanent adjustment needed = 4.8% (pp of GDP per year) - Charts described: Pension financing needs and Total benefits paid (per cent of GDP) are projected over 2024–2102, with scenarios "Custom" and "With pension cost increase" indicating rising long-term pressures. Commentary: Long-term amortization module does not trigger an overall risk indication. Long-term risks are assessed as moderate, as the debt ratio and gross financing needs are projected to trend downwards with sustained primary surpluses and favorable interest-growth differentials, while there are risks to public debt related to pension cost increase. *Source: IMF staff (Annex I. Risk Assessment Matrix; Annex II. Sovereign Risk and Debt Sustainability Framework).* ### Annex III. External Sector Assessment ### Annex III. External Sector Assessment ### Summary assessment of external position - The external position of Egypt in FY2022/23 was moderately weaker than the level implied by medium-term fundamentals and desirable policies. - Assessment reflects conditions prevailing at end-June 2023, following a nominal exchange rate depreciation of 65 percent in FY2022/2023. - Going forward, commitment to a flexible exchange rate regime, expenditure consolidation, and implementation of the structural reform agenda are essential for further improvements in competitiveness. - Reserves recovered marginally in FY2022/23 and are projected to experience a marked improvement in FY2023/24 and over the medium term on the back of significant foreign currency inflows from the Ras El-Hekma investment deal. ### Nominal and real exchange rate evolution - The pound depreciated by 65 percent in FY2022/23. - Exchange rate chronology and behavior: - Depreciated by 4 percent against the U.S. dollar in FY2022/23Q1. - Depreciated sharply in FY2022/23Q2 and FY2022/23Q3 (by 25 and 27 percent Q-o-Q, respectively). - Minimal fluctuations in FY2022/23Q4-20223/24Q2 (total Y-o-Y percent change of 65 percent in FY2023/24). - Depreciated sharply in FY24Q3 closing the gap between the official and parallel market. - Real effective exchange rate (REER) and nominal effective exchange rate (NEER): - REER depreciated in Q2-Q3, then appreciated slightly in FY2022/23Q4-2023/24Q2. - Inflation reached 38 percent in September 2023, driven primarily by food prices. - REER remained largely unchanged in January 2024 (beginning of FY2023/24Q3), as inflation declined to 29.8 percent. - NEER was relatively stable up to FY2022/23Q1, depreciated in FY2022/23 Q2-Q3, and remained relatively stable during 2022/23Q4-20223/24Q2. ### Current account balance and drivers - Egypt’s current account deficit narrowed in FY2022/23 to 1.2 percent of GDP, compared with 3.5 percent in FY2021/22. - Key drivers of the narrowing: - Improvement in the non-oil trade balance due to a decline in non-oil imports (partly from exchange rate depreciation and partly from shortages of foreign exchange and an outstanding FX backlog). - Boost to the services balance: tourism surpassed pre-COVID levels; transport receipts from the Suez Canal increased due to higher transit fees and tonnage. - Import backlog estimated at US$6.0 billion at end-June 2023 (or 1.5 percent of GDP), attributed to delays in processing letters of credit (LC) in 2022 Q2. - The current account turned into a deficit in FY2023/24 Q1 on account of a deterioration in the balance of services. ### EBA current account model and external sustainability approach (FY2022/23 / 2023 results) - EBA current account model (October 2023 WEO data) results for FY2022/23: - Cyclical adjustments amounting to 0.6 percentage point (negative output gap and positive terms of trade). - Cyclically adjusted current account: -1.8 percent of GDP. - Adjusted cyclically adjusted current account norm: -1.6 percent of GDP. - Current account gap: -0.2 percent of GDP (consisting of an identified gap of 0.6 percent of GDP and an unexplained gap of -0.8 percent of GDP). - Contribution from fiscal policies: 0.2 percentage point; other policy gaps: 0.4 percentage point; contribution from residual: -0.8 percentage point. - Semi-elasticity of CA/GDP to REER: 0.17. - External sustainability approach results for 2023: - An adjusted cyclically adjusted current account of -4.6 percent of GDP would be needed to stabilize Egypt’s net foreign assets (NFAs) at their FY2021/22 levels. - With the cyclically adjusted current account deficit at -1.8 percent of GDP in FY2022/23, this implies a current account gap of about 2.8 percent of GDP. - Semi-elasticity of CA/GDP to REER: 0.17 (memo). - Staff caveats and assessment: - Both model assessments reflect conditions prevailing at end-June 2023. - Staff assessment judges external position in FY2022/23 as moderately weaker than implied by fundamentals and desirable policies because: - Significant import compression in FY2022/23 partly resulted from CBE instructions to banks to use letters of credit as the only means of import facilitation in February 2022; elimination of this instruction by end-2022 left an import backlog of US$6.0 billion at end-June 2023. - The international investment position weakened in FY2022/23. - Exchange rate was de facto fixed from January 2023 until March 2024. - Baseline scenario incorporates expectation of a real effective exchange rate appreciation over the medium term, assuming maintained exchange rate flexibility and higher domestic savings via expenditure consolidation, including curbing off-budget national priority projects, and structural reforms to diversify exports. ### International investment position, international reserves, and intervention - Net international investment position (NIIP): - NIIP deteriorated to -65 percent of GDP in FY2022/23, from -49 percent in FY2020/21. - Total assets stood at 16 percent of GDP (1 percentage point of GDP higher than in FY2021/22), with increases in reserve assets and other assets. - Gross liabilities reached 81 percent of GDP in FY2022/23 (17 percentage points of GDP higher than in FY2021/22), driven primarily by an increase in FDI, deposit liabilities and other liabilities (primarily long-term loans by depository corporations). - Foreign reserves: - Reserves partially recovered to US$37 billion at end-June 2023, from US$32 billion at end-June 2022. - The end-June 2023 level corresponded to about 79 percent of the ARA metric for flexible exchange rate regimes. - Net international reserves are projected to increase to US$49.2 billion by end June 2024 (which corresponds to 115 percent of the ARA metric), benefiting from significant foreign currency inflows from the Ras El-Hekma investment deal. - Staff views the flexible metric as appropriate for Egypt given exchange rate movements in FY2022/23 and Q1-Q3FY2023/2024 and the authorities’ renewed resolve to maintain a flexible exchange rate regime during the EFF arrangement. --- ### Annex IV. Monetary Policy Consultation (selected findings relevant to external sector and inflation) ### Inflation breaches and drivers - Headline urban inflation: - 21.3 percent in December 2022 (outside agreed outer bands). - 35.7 percent in June 2023 (outside agreed outer bands). - Core inflation: - 24.4 percent in December 2022 (from 21.5 percent in November 2022). - 41.0 percent in June 2023 (from 40.3 percent in May 2023). - Key contributors to inflation breaches (Dec 2022 and Jun 2023): - Food price increases (dairy, red meat, poultry, pulses, other core food items); impacted by import restriction regulation that was repealed in December 2022. - Non-food inflation driven by higher prices of services and retail items, and higher regulated prices. - Exchange rate depreciations (major episodes in October 2022 and January 2023) contributed around 25 percent to monthly headline inflation during December 2022–June 2023. - Higher international commodity prices and international supply chain disruptions contributed about a third of monthly headline inflation dynamics during December 2022–June 2023. - Core food inflation record high: 79.4 percent in February 2023, declining to 76.3 percent in June 2023 (driven mainly by high poultry and red meat prices). - Second-round effects: restaurants and cafes annual inflation 47.4 percent in June 2023 (peak of 50.7 percent in February 2023). - Tobacco annual inflation: 47.3 percent in June 2023 (no new taxes on tobacco till June 2023). - Fiscal measures contribution: around 8 percent to monthly headline inflation during December 2022–June 2023 (including increasing prices of major subsidized food items in May 2023, raising domestic fuel prices, and raising regulated prices of medical care and other commodities/services). - Nominal wages increased with an average annual increase of 17 percent between December 2022 and June 2023; real wages growth remained negative since June 2021 till June 2023. ### Monetary and macro-financial environment - Broad money (M2) growth: - Historical average: 15 percent. - M2 in 2020: 17.4 percent. - M2 in 2021: 18.4 percent. - M2 in 2022: 23.7 percent. - High M2 growth and accommodative monetary policy during 2020–2022 contributed to inflationary pressures. - Policy responses and transmission: - CBE reaffirmed commitment to transition to an inflation targeting regime: target inflation as nominal anchor and allow exchange rate to be market-determined; unification of exchange rate seen as crucial to eliminate FX backlogs and act as shock absorber. - Monetary tightening cycle started in March 2022 to offset negative real interest rates from accommodative stance. - Key policy rate hikes cumulatively by 1900 bps since March 2022: - 800 bps in 2022, - 300 bps in 2023, - 800 bps in 2024. - Reserve requirement ratio raised in September 2022 from 14 percent to 18 percent. - Phasing out of subsidized lending schemes (CBE initiatives) and increasing liquidity absorption to strengthen transmission. - Rationale and effects of tightening: - Goals: anchor inflation expectations, contain demand-side pressures and second-round effects, preserve purchasing power of the Egyptian pound, and narrow inflation differential with trading partners. - CBE assumption: cumulative impact of interest rate tightening on the real economy peaks after three quarters. - Impact to date: contractionary on the real economy—real GDP growth slowed to 3.8 percent in FY 2022/23 from 6.7 percent in FY 2021/22. - Gross domestic investments contracted for four consecutive quarters as of 2022 Q3, driven mainly by declining public investments in FY 2022/23. - Private investments also contracting at a slower pace, reflecting cumulative impact of tightening since 2022 Q1 and declining real growth of private business sector loans in local currency. *Source: Annex III. External Sector Assessment and Annex IV. Monetary Policy Consultation, as provided in the content unit.* ### 16. Furthermore, monetary policy decisions remain data-driven through monitoring all ### 16. Furthermore, monetary policy decisions remain data-driven through monitoring all ### Monetary policy approach - Monetary policy decisions are data-driven through monitoring all economic, monetary and financial developments. - The authorities track a wide range of domestic and global indicators, including but not limited to: - leading indicators for the real economy, - measures of underlying inflation, - development of M2 growth, - real credit growth to the private sector. - Analysis focuses on the nature, persistence, and breadth of shocks, alongside changes in international commodity prices, global financial conditions, and political developments. - The Central Bank of Egypt (CBE) reaffirms commitment to utilizing all available instruments proactively to fulfill its medium-term price stability objective. ### Inflation outlook and drivers - 2023 headline inflation was mainly driven by food items rather than non-food items due to strong dynamics of food inflation and higher core food prices. - In 2023 Q3, volatile food had a stronger impact than core food items because of adverse weather conditions; this impact faded by 2023 Q4 in line with seasonal patterns. - Volatile food items generally have a transitory impact on Egypt’s inflation. - Near-term influences on inflation: - exchange rate depreciation, - projected higher regulated prices, - increased availability of products in the market. - The CBE’s current baseline forecast projects annual headline inflation to continue recording double-digit rates throughout 2024. - A significant decline in annual headline inflation is anticipated in 2025 due to the combined effects of ongoing tightening measures and favorable base effects, contingent on maintaining a sufficiently restrictive monetary policy stance. - Assuming the absence of unforeseen external shocks, a gradual moderation of annual headline inflation is expected over the medium term. ### Inflation targets and communication - Annual headline inflation rates are expected to deviate from the announced target of 7 percent (± 2 p.p.) on average in 2024 Q4, as communicated in the MPC press release on the 6th of March 2024. - The reassessment of the inflation targets will be clearly communicated in due course. - The MPC will set monetary policy at sufficiently restrictive levels to stabilize inflation expectations and bring inflation on a downward trajectory. - The CBE is coordinating with the government to develop solutions to domestic supply chain bottlenecks and increase availability of key staples. - The CBE is monitoring developments and stands ready to act further should inflationary pressures persist. ### Upside risks to the inflation path - Upside risks include, but are not limited to: - an escalation of current geopolitical tensions, potentially leading to higher international commodity prices and negative spillovers on services, - higher-than-expected fiscal consolidation measures, - a higher-than-expected tightening of global financial conditions that could persist for longer. ### Recent macroeconomic developments (selected) - Inflation: increased to 38.0 percent in September 2023; moderated but remained elevated at 29.8 percent in January 2024, with food inflation at 47.9 percent. - Net domestic assets of the CBE increased by 51 percent between end-June 2022 and end-December 2023. - Debt: budget sector debt increased to 98 percent of GDP. - Primary balance improved to 1.6 percent of GDP in FY2022/23. - GDP growth: slowed to 3.8 percent in FY2022/23 and decelerated to 2.7 percent year-on-year in the first quarter of FY2023/24. - Current account: deficit narrowed to 1.2 percent of GDP in FY2022/23. - Suez Canal receipts declined by 47 percent in January 2024 relative to January 2023. - Growth projection: growth is projected to slow in FY2023/24 to 3.0 percent. ### Policy actions and program adjustments - Shift to a flexible exchange rate regime and a liberalized foreign exchange system; backlog for foreign exchange demand is being eliminated. - Significant tightening of monetary policy: - CBE raised key policy rates cumulatively by 1,100 basis points between March 2022 and August 2023 (800 basis points in 2022 and 300 basis points in 2023) and another 800 basis points in early 2024. - Reserve requirement ratio raised in September 2022 from 14 percent to 18 percent. - The CBE will constrain further expansion of its balance sheet, including reducing the Ministry of Finance’s overdraft at the central bank and stopping central bank lending to other public agencies. - The CBE will sterilize liquidity injections from foreign exchange purchases and conversion of foreign exchange deposits into local currency. - Fiscal and structural measures: - Targeting a more ambitious primary surplus. - Use of proceeds from divestment program and $12 billion of receipts from the Ras El-Hekma investment deal to reduce government debt. - Slowing down implementation of public investment and strengthening management of the public investment portfolio. - Advancing divestment program, state-ownership policy, procurement reforms, and measures to enhance competition and ease of doing business. - Prime Minister decree requiring all public entities to report their investment activity. ### Program financing and requests to the IMF - Requesting augmentation of access equivalent to SDR 3,761.52 million (around US$5 billion) and rephasing of disbursements; request the purchase of SDR 618.11 million after completion of the first and second reviews. - Complementary support from other partners and commitment to capture $15 billion of Ras El-Hekma proceeds to build buffers. - Request Executive Board approval for: - waiver(s) of non-observance for the QPC on net international reserve accumulation (NIR) and the continuous PC on not imposing or intensifying exchange restrictions, - completion of the Monetary Policy Consultation with the Executive Board (triggered by breach in the upper band of the 12-month change in consumer prices), - modification of program targets to include new safeguards (QPCs) addressing monetary financing of the deficit and central bank lending to public agencies excluding the Ministry of Finance. - Program monitoring: more frequent reviews through quantitative performance criteria, indicative targets, and structural benchmarks; third review expected on or after June 15, 2024, and fourth review on or after September 15, 2024. *Source: 1egyea2024001 - 16. Furthermore, monetary policy decisions remain data-driven through monitoring all* ### 8. We are implementing a recalibrated and strengthened reform package that includes a ### 8. We are implementing a recalibrated and strengthened reform package that includes a move to a flexible exchange rate regime and a liberalized foreign exchange system and tightening of macroeconomic policies to bring down inflation and safeguard external and debt sustainability. ### Exchange Rate and Foreign Exchange System - Shifted permanently to a flexible exchange rate regime and a liberalized foreign exchange system (March 2024). - CBE communicated exchange rate flexibility as a main pillar for transition towards an inflation targeting regime (MPC press release). - Circular to banks issued to cancel foreign exchange requests if clients do not accept prevailing market exchange rates. - Prior action and structural benchmark indicators to evidence and monitor the shift: - Effective elimination of foreign exchange demand backlogs at commercial banks (prior action). - Closing of the spread between the official exchange rate and measures of the market-clearing rate (prior action). - Increased FX turnover in the interbank market (prior action). - Continuous performance criterion commitments during the program period: - No introduction or intensification of exchange restrictions or multiple currency practices. - No imposition or intensification of import restrictions for balance of payments purposes. - No conclusion of bilateral payment agreements inconsistent with Article VIII of the IMF’s articles of agreement. - CBE intervention guidance and banking limits: - Occasional CBE step-in allowed at times of excessive exchange rate volatility, but no recourse to foreign exchange interventions or use of banks’ net foreign assets with intent to stabilize or guarantee the exchange rate level. - Interventions guided by a volatility-based intervention framework. - CBE will not grant exemptions for commercial banks that breach net foreign exchange open position limits and will apply sanctions to banks that violate the limits. - CBE to provide data to the IMF team as defined in the TMU on FX backlogs, individual banks’ net open position, net foreign assets, and foreign exchange transactions on the interbank market. - CBE to consult with IMF staff if aggregate banks’ NFAs show a cumulative decline of $2 billion over a three-month period (see TMU). ### Monetary Policy and Inflation Targets - Policy tightening actions: - CBE increased the policy rate by 200 basis points on February 1, 2024 (prior action). - CBE increased the policy rate by a further 600 basis points on March 6, 2024 (prior action). - Move shifts the real interest rate back towards positive levels. - Continuous performance criterion and structural benchmark on lending and claims: - CBE will not increase its lending to public sector agencies excluding the Ministry of Finance (continuous performance criterion). - CBE to issue a plan, approved by the CBE Board and agreed with the Egyptian government and Ministry of Finance, to reduce existing claims on these agencies to zero by end-FY2025/26 (structural benchmark). - Ministry of Finance to reduce the government’s overdraft at the CBE to within the statutory limit by end-March 2024 (performance criterion) using a market-based approach. - Liquidity and sterilization: - CBE will sterilize the injection of EGP liquidity from foreign exchange purchases and the conversion of UAE dollar deposits into local currency. - Data-dependent approach and monitoring: - CBE will follow a data-dependent approach and stand ready to act further should inflationary pressures persist. - CBE will continue to support monitoring of inflation with an MPCC. - MPCC will trigger consultations with IMF staff when headline urban CPI inflation (y/y) falls outside the CBE’s inflation target of 7 ±2 percent range (i.e., inflation falls outside 5 to 9 percent). - MPCC will trigger consultations with the Executive Board if inflation falls outside the outer bands of: - 3 to 27 percent in March 2024, - 3 to 32.5 percent in June 2024, - 3 to 29 percent in December 2024. ### Strengthening Monetary Transmission - Observed transmission: - Daily overnight interbank rate remaining within 50 basis points of the mid-corridor rate. - CBE refrained from introducing new subsidized lending schemes to remove passthrough distortions. - Structural benchmark to reinforce transmission: - CBE will design the main 7-day deposit auction as a fixed-rate full-allotment auction with the fixed-rate being the mid-corridor rate, with each operation published on the CBE’s website (structural benchmark). - CBE will continue to refrain from extending, renewing, or introducing any subsidized lending schemes. ### External Reserves and External Sustainability - Target and composition: - Target a further gradual buildup of net international reserves (performance criterion). - Comprehensive definition of net international reserves includes Tier 1 and Tier 2 assets of the CBE and any other foreign currency assets held by the CBE usable for reserve management (see TMU). - Specific reserve goals tied to the Ras El-Hekma deal: - Net international reserves to increase by $13.7 billion over FY2023/24 to reach $30.3 billion by June 2024. - Net international reserves target of $29.6 billion by December 2024. - Commitment: - Will not accumulate any general government external debt payment arrears (continuous performance criterion). - Will continue to boost foreign exchange buffers should the sale of public assets generate foreign exchange inflows. ### Fiscal Policy and Debt Reduction Targets - Recent fiscal context: - Fiscal consolidation in FY2022/23 increased the primary surplus to 1.6 percent of GDP, but budget sector debt rose due to depreciation of the Egyptian pound and increased interest payments. - FY2023/24 and FY2024/25 primary surplus targets: - FY2023/24 budget targeting a primary surplus of 2.5 percent of GDP, inclusive of 0.4 percent of GDP of divestment proceeds that flow to the budget. - Commitment to secure the Egyptian pound equivalent of $12 billion proceeds from the Ras El-Hekma investment deal with ADQ to reduce public debt; this one-off windfall will boost the primary balance by 4.6 percent of GDP, bringing it to 7.1 percent of GDP in FY2023/24 (performance criterion). - FY2024/25 target a primary surplus of 3.5 percent of GDP, plus targeting 1 percent of GDP of divestment proceeds to be transferred to the treasury to reduce budget sector debt. - Prior action and structural revenue measures: - Cabinet to approve the draft budget law for FY2024/25 reflecting these targets, underpinned mostly by new structural revenue measures expected to improve tax and dividend revenue by about 1.0 percent of GDP in FY2024/25 (prior action). - Identified tax measures of 0.4 percent of GDP, including full year impact of previously implemented law eliminating preferential tax treatment and exemptions for SOEs and rationalization of VAT exemptions. - Enact a law to speed up resolution of tax disputes to provide additional 0.2 percent of GDP tax revenue for FY24/25. - Submit to parliament amendments to the VAT law to simplify VAT, rationalize exemptions, and enhance efficiency and progressivity by November 2024 (structural benchmark). VAT reform will target a structural increase in tax revenue of at least 1 percent of GDP on a 12-month basis. - Executive regulation published to ensure full implementation of law removing preferential tax exemptions for SOEs. - Divestment and asset sales: - Establish the Ministry of Finance asset divesture committee with a target of generating EGP 20–25 billion annually for the treasury over the coming years. - Commitment to a floor on tax revenues (indicative target) and a ceiling on gross debt of the budget sector (indicative target) to bring gross debt of the budget sector below 90 percent of GDP by end-FY2025/26. - Freezones and revenue protection: - By end-September 2024 undertake a detailed assessment of the economic and financial benefits of current freezones (structural benchmark) and limit any further expansion of freezones until assessment is conducted. - Medium-term targets to FY2026/27: - Target improvement in the primary surplus inclusive of divestment proceeds of 5.5 percent of GDP by FY2026/27. - Tax revenue to GDP to increase by at least 3 percentage points by FY2026/27. - Additional tax and administrative measures to be introduced, including: - Full implementation of taxation and e-commerce on all traded goods. - Implement a new Income Tax Law by FY2025/26. - Adopt a withholding tax on turnover from exports from freezones in Egypt to the domestic market. - Adopt green fees and taxes in line with international best practices. - Implement reforms adopting the Automatic Exchange of Information Standard by FY2026/27. - Accelerate reform of property taxation. - Introduce anti-fraud measures and strengthen the e-tax platform. ### Fuel Pricing and Social Protection Trade-offs - Fuel price adjustments to reduce subsidies: - Commit to increase prices for gasoline grade fuels (octane 80, 90, and 95) in March 2024, including any catch-up adjustments (prior action). - Develop a plan to adjust diesel prices to be fully in line with the level implied by full implementation of the indexation formula since the start of the program. - Recurring structural benchmark: continuously implement in full the retail fuel price indexation mechanism according to the formula and refrain from reducing fuel prices until the level of fuel subsidies for products covered by the mechanism since FY2021/22 has been eliminated (see TMU for formula). - Strengthen communication on the mechanism and continue efforts to record and publish fuel subsidies and any liabilities to Egyptian General Petroleum Corporation (EGPC). - Social mitigation measures and commitments: - Expanded Takaful and Karama coverage to more than 5 million households and increased average monthly payments by 15 percent by end-June 2023. - Raised the minimum public sector wage by almost 17 percent in 2023 and issued monthly nominal increases to protect public sector employees’ wages. - Increased pension payments for civil servants by 15 percent. - February 2024 announcement of an additional EGP 180 billion social protection package for FY2024/25, including: - 50 percent increase in the public sector minimum wage. - 15 percent pension increase. - Increase in the personal income tax exemption threshold by more than 30 percent. - Increase in performance bonuses and other specific allowances to almost 2 million teachers and 0.6 million doctors and health experts. - Will publish a report evaluating the social housing program and explore efficiency gains in food subsidies. - Continue rollout of universal health insurance scheme. - Commitment to a minimum level of social spending consistent with protecting those most in need (indicative target). ### Public Investment Management - Measures to slow and reprioritize public investment: - Slow implementation of public investment projects less than 70 percent complete. - Cut funding for budget sector investment in the second half of FY2023/24 by 15 percent relative to the prior year and postponed any new projects. - Prime Minister decree requires all public entities to report annual projected investment, including projects by ACUD, NUCA, Armed Forces Engineering Authority and affiliates, to a cabinet-level committee chaired by the CAO. - First submission outlining projected investment for FY2024/25 due by April 30, 2024, and then annually by April 30 thereafter. - Decree requires reporting each October and April on investment spending executed over January – June and July – December, respectively. - Target ceilings on total public investment: - Target ceiling for value of total public investment over January – June 2024 is EGP 350 billion (indicative target). - Target for FY2024/25 is EGP 1,000 billion (indicative target). ### Transparency, Public Financial Management, and SOE Reforms - Publication and audit transparency: - Publish a comprehensive annual tax expenditure report, including available details and estimates of tax exemptions and tax breaks broken down by classification, including those provided to companies operating in free economic zones and to all state-owned enterprises, public sector companies, public business sector companies, military-owned companies, economic authorities, and joint ventures and partnerships (structural benchmark, reset to end-April 2024). - Identify tax exemptions that are no longer economically or socially justifiable and work gradually to eliminate or streamline them based on the report. - Introduce a binding requirement to ensure timely publication of the Central Auditing Organization’s (CAO) annual audit reports on the fiscal accounts (structural benchmark, reset to end-March 2024). - Procurement transparency: - Publish on the procurement portal website in open access format all procurement contracts exceeding EGP 20 million, including, if awarded through bidding, information on all bids made, the winning bid, and names of successful bidders, accessible without need to set up an electronic account (recurring structural benchmark). - Monthly publication with one month lag (end of each month). - PFM law executive regulations (structural benchmark, reset to end-March 2024) to include: - Main elements of the budget calendar starting with submission and approval of the fiscal strategy paper. - Process to update and publish the MTBF taking into account costing of new laws and regulations. - Requirement for all entities to separate baseline and new policy initiatives. - Section on climate providing a mandate for climate-related activities. ### Fiscal Perimeter Expansion and Economic Authorities - Expanding general government reporting perimeter: - Create new national fiscal indicators that include the general government and economic authorities, beginning in FY2024/25 with inclusion of a maximum of 40 economic authorities and gradually expand by adding 5 economic authorities each subsequent year so that all economic authorities are covered by FY2029/30. - Economic authorities to report semiannually in the first year and then quarterly in subsequent years to the Ministry of Finance, which will have authority to request information. - Introduce binding ceilings on the debt of entities included in these indicators in the annual budget law; adjustments require recommendation from the Ministry of Finance and parliamentary approval. - Sector classification exercise: - Conduct a sector classification exercise of all 59 economic authorities, in accordance with GFSM 2014 concepts and principles, and document the rationale for each classification decision by end-September 2024 (structural benchmark). *Source: ARAB REPUBLIC OF EGYPT — International Monetary Fund (selected chapter text).* ### 19. We will establish a repayment strategy to reduce arrears to international oil companies. ### 19. We will establish a repayment strategy to reduce arrears to international oil companies. ### Repayment strategy and arrears - EGPC has accumulated payment arrears on supply contracts of about $4.5 billion, denominated in US dollars. - Buildup of arrears reflects foreign exchange shortages and structural factors: a cyclical downturn in domestic production of gas, higher domestic consumption reducing scope for gas exports, and increased subsidies from EGPC to the electricity sector. - A ministerial decree has established a committee for negotiating deferral agreements with all suppliers. - Policy commitment: develop a repayment strategy with the objectives of ensuring that no new arrears are accumulated, and existing arrears will be cleared (structural benchmark). - Commitment: ensure that any other public entities outside the general government repay any external arrears they may have in a timely manner. ### Transparency and reporting - Resume publication of EGPC’s financial statement on a semi-annual basis, starting with the statement for end-December 2023, to provide transparent reporting of the level of EGPC’s arrears. - The Ministry of Finance will report annually the payment arrears of the budget sector, including to critical SOEs and EAs, and publish an annual report within 90 days of the end of the fiscal year (recurrent structural benchmark) on: - stocks of commitments, - overdue payments, - overdue transactions, - stock of gross liabilities and due payments to and from the Ministry of Finance with a specified list of 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; EgyptAir). ### Debt management and related measures - Apply half of the new financing from the Ras El-Hekma investment deal for debt reduction. - Target to lengthen the average maturity of debt as financing conditions improve. - Indicative target: maturity of new gross local currency debt issuance through public placements in FY2023/24 of 0.65 years. - Sought to extend maturity of existing domestic debt held by domestic banks and pension and health funds. - Increased official sector external financing; reduced use of the overdraft at the CBE to within the statutory limit. - Undertake comprehensive assessment of the CBE’s recapitalization needs and develop a recapitalization plan; implement this recapitalization plan by end-April 2024 (structural benchmark). - Commit to establish an agreement between the CBE and the Ministry of Finance that regularizes the use of the 2021 SDR allocation for fiscal purposes. - Asset divestment resources to be used first and foremost to reduce public debt and the associated debt service cost, and to facilitate payment of arrears; such resources will not be used to capitalize existing or new public sector companies. ### Fiscal risk control and off-budget exposures - Ensure that the stock of government guarantees relative to GDP will stabilize for the remainder of the current fiscal year at their end-September 2023 level and decline as a percent of GDP starting from end-June 2024 (indicative target). - Publish an annual fiscal risk statement as part of the budget documentation, starting from FY2024/25 in line with IMF technical assistance. ### Financial sector measures linked to arrears and stability - Continue to monitor banks’ maturity and composition of foreign currency assets and liabilities and exposure to public sector agencies following exchange rate unification and monetary tightening. - CBE to establish a bank resolution unit (post-IMF technical assistance). - CBE will publish semi-annual financial stability reports (with English translation) and ensure all instructions and guidance to banks are undertaken through formal written channels. - CBE to complete stress tests of the banking sector and share detailed results with IMF staff by end-September 2024; tests to be prepared in consultation with IMF staff (structural benchmark). - CBE will not issue any new subordinated debt to state-owned banks and will develop proposals for strengthening the independence of state-owned banks for commitments at the time of the next review. ### State ownership, divestment, and use of proceeds - State-ownership policy (published late-2022) applies to all state-owned enterprises and requires regular submission of financial data to the Prime Minister’s office. - Re-instate regular publication of annual aggregate reports on Egypt’s SOE portfolio, expanded to include all state-owned enterprises covered by the state-ownership policy; report to be published in September 2024 (structural benchmark). - Develop an indicator to track implementation of the state-ownership policy (structural benchmark). - Divestment progress: closed deals netting proceeds worth $2.4 billion and yielding $2.2 billion of US dollar inflows so far in FY2023/24; anticipate at least another $600 million in U.S. dollar inflows from deals well advanced. - FY2024/25 target: sales of four or more assets in the energy and manufacturing sectors yielding $3.6 billion in foreign exchange inflows. - Channel 1 percent of GDP of divestment flows to the budget in FY2024/25 and another 0.7 percent of GDP in FY2025/26 to support debt reduction. - Foreign exchange proceeds from sales of state-owned assets will be deposited at the CBE and will support goal of increasing net international reserves. ### Complementary governance and business environment reforms - Legislation passed in July 2023 eliminating preferential tax treatment and exemptions for state entities became effective in February 2024. - Include procurement opportunities and awards made by the largest 50 state-owned enterprises on the general government’s e-tenders site by September-2024 (structural benchmark). - Continue monthly publication on the procurement portal of all government procurement contracts exceeding EGP 20 million (recurring structural benchmark). - Align payment terms of public companies’ utility bills with those of private companies. - Competition Law amendments: executive regulations for ex-ante merger control to be completed by end-April 2024; further amendments to strengthen the ECA’s independence to be submitted for Cabinet approval by end-June 2024. - Expand “Golden Licenses” approvals to be available to all commercial entities. - Create an integrated information system outlining all steps involved in land allocation; prepare legislative amendments to facilitate use of land under investment as collateral. - Amend Law 62 of 1975 and executive regulations to digitalize and automate asset declaration forms, require submission at least once every three years (with objective of annual submission within program horizon), widen coverage to top officials in all state-owned enterprises; publish an annual report showing compliance rate with asset declaration submission. - Egypt Customs Administration to conduct a Time Release Study (TRS) in accordance with the World Customs Organization TRS methodology. ### Financing, reserves, and implications for arrears management - CBE will purchase at least $15 billion of the $24 billion of new financing from the Ras El-Hekma investment deal. - Convert ADQ’s existing deposit of about $11 billion at the CBE into an EGP denominated deposit for investments across Egypt, while the CBE will keep the $11 billion in foreign exchange reserves—reducing foreign liabilities of the CBE and improving the composition of reserves. - Secured assurances that $19 billion of official deposits from Arab countries at the CBE that existed at end-January 2024 do not mature until after completion of the four-year Extended Fund Facility in September 2026 and will not be used for the purchase of equities or debt. - Current projections: total financing needed to reach the revised net international reserve targets for FY2023/24 is $6.2 billion after accounting for $1.6 billion from the IMF. - These financing and reserve measures are intended to close the previously estimated financing gap for the 12 months ending March 2025 and to exceed the reserve targets envisaged at the start of the program for end-FY2023/24. *International Monetary Fund — Arab Republic of Egypt, Program Memorandum excerpts.* ### 30. The program will be monitored through prior actions, quantitative performance ### 1egyea2024001 - 30. The program will be monitored through prior actions, quantitative performance criteria, indicative targets, and structural benchmarks ### Monitoring framework and review schedule - Program monitoring instruments: - Prior actions - Quantitative performance criteria (PC) - Indicative targets (IT) - Structural benchmarks (SB) - Review schedule: - Third review requires observance of end-March 2024 performance criteria. - Fourth review requires observance of end-June 2024 performance criteria. - Following the fourth review, program reviews will be semi-annual and based on end-December and end-June test dates. - All quantitative PCs and ITs listed in Table 1; prior actions and SBs detailed in Table 2. - The Technical Memorandum of Understanding (TMU) defines PCs, ITs, SBs, consultation clauses, and data provision requirements. ### Key quantitative definitions and program exchange rates (TMU) - Program exchange rates for FY2022/23 (prevailing on September 30, 2022): - SDR 0.781323 per U.S. dollar - Euro 1.0293 per U.S. dollar - U.K. Pound 0.9213 per U.S. dollar - Japanese Yen 144.7094 per U.S. dollar - Saudi Arabian Riyal 3.7576 per U.S. dollar - Chinese Yuan 7.1305 per U.S. dollar - 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 valued at $1654.80 per troy ounce (the rate on September 30, 2022). - Program exchange rates for FY2023/24 and FY2024/25 (prevailing on January 31, 2024): - SDR 0.751945 per U.S. dollar - Euro 0.9228 per U.S. dollar - U.K. Pound 0.7883 per U.S. dollar - Japanese Yen 147.5000 per U.S. dollar - Saudi Arabian Riyal 3.7500 per U.S. dollar - Chinese Yuan 7.1807 per U.S. dollar - U.A.E. Dirham 3.6725 per U.S. dollar - The program exchange rate of the Egyptian pound against the U.S. dollar for FY2023/24 is 30.8272 (the CBE’s official buy rate on January 31, 2024). - Monetary gold valued at $2053.25 per troy ounce (the rate on January 31, 2024). ### Net International Reserves (NIR) floor (PC) — definitions and adjustors - NIR definition: - Difference between foreign reserve assets and foreign reserve-related liabilities of the CBE. - Assets and liabilities in currencies other than the U.S. dollar are converted using program exchange rates. - Foreign reserve assets include: - CBE holdings of monetary gold, SDRs, foreign currency cash, foreign currency securities, deposits abroad (irrespective of maturity), the country’s reserve position at the Fund, CBE’s foreign currency deposits at local banks, and other foreign currency assets usable for reserve management. - Excludes assets frozen, pledged, used as collateral, assets from short-term currency swaps with original maturity of less than 360 days, claims on residents other than CBE foreign currency deposits at local banks, precious metals other than gold, assets in nonconvertible currencies, and illiquid assets. - As of December 31, 2023, foreign reserve assets thus defined amounted to $39,517 million. - Foreign reserve-related liabilities include: - All short-term foreign exchange liabilities of the CBE with original maturity of less than 360 days, except deposits at the CBE with original maturity of less than 360 days owed to official GCC member creditors. - Include government’s foreign currency deposits with original maturity of less than 360 days, banks’ required reserves in foreign currency, and all credit outstanding from the Fund on the CBE balance sheet. - Excludes liabilities under currency swaps with original maturities of 360 days or more. - As of December 31, 2023, foreign reserve-related liabilities thus defined amounted to $18,199 million. - Adjustors to the NIR floor: - (i) Deviation in program disbursements relative to projections. - (ii) Deviation in external commercial borrowings relative to baseline assumptions. - (iii) Deviation in the stock of government T-bills and T-bonds denominated in local currency and held by nonresidents relative to program assumptions. - (iv) Repo margin calls. - (v) Use of reserves according to an FX intervention framework. - Program disbursements are defined to include (selected highlights): - Disbursements of loans denominated in foreign currency, grants, deposits for budget support, net issuance of FX T-bills, purchases under the IMF’s Extended Fund Facility, foreign reserve-related loans and deposits to the CBE with original maturity of more than 360 days (with exceptions), rollovers by more than 360 days of existing foreign loans and liabilities, and foreign currency resources generated by sales of state-owned assets (excluding the Ras El-Hekma investment deal). - Program disbursements do not include project loans and project grants. - Specific adjustor rules and program projection values: - Adjustor for deviations in program disbursements: - NIR floor adjusted up by full amount of any excess and down by full amount of any shortfall in cumulative program disbursements relative to projections. - Projections for cumulative external program disbursements (excluding the IMF) from June 30, 2023: - $4,941 million as of end-March 2024 - $6,204 million as of end-June 2024 - $1,531 as of end-September 2024 - $3,649 million as of end-December 2024 - Adjustor for deviations in external commercial borrowings: - NIR floor adjusted up by full amount of any excess in net external borrowings from private creditors in foreign currency relative to baseline BOP projections. - Projections for net external borrowing from private creditors from December 2023: - $643 million as of end-March 2024 - $110 million as of end-June 2024 - $1,000 million as of end-September 2024 - $2,500 million as of end-December 2024 - Adjustor for deviations in stock of local-currency T-bills and T-bonds held by nonresidents: - NIR floor adjusted up by 50 percent of any excess in the stock relative to program assumptions. - Program assumptions for the stock of local currency T-bills and T-bonds held by nonresidents: - $1,550 million for end-March 2024 test date - $1,850 million for end-June 2024 test date - $1,950 million for end-September 2024 test date - $2,050 million for end-December 2024 test date - 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 intervention is consistent with the intervention framework. ### Prior actions and structural benchmarks (selected items, statuses, and timings) - Prior actions (timing: to be observed five business days before the Board meeting unless otherwise noted): - A shift to a flexible exchange rate regime and a liberalized foreign exchange system. - Status: Not met. - Cabinet approval of the FY2024/25 draft budget law in line with agreed fiscal parameters (3.5 percent of GDP primary surplus excluding divestment proceeds and an additional 1 percent of GDP of divestment proceeds) including a 1 percent of GDP increase in tax and dividend revenue, based on structural measures. - Status: Not met. - Increase the retail gasoline prices, including any catch-up adjustments in March 2024 to ensure gasoline prices are fully in line with the automatic fuel price mechanism formula since the start of the program. - Status: Not met. - CBE to increase the overnight deposit rate, main operation rate, and overnight lending rate each by a cumulative 800 basis points. - Status: Met. - Recurring structural benchmarks (examples and timing): - Publication monthly of all public procurement contracts that exceed EGP 20 million on the E-tenders government procurement portal website; ensure access without an electronic account. - Type: Recurring SB (Existing). Timing: 30 days after month end. - Implementation of the retail fuel price indexation mechanism according to the formula (see TMU); reductions delayed until prior-year fuel subsidies for covered products have been eliminated. - Type: Recurring SB (Existing). Timing: Last day of the month after quarter end. - The Ministry of Finance will monitor and report payment arrears, including to critical SOEs and EAs, 90 days after fiscal year end as defined in the TMU. - Type: Recurring SB (Existing). Timing: 90 days after each fiscal year end. - Reset and new structural benchmarks (selected, with timing): - Introduce a binding requirement to ensure timely publication of CAO’s annual audit reports on the fiscal accounts. - Type: SB (Reset). Timing: End-March 2024. - Enact executive regulation of the PFM law including budget calendar elements, MTBF update and publication process, separation of baseline and new policy initiatives, and a climate section mandate. - Type: SB (Reset). Timing: End-March 2024. - Publish a comprehensive annual tax expenditure report covering exemptions and breaks across classifications and entities. - Type: SB (Reset). Timing: End-April 2024. - Sustain the flexible exchange rate regime (assessed comprehensively over inter-review period). - Type: SB (New). Timing: To be assessed once for each program review. - Implement a plan for recapitalization of the CBE based on an assessment of CBE’s recapitalization needs in consultation with IMF staff, considering full compliance with Egyptian Accounting Standards (EAS). - Type: SB (New). Timing: End-April 2024. - CBE to introduce fixed rate, full allotment of 7-day deposit operations at the mid-corridor rate and publish results within one hour of operation allotment. - Type: SB (New). Timing: End-April 2024. - CBE to issue a Board-approved plan to reduce existing claims on public sector agencies (excluding the Ministry of Finance) to zero by end-FY2025/26, specifying repayment or off-balance-sheet treatment. - Type: SB (New). Timing: End-April 2024. - Develop a repayment strategy to clear accumulated payment arrears by Egyptian General Petroleum Corporation (EGPC) on supply contracts denominated in US dollars, aiming for no new arrears and clearing existing arrears. - Type: SB (New). Timing: End-April 2024. - Indicator to track implementation of the state-ownership policy. - Type: SB (New). Timing: End-June 2024. - CBE to complete banking sector stress tests and share detailed results with IMF staff. - Type: SB (New). Timing: End-September 2024. - Sector classification exercise of all 59 economic authorities in accordance with GFSM 2014. - Type: SB (New). Timing: End-September 2024. - Monthly publication on the general government’s e-tenders site of all procurement contracts and awards made by the largest 50 state-owned enterprises. - Type: SB (Recurring New). Timing: End-September 2024. - Re-instate regular publication of annual aggregate reports on Egypt’s SOE portfolio with broader coverage. - Type: SB Recurring (New). Timing: End-September 2024 and then end-September each subsequent year. - Undertake detailed assessment of economic benefits of current freezones. - Type: SB (New). Timing: End-September 2024. - Submit to parliament amendments to the VAT law to simplify VAT, reduce exemptions, and enhance efficiency and progressivity. - Type: SB (New). Timing: End-November 2024. ### Additional TMU operational notes - For assessment purposes, assets and liabilities in other currencies are converted at the program exchange rates defined in the TMU. - For definitions of aggregates shown and details of adjustment clauses, see the TMU. - As of December 31, 2023: - Foreign reserve assets amounted to $39,517 million. - Foreign reserve-related liabilities amounted to $18,199 million. *Source: IMF staff report (Technical Memorandum of Understanding and Tables 1–2, March 2024).* ### 10. The budget sector comprises 184 central government (administration) units, including the ### 1egyea2024001 - 10. The budget sector comprises 184 central government (administration) units, including the ### Budget sector coverage and composition - The budget sector comprises 184 central government (administration) units, including the executive powers (presidency, parliament, senate, and ministers), the legislative powers (judiciary and prosecution), 323 local government units, and 156 entities in the public service authorities (which include universities and hospitals). ### Fiscal balance definitions and recent outcome - Primary fiscal balance (program definition): overall balance measured on a cash basis minus total cash interest payments of the budget sector. - Overall balance (program definition): total revenue and grants minus total expenditure plus net acquisition of financial assets, measured cumulatively from the beginning of the fiscal year. - For FY2022/23, the primary balance of the budget sector thus defined was EGP164 billion. ### Off-budget funds and reporting - 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 operations of fiscal nature as defined in the IMF’s Government Finance Statistics Manual 2014. ### Divestment proceeds and adjustors - Divestment proceeds flowing to the budget include proceeds from the sale of state-owned assets in both FX and Egyptian pounds, including sale of equity stakes in SOEs and sale of stakes in other assets such as land. - Divestment proceeds flowing to the budget are recorded in the net acquisition of financial assets for program purposes. - Adjustor (primary balance): 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 as indicated in the QPC table. - Adjustor (gross debt): 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 relative to program assumptions listed in the QPC table. ### Tax revenues (performance indicator) - Tax revenues include personal income tax, corporate income tax, capital gain tax, property tax, tax on T-bills/T-bonds, value-added tax, excises, tax on specific services, stamp tax, international trade taxes, tax on use of goods and on permission to use on goods and perform activities and other taxes and development fees. - Tax revenues totaled EGP662 bn as of December 2023, since the start of FY2023/24. ### Health and social spending floor (IT) - Health and social spending of the budget sector includes all spending related to the budget of the Ministry of Health and the Ministry of Social Solidarity. ### Public investment ceiling (IT) - Program target: cumulative capital investment spending undertaken by all public agencies and entities controlled or owned directly or indirectly by public entities. - For FY2023/24, the ceiling for end-June 2024 applies to the period from January 1, 2024, to June 30, 2024; thereafter the ceiling applies to investment spending since the beginning of the relevant fiscal year. ### CBE overdraft account ceiling (PC) - Program target: balance on the government’s overdraft account at the CBE. - The ceiling on the balance is shown in Table 1 of the MEFP and applies recurrently on a weekly basis based on end-of-week data. ### Ceiling on CBE lending to public agencies excluding the Ministry of Finance (PC) - Program target: balance on lending by the CBE to public agencies excluding the Ministry of Finance. - Ceiling on the balance: EGP 661.172 billion, reflecting the stock of outstanding lending as of January 2024 to six entities. - This performance criterion applies on a continuous basis and will be reported transparently in the weekly analytical balance sheet of the CBE, with “Other Items, net” split to show CBE lending to public agencies excluding the Ministry of Finance. Loan-by-loan information will be reported separately. ### Floor on average original maturity of newly issued local currency tradable debt (IT) - Program target: weighted average original maturity of local currency tradable debt of the budget sector issued through public placements, weights being issuance volumes, calculated cumulatively from the beginning of each fiscal year. - Local currency tradable debt includes 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. ### Ceiling for gross debt of the budget sector (IT) - Gross debt (definition): outstanding stock of debt issued by the budget sector, as defined in the IMF’s Government Finance Statistics Manual 2014; includes debt issued to the pension fund and other public entities. Sukuk issued by the budget sector are treated as debt. - For program monitoring, U.S. dollar amounts of foreign currency debt will be converted to Egyptian pound equivalents using program exchange rates indicated in this TMU. - Adjustor: ceiling for gross debt will be adjusted down by the full amount of excess divestment proceeds flowing to the budget relative to program assumptions in the QPC table. ### Ceiling on government guarantees (IT) - Program target: cumulative change in guarantees issued by the Ministry of Finance. - Guarantee definition: arrangement where the Ministry of Finance has an obligation to pay a third-party beneficiary when another institutional unit fails to perform certain contractual obligations. - Ministry of Finance will report changes in the level of guarantees in billions of Egyptian pounds on a quarterly basis. - For cumulative values for end-March and end-June 2024 test dates, the ceiling on the change in guarantees is measured since September 30, 2023. Thereafter the cumulative ceiling applies since the beginning of the relevant fiscal year. ### Exchange rate regime structural benchmark (SB) - Structural benchmark: maintain a flexible exchange rate regime and a liberalized FX system; assessed comprehensively using indicators including FX demand backlogs at banks, spread between official rate and measures of market-clearing rate, and interbank FX turnover. - FX demand backlogs: CBE will provide data covering eight banks identified by the CBE; the sample is fixed throughout the program. - Market-clearing rate measures: include local parallel market rate and exchange rates implied by transactions in gold, GDR, and ADR markets; monitored daily. - Interbank FX turnover: CBE will provide daily data. - SB assessed once for each program review based on information over the period between program reviews. ### Monetary policy consultation clause and inflation definition - Inflation definition: 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 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 will address reasons for deviations, stance of monetary policy, inflation outlook, program trajectory, and CBE remedial actions before further EFF purchases could be requested. - 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 will address reasons for deviations, monetary stance, inflation outlook, and CBE remedial actions. ### Commercial banks’ net foreign assets (NFA) consultation clause - NFA definition: claims on nonresidents (including foreign currency holdings) minus liabilities to nonresidents of other depository corporations. - NFA measured in US dollars using monetary data reported in the standardized report form. - NFA at end-December 2023 was -$16.2 billion. - 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 will be assessed at the end of every month; consultation will review reasons for the decline and whether imbalances in the FX market exist and if corrective CBE actions are necessary. ### Other continuous performance criteria - Non-accumulation of external debt payments arrears by the general government (general government comprises the budget sector, the Social Insurance Funds (SIFs), and the National Investment Bank (NIB)). - External debt payments include principal and interest payments, including payments on long-term leases. - New external debt payments arrears cannot be accumulated during the program period. - Definition: an external debt payments arrear is the amount of payment obligation (principal and interest) due to nonresidents by the general government and the CBE, which has not been made when due under the contract, including any applicable grace period. - Standard continuous performance criteria also include prohibitions on: (i) imposition or intensification of restrictions on payments and transfers for current international transactions; (ii) introduction/modification of multiple currency practices; (iii) conclusion of bilateral payments agreements inconsistent with Article VIII; and (iv) imposition or intensification of import restrictions for balance of payments reasons. ### Structural benchmarks for SOEs, arrears publication, fuel indexation, and CBE operations - SOE definition (for structural benchmarks): all public corporations regardless of legal framework or oversight agency; covers public sector companies, public business sector companies, military-owned companies, economic authorities, joint ventures, and partnerships. - Reoccurring (annual) publication of domestic payment arrears: publish within 90 days after fiscal year end the stocks of commitments, overdue payments, overdue transactions, stock of gross liabilities and due payments to and from MoF with specified public entities. - Reoccurring (quarterly) implementation of retail fuel indexation mechanism: enact increases in retail fuel prices each quarter in line with the indexation mechanism formula; mechanism described with formula components including: - Percentage change in retail fuel price in quarter t computed using components: 0.8 × Percent change in (Brent_{t-1} / FX_{t-1}) + 0.2 × Annual adjustment due to other costs_{t-1} + Catchup adjustment_{t-1}, subject to caps of ±10 percent and a floor of 10 percent in the max-min expression. - Definitions: retail fuel price in quarter t is the average price in a quarter in domestic currency; Brent_{t-1} is average Brent crude oil price in USD in the previous quarter; FX_{t-1} is average exchange rate of Egyptian pound against the USD in the previous quarter; 0.8 is share of oil in production cost. For gasoline and diesel, change rounded to multiples of 25 piasters. - Annual adjustment due to other costs included in second quarter of fiscal year and zero in other quarters; catchup adjustment captures any quarter-to-quarter capped shortfalls and is zero for the third quarter adjustment of FY2022/23. - Transition rule: during transition period retail fuel prices will not be reduced and catchup adjustment and pass-through from changes in crude oil prices in domestic currency will not be negative; transition concludes once the level of fuel subsidies for covered products in the previous fiscal year has been eliminated. - Fixed rate full allotment deposit auctions (structural benchmark): CBE to issue a circular detailing that for 7-day deposit operations, the fixed interest rate will be the mid-corridor rate and full amount of deposits demanded will be accepted; results and demand to be published on CBE’s website within three hours of operation completion. - CBE subsidized lending initiatives (structural benchmark): defined as schemes where CBE provides subsidies to financial institutions based on loans extended to predefined sectors/households at predefined interest rates; existing schemes include mortgage finance initiative for middle-income class, industrial/agricultural/construction private sectors initiative, tourism sector initiative, and a scheme aimed at substituting cars to work with dual fuel. - As of Dec 31, 2023, total amount of loans utilized under the subsidized lending schemes is EGP 73.2 billion. - CBE lending to public agencies excluding the Ministry of Finance (structural benchmark): CBE to issue a strategy, approved by the CBE Board, detailing how its claims on public agencies excluding the Ministry of Finance will be reduced to zero; for each outstanding claim the strategy must detail either timing and entities involved in repaying the claim to the CBE or transferring the claim off the balance sheet of the CBE. *Source: IMF staff report (1egyea2024001).* ### 38. Performance under the program will be monitored using the data reported by the ### Performance under the program will be monitored using the data reported by the ### Monitoring framework and data flows - Performance under the program will be monitored using the data reported by the Ministry of Finance and the CBE to the IMF, with frequency and submission lag indicated in Table 1A and Table 1B. - Data are defined consistently with the program definitions in the TMU. - CAPMAS will report data on inflation to the IMF, with submission lag of no more than 10 business/working days after each test date. - In case of any data revisions, the authorities will transmit them to the IMF immediately. ### Ministry of Finance: key reporting requirements (selected items from Table 1a) - Overall deficit of the budget sector — Frequency: M; Submission Lag: 30 calendar days - Overall deficit of the general government, the NIB, and the SIFs — Frequency: Q; Submission Lag: 60 calendar days - Summary of budget sector accounts (revenues, expenditures, net acquisition of financial assets, cash basis, consistent with GFS 2001) — Frequency: M; Submission Lag: 30 calendar days - Budget sector expenditures by the ministries of health and social solidarity — Frequency: M; Submission Lag: 30 calendar days - Summary accounts of the NIB and the SIFs, consistent with presentation of general government accounts — Frequency: Q; Submission Lag: 60 calendar days - Total divestment proceeds and divestment proceeds flowing into the budget, including sales of equities and land — Frequency: M; Submission Lag: 30 calendar days - Domestic debt stock and debt service costs of the general government and the budget sector, including interest payments and amortization, and information on below-the-line transactions — Frequency: Q; Submission Lag: 30 calendar days for the budget sector debt and the below the line transactions (60 days for the general government debt) - Debt of the budget sector by maturity of issuance and by debt holder, including debt to the NIB, the SIFs, and other public entities, at actual and program exchange rates — Frequency: M; Submission Lag: 30 calendar days - End-week balance of government overdraft at the CBE (as defined in TMU). Separately, interest payments including penalty — Frequency: W; Submission Lag: 5 working days - Auctions of T-bills and T-bonds via primary dealers (number and value of submitted and accepted bids; minimum, maximum, and weighted average interest rates; maturity dates) — Frequency: W; Submission Lag: 5 working days - Private placements of domestic and external debt (issuance amount, maturity date, currency, interest rate). The information on each issuance should be reported — Frequency: M; Submission Lag: 5 working days - Recapitalization of the CBE by the government (date, amount, instruments, maturity, interest rate) — When recapitalization takes place; Submission Lag: 5 working days - Submit each October and April all investment spending executed over the periods January – June and July – December, respectively, undertaken by all public agencies and entities controlled or owned directly or indirectly by a public entity (break out by budget sector, Economic Authorities, state-owned enterprises, and other) — Frequency: S; Submission Lag: End April and end October of each year ### Central Bank of Egypt (CBE): key reporting requirements (selected items from Table 1b) - Program net international reserves at the CBE and its components (foreign reserve assets and foreign reserve-related liabilities), at market and program exchange rates — Frequency: M; Submission Lag: 7 working days - Breakdown of gross foreign assets and liabilities of the CBE by currency, at actual and program exchange rates — Frequency: M; Submission Lag: 15 calendar days - Program disbursements as defined in this TMU, including purchases of state-owned assets in foreign currencies by official bilateral partners including sovereign wealth funds and the private sector — Frequency: M; Submission Lag: 7 working days - Stock of government T-bills and T-bonds denominated in local currency and held by nonresidents — Frequency: W; Submission Lag: 7 working days - Daily interbank turnover in the FX spot market — Frequency: W; Submission Lag: 5 working days - Daily central bank purchases and sales of foreign exchange by counterparts (commercial banks, EGPC, GASC, government) — Frequency: W; Submission Lag: 2 working days - Information on FX intervention, including full array of bids, both prices and volumes — When intervention takes place; Submission Lag: End of the day of intervention - Daily official exchange rates (EGP per U.S. dollar) — Frequency: W; Submission Lag: 5 working days - End-week stock of bank-by-bank FX demand backlogs in USD, for the eight banks identified by the CBE (fixed sample). For each bank, report total stock and breakdown by type of backlogs (i) pending LCs; (ii) unavailed IDCs (sight); (iii) unavailed IDCs (deferred); (iv) non-trade items; (v) foreign investors — Frequency: W; Submission Lag: 5 working days - End-month bank-by-bank foreign exchange net open position (NOP) as a ratio of bank capital, with underlying components and any breaches and sanctions — Frequency: M; Submission Lag: 30 calendar days - Bank-by-bank data (balance sheets by currency; income statements; loan classification breakdown; deposits; securities holdings; repos; fixed and repossessed assets; net open positions; FSI indicators) — Frequency: Q; Submission Lag: 75 calendar days - Central bank’s weekly analytical balance sheet (with “Other Items, net” split into CBE lending to public agencies excluding the Ministry of Finance and all other items) — Frequency: W; Submission Lag: 7 working days - Monthly CBE financial statements (unaudited) — Frequency: M; Submission Lag: 20 calendar days - Quarterly and annual CBE financial statements (audited) — Frequency: Q; Submission Lag: 60 calendar days - Stock of loans under CBE subsidized lending initiative, both utilized and allocated/committed amounts, with decomposition by initiative — Frequency: M; Submission Lag: 30 working days - Bank-by-bank holdings of government securities with detailed fields (total issuance amount; issuer; type; accounting treatment; maturity date; coupon rate and interest payment frequency; current market price; yield to maturity). Data for bank-by-bank holdings at end-December 2023 will be provided by end-March 2024 — Frequency: Q; Submission Lag: 60 calendar days ### Program update: prior actions, outcomes, and quantitative indicators - Two of the three remaining prior actions for completion of the first and second reviews were met: - Shift to a flexible exchange rate regime and a liberalized foreign exchange system was met; assessment used FX demand backlogs at banks, spread between official exchange rate and measures of market-clearing rate, and interbank FX turnover. Based on information from eight banks as of March 21, staff assesses the foreign exchange backlogs were fully cleared. The spread between the official exchange rate and various measures of market-clearing rate has remained essentially closed (less than 2 percent for the spread with local parallel market after unification). - Cabinet approval of the FY2024/25 draft budget law in line with the agreed fiscal parameters was met. The draft budget targets a 3.5 percent of GDP primary surplus, excluding divestment proceeds, and an increase in total revenues of 1 percent of GDP compared to preliminary estimates for FY 2023/24. The cabinet also approved targeting additional revenues of 1 percent of GDP through tenders and the sale of assets, to be credited to the treasury as additional proceeds for lowering the debt of the agencies covered by the general budget. - Remaining prior action on increasing retail gasoline prices in line with the automatic fuel price adjustment mechanism was not met exactly, but authorities implemented a much stronger overall package of fuel price adjustments: - Authorities raised gasoline prices by a simple average of almost 9 percent (increase fell short of the increase implied by the formula). - Authorities raised the price of diesel by 21.2 percent and the price of fuel oil by 25 percent. - Staff estimate annual fuel subsidies will now be EGP 8.5 billion less than under staff’s baseline estimate (which only considered a change in gasoline prices as a prior action). - Interbank FX turnover: increased to US$ 300-900 million (compared to US$ 20-40 million before unification). ### Prior action on fuel prices — increase implied by the formula vs announced increase (as presented) - Price increase for the prior action implied by the formula / Announced price increase - Gasoline grade fuels - Octane 8011.010.0 - Octane 9211.38.7 - Octane 9511.28.0 - Memorandum - Diesel0.021.2 - Fuel oil (Mazut)0.025.0 *Prepared by the Middle East and Central Asia Department; Approved by Taline Koranchelian (MCD) and Rishi Goyal (SPR).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1egyea2024001.pdf_