Key Questions on Egypt

Last Updated: June 26, 2020

On June 26th, 2020, The Executive Board of the International Monetary Fund (IMF) approved a 12-month Stand-by Arrangement for Egypt (SBA), with access equivalent to SDR 3.76 billion (about US$5.2 billion or 184.8 percent of quota).

The new program aims to help Egypt cope with challenges posed by the COVID-19 pandemic by providing balance of payments and budget support. The program would also help the authorities safeguard the macroeconomic stability achieved over the past three years, support health and social spending to protect vulnerable groups, and advance a set of key structural reforms to put Egypt on a strong footing for sustained recovery with higher and more inclusive growth and job creation over the medium term.

Read on for the key questions regarding the IMF agreement with Egypt

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What is the size of this arrangement? How much is the first disbursement? How much will the next disbursement be? What are the terms of payment of this loan?

The Executive Board of the International Monetary Fund (IMF) approved today a 12-month Stand-By Arrangement (SBA) for Egypt, with access equivalent to SDR 3.76 billion (about US$5.2 billion or 184.8 percent of quota). The approval allows for an immediate disbursement of the equivalent of SDR 1.4 billion (about US$2 billion). The remainder will be phased over two reviews.

Each disbursement will be repaid in eight equal quarterly installments beginning 3¼ years after the disbursement takes place. Repayment of the first disbursement will begin in September 2023. The interest rate on borrowing under an SBA is set at 100 basis points over the SDR interest rate (currently at 0.082%). As Egypt’s total borrowing from the Fund is above 187.5 percent of quota, an additional surcharge of 200 basis points is applied. This surcharge rises to 300 basis points if credit remains above 187.5 percent of quota after three years.

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What are the objectives of the new program and how is it different from the one before? Will it address the effects of COVID-19?

After a strong track record of successfully completing a home-grown economic reform program supported by the IMF’s Extended Fund Facility in 2016-2019, and despite some remaining structural challenges, Egypt was one of the fastest growing emerging markets prior to the COVID-19 outbreak. However, the significant domestic and global disruptions from the pandemic have worsened the economic outlook and reshuffled policy priorities.

The authorities’ economic policy framework, supported by the SBA, aims to maintain Egypt’s macroeconomic stability with priorities to: (i) protect necessary social and health spending while avoiding an excessive build-up of public debt; (ii) keep low inflation and financial stability while maintaining a flexible exchange rate; and (iii) implement key structural reforms to strengthen transparency, governance, and competition.

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What structural reforms are proposed in the program? Will there be changes to social protection measures?

In addition to several fiscal structural measures to enhance fiscal transparency and reduce debt vulnerabilities, the authorities remain committed to a focused set of structural reforms that began under their reform program supported by the IMF’s Extended Fund Facility (EFF) to support private-sector-led growth and job creation. The measures supported by the SBA include stepped-up reporting requirements for state owned enterprises (SOEs) to improve transparency and financial disclosure; approval of the amended customs law to facilitate trade and reduce non-tariff barriers; and revisions to the competition law to strengthen competition and support a level playing field for all stakeholders.

Improving social protection has been a focus of the authorities’ reform program over the past several years. Accordingly, they have introduced a minimum level of social spending for FY20/21 to ensure that health spending and the more vulnerable people are protected during the crisis. They will also undertake a public expenditure review with the assistance of the World Bank to evaluate the effectiveness of spending initially on social protection, and thereafter on health and education, to identify any gaps and recommendations to address them.

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What about fiscal measures? Will there be an increase in fuel and electricity prices?

Fiscal policy aims to provide much-needed support to the most-affected individuals and sectors to help confront the health and economic crisis. This includes additional allocations for health spending, an expansion of Takafol and Karama’s cash transfer social programs, and targeted, temporary support for the most severely impacted sectors. The FY 2020/21 budget targets a primary surplus of at least 0.5 percent of GDP to balance crisis-related spending with avoiding an excessive increase in public debt. The authorities plan to restore the pre-crisis primary surplus of 2 percent of GDP in FY2021/22 as economic conditions normalize to put debt back on a downward path.

There are no additional measures on fuel pricing under the authorities’ reform program supported by the IMF’s SBA. The fuel indexation mechanism that was introduced in 2019 ensures that retail fuel prices remain at cost recovery and that the budget is unaffected through regular quarterly adjustments to reflect changes in world oil prices and movements in the exchange rate.

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What are the changes to monetary policy and exchange rate?

The Central Bank of Egypt (CBE) continues to pursue a data-driven monetary policy based on anchoring inflation expectations within the target range of 9 percent (±3 percent) on average for 2020Q4. A flexible market-driven exchange rate remains an important part of the policy framework to help absorb external shocks and maintain competitiveness, with intervention limited to disorderly market conditions.

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Egypt’s debt levels are very high. Will more borrowing add to the debt burden?

Egypt’s high public debt and large financing needs remain a risk and create a vulnerability to changes in financial market conditions. Prior to the COVID-19 crisis, the authorities had made significant progress in reducing public debt from nearly 104 percent of GDP in 2016/17 to 85 percent of GDP in 2018/19, but the crisis has put considerable stress on public finances, and debt is projected to rise to about 93 percent of GDP by the end of FY20/21. Lending under the SBA will help reduce Egypt’s financing needs under volatile market conditions, support space to tackle the immediate health crisis, and provide targeted support to the most-affected sectors. As conditions begin to normalize, it will be essential to restore primary surplus of 2 percent of GDP and put public debt back on a downward path. To reduce risks to debt sustainability, the authorities are taking steps to lengthen debt maturities and strengthen revenue mobilization over the medium term to lower gross financing needs and create fiscal space for priority spending.

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How is the IMF addressing the problem of corruption that is perceived as being widespread in Egypt? How can you ensure the IMF loan money is used for intended purposes?

Strengthening governance and reducing corruption has been an important objective of the authorities’ reform program, supported by the IMF. The measures to this end are aimed to improve transparency and accountability in public finances as well as reduce opportunities for and rewards from rent-seeking. Specific reforms under the SBA include the publication of detailed financial information on all SOE and Economic Authorities for FY2018/19 and revisions to the public financial management law to strengthen the budget process, including improved accounting rules for all public entities. The authorities will also introduce amendments to the previously submitted Egyptian Competition Law to support competitive neutrality and empower the Egyptian Competition Authority to regulate mergers and acquisitions and act as needed to curb anti-competitive economic behavior.

In addition, the authorities intend to publish all crisis-related spending in a consolidated manner on the Ministry of Finance web site and will publish government procurement plans and awarded contracts for the emergency responses to COVID-19, including the names of the awarded companies and information on beneficial ownership in accordance with the applicable law.

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How can the people of Egypt share their views on an IMF engagement with the country?

The IMF is committed to being transparent about its work, to explaining itself, and to listening to the people whom it affects. IMF staff, including the IMF’s Senior Resident Representative office in Cairo, is available to engage with representatives of civil society groups, parliamentarians, academics and youth leaders through information sharing, dialogue, and consultation at both the global and national level. You can find more information here. Also, the IMF has policies in place to ensure that meaningful and accurate information—both about its own role in the global economy and the economies of its member countries—is provided to its global audiences. We are committed to this approach in Egypt as in other countries. We also aim in our financial support for our members to improve people's living standards and protect the poor and vulnerable. Any program in support of Egypt would be guided by these principles.