FREQUENTLY ASKED QUESTIONS ON EGYPT AND THE IMF

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Why is exchange rate flexibility important for Egypt?

In the past, a heavily managed exchange rate has not served Egypt well. It has led to periods of building imbalances, which in turn, have led to the loss of central and commercial bank foreign currency assets, rationing of foreign currency, forcing the central bank to abruptly devalue the Egyptian pound relative to other currencies. These devaluations have led to spikes in inflation and undermined economic activity as consumers and investors lose confidence in the health of the Egyptian economy.

The objective of policies under the Fund-supported program is, therefore, for the value of the Egyptian pound to be determined freely against other currencies (i.e., establish a flexible exchange rate), which would avoid the build-up of a chronic imbalances in the demand for and supply of foreign currency in Egypt and preserve the FX reserves of the central bank. Under this framework, one would observe two-way movements in the exchange rate, as it appreciates or depreciates in line with economic conditions. Flexibility in the exchange rate would bring several benefits. It would help Egypt’s domestic economy adjust more smoothly to external shocks, support the ability of Egyptian businesses to sell their goods and services abroad, and encourage greater investment by reducing the likelihood of large abrupt changes in the exchange rate. In addition, it would help preserve the financial buffers of the central bank.

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Egypt faces a large external financing gap. How will it be filled?

The external financing gap represents the difference between the projected demand for and supply of foreign currency financing, including the demand for foreign currency to rebuild the foreign reserves of the central bank. IMF financial support under the program will fill part of the financing gap. In addition, an important objective of IMF-supported programs is to catalyze broader financial support from international and bilateral partners, as well as private sector investors. While conditions in private international financial markets are difficult at this juncture for a large cross-section of emerging markets, Egypt included, there is sufficient international and regional financial support for the program. Importantly, Egypt has secured new financing of around $5 billion in FY2022/23 (first fiscal year of the program), of which $2 billion will be generated through the sale of equity in public sector companies, including as part of the authorities’ privatization strategy, executed by the Sovereign Fund of Egypt (SFE). These will be in addition to the rollover of GCC deposits at the central bank. The remaining $3 billion will come from multilateral support.

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How does the program protect Egypt's vulnerable households?

Safeguarding macroeconomic stability and fighting inflation are key to ensuring prosperity for all Egyptians, in particular the most vulnerable. In this regard, monetary policy under the program will be focused on fighting inflation and the erosion in purchasing power that is disproportionately affecting poor and middle-class families. In addition, the authorities plan to expand social spending under the program to help the most vulnerable. A number of measures are planned, including: (i) coverage of the Takaful and Karama cash transfer program will be extended to an additional 5 million households; (ii) the rollouts of the universal health insurance scheme and the COVID-19 vaccination program will continue; (iii) emergency support to ration card holders and measures to protect the purchasing power of vulnerable wage earners and pensioners will be extended; and (iv) the planned expansion of the social registry will enable the authorities to strengthen targeting of social protection schemes.  

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What measures in the program support development of the private sector?

Encouragingly, there is an ongoing debate in Egypt about the role of the state in the economy. Structural reform policies under the program will support the authorities’ plan to reduce the state footprint, enhance transparency and governance of state-owned enterprises (SOEs), level the playing field for all economic agents (e.g., through the removal of preferential treatment for SOEs), and improve trade facilitation. The State Ownership policy—with the primary objective of establishing a clear framework that regulates the relationship between the state and the private sector across various economic activities—is a critical first step down this reform path. This and other structural reforms, such as strengthening competition policy and improving trade-related processes, will strengthen the ability of the private sector to better contribute to economic growth in Egypt and help create economic opportunities for Egypt’s large and fast-growing working age population.

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What is the IMF doing to promote greater transparency over policies in Egypt?

The IMF-supported program has a number of measures to promote greater fiscal transparency. Transparency helps governments obtain an accurate picture of their finances when making economic decisions, including of the costs and benefits of policy changes and potential risks to public finances. It also provides legislatures, markets, and the public with the information they need to hold governments accountable. Greater fiscal transparency can also help strengthen the credibility of a country’s fiscal plans and can help underpin market confidence and market perceptions of fiscal solvency. The authorities have committed to a significant number of concrete measures in this area, including:

• All SOEs will be required submit financial accounts to the Ministry of Finance (MOF) on a biannual basis, and the MOF will ensure open access to these data, along with information on the subsidies to the SOEs;
• Publication of audit reports on fiscal accounts by the Central Auditing Organization (CAO);
• Publication of all procurement contracts that exceed EGP 20 million on the procurement portal website;
• Publication of a comprehensive annual report on tax breaks, exemptions, and incentives;
• Publication of reports on payment arrears by the MOF; and
• Publication of the monthly budget outturns within 60 days after the end of the reporting month.