Key Questions on Egypt

Last Updated: February 4, 2019

In November 2016, The Executive Board of the IMF approved financial assistance for Egypt in the form of an Extended Fund Facility (EFF) arrangement for SDR 8.59 billion or about US$12 billion. The Executive Board approved the first review on July 13, 2017, the second review on December 20, 2017, the third review on June 29, 2018, and the fourth review on February 4, 2019.

The EFF supports the authorities' comprehensive economic reform program to restore macroeconomic stability and return Egypt to strong and sustainable growth. More specifically, the program aims to improve the functioning of the foreign exchange markets, bring down the budget deficit and government debt, and raise growth to create jobs, especially for women and youth. It also aims to protect the most vulnerable groups in the society during the process of adjustment.

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

 

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How much money was disbursed under the fourth review and what are the total disbursements so far? How much money will be disbursed after the fourth review?

Completion of the fourth review allows the disbursements of SDR 1,432.76 million, or about US$2 billion, bringing total disbursements under the program to date to about US$10 billion. Completion of the fifth and final review will complete the program’s total disbursement of around $12 billion.

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The program is nearing its end. What are the milestones that were met and what is left?

The Egyptian authorities’ economic reform program has made substantial progress as evident in the success achieved in macroeconomic stabilization and recovery of growth. Tourism is rebounding sharply, remittances have increased, and the non-petroleum manufacturing sector – key for job creation – is showing signs of a rebound. The authorities have adopted the value-added tax, allowed the exchange rate to be determined by market forces, and reduced inefficient fuel and electricity subsidies. In addition, to improve the business climate, they passed the new industrial licensing law, the investment law, the companies law and the insolvency law. At the same time, various measures have been taken to shield the poor from the adverse effects of the adjustment process. Looking forward, the authorities are working on improving availability and access to industrial land which is critical for private sector development, the reform of public procurement is advancing, and the authorities are revamping the law on the Egyptian Competition Authority (ECA) to level the playing field for encouraging new private investment. These reforms should help lay the foundation for higher and more inclusive growth and job creation over the medium term.

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Why are prices still so high despite the decrease in inflation and what are the Fund's recommendations to bring down inflation further?

The rise in inflation following the launch of the reform program was anticipated. It reflected the effects of increases in electricity and fuel prices, the introduction of the VAT, and pass-through from the exchange rate depreciation. However, inflation has been on a declining trajectory since its peak in the summer of 2017, which means that prices are increasing at a slower pace. Annual headline inflation has declined from 33 percent in mid-2017 to 12 percent in December 2018, in response to the Central Bank of Egypt’s (CBE’s) well calibrated interest rate policies. This is line with the rate of inflation prior to the program, and on track to meet the authorities’ target of single digit inflation by 2020. Going forward, monetary policy decisions will need to remain data-driven and as before, be guided by the primary goal of achieving low and stable inflation and underpinned by a flexible exchange rate regime. A flexible exchange rate is critical for maintaining competitiveness and adjusting to external shocks. 

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What are the social protection measures implemented so far to shield the most vulnerable?

Social protection is a cornerstone of the government's reform program. The authorities have put in place several programs, including: (i) more than doubling the value of cash transfer allowances offered through food smart cards – from 21 to 50 Egyptian pounds per person – and raising transfers for infant milk and children’s medicines; (ii) expanding the social solidarity pensions to include medical coverage, as well as expanding the coverage of the Takaful and Karama programs to 2.2 million households—around 9 million Egyptians--and increasing the amounts provided; (iii) raising pension benefits, especially for the lower pension categories; (iv) To complement Takafol and Karama and help low income families improve living standards, the government started in June 2017 a new program “Forsa”. Partnering with private sector, Forsa links the children of the Takafol and Karama recipient families and job seekers with employment opportunities which offers them steady income. (V) paying a one-time allowance to public employees to compensate for high inflation; (vii) providing free school meals and new gas connections in poor districts and (viii) increasing the exemption threshold for taxes on domestic salaries. (iv) More broadly, the faster creation of private sector job opportunities as part of the authorities’ inclusive growth strategy is expected to steadily improve living standards, including for lower-skilled workers. Some of the savings from the latest subsidy reform (around 0.3 percent of GDP) will be used in 2018/19 to mitigate the impact of the energy price reform on the most vulnerable.

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How does the Fund evaluate the step of fuel price indexation for the 95 octane gasoline? Did the government have other alternatives to postpone fuel price indexation? When will the government move to indexation of other fuel products?

Fuel price indexation for octane 95 is an important first step in protecting the budget from future changes in fuel prices, and for creating fiscal room for investments in health, education and infrastructure. These investments would help achieve higher sustained growth, job creation, and greater purchasing power for Egypt’s middle class and the poor. At the time of the 3rd review, the authorities indicated their intention to implement indexation for most fuel products as part of completing their energy sector reforms, and the timing of its implementation will be determined by them.

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What is the program doing to reduce unemployment, especially among youth and women?

The Egyptian authorities are implementing measures to increase job opportunities for youth and promote women’s labor force participation. These include specialized training programs for youth and job search schemes. To help women join the labor force, the 2016/17 budget included EGP 250 million to improve availability of public nurseries. The amount was increased to EGP 500 million in 2017/18 and to EGP 600 million in 2018/19. The authorities are also planning to implement gender budgeting starting in 2018/19.

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Wouldn't the IMF loan add to Egypt’s debt and make the problem worse?

Countries generally turn to the IMF for financing when they have run into economic difficulties. At the time that Egypt requested the IMF program, its international borrowing costs were substantially higher compared to about 2.7 percent annual interest rate for the IMF money. In addition, the IMF program served as a catalyst for support from other international and bilateral partners. The IMF financing helped Egypt ease the burden of economic adjustment by providing a financial cushion and more time to address the external and budget deficits which were the source of Egypt’s rising imbalances.

 

The economic reforms envisaged under the IMF supported program have been designed to restore confidence in the Egyptian economy and spur growth. Restoring growth is essential to improve Egypt’s debt servicing capacity and reduce its debt-to-GDP ratio. Progress has already been achieved. Egypt reached a primary budget surplus in 2017/18 for the first time and debt has started to decline.

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Why are structural reforms so important for Egypt?

Egypt has a young and growing population and many Egyptians will join the labor market every year. Significant progress has been achieved to restore macro-stability and confidence in the economy. But to create the needed jobs, Egypt needs to grow faster and increase the contribution of the private sector to growth and job creation. To this end, structural reforms aimed at improving the business environment, improving access to land and finance, strengthening competition, improving accountability and transparency of state-owned enterprises, and reducing corruption. Removing the constraints that have weighed on higher investment and job creation in the past will help Egypt grow faster and improve the living standards of the population.

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How is the IMF addressing the problem of corruption that is perceived as being widespread in Egypt?

The IMF is helping the Egyptian authorities address the issue of corruption in Egypt both in the context of the IMF-supported reform program and its annual health check of the economy, the so-called Article IV consultation. A main pillar of the reform program is the commitment to transparency and accountability. This encompasses both transparency in public finances as well as reforms to reduce the opportunities for and rewards from rent-seeking activities.
 
For example, significant progress has been made in improving transparency and accountability of state owned enterprises through the publication of the SOE report in June 2018 and its update in December. This report now includes about 300 SOEs with abridged financial statements for most of them, a description of the legal framework governing state ownership of SOEs, and the impact of the SOE sector on government finances. As the authorities develop capacity, they plan to continue to improve the quality of this report on SOEs, which will be published annually.
 
The authorities are also working on improving competition, which would reduce the scope for rent-seeking activities and market manipulation. Other measures that reduce the opportunities for rent-seeking include reforms to the process for access to industrial land and public procurement reforms.

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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 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.