Online press briefing on the release of release of the Staff Report on Egypt’s request for and IMF Extended Fund Facility

January 18, 2017

MS. ELNAGAR: Good morning, everyone, good morning our viewers. Welcome to the IMF online press briefing on Egypt. We are releasing the Staff Report for Egypt’s request for a $12 billion IMF Extended Fund Facility. I am Randa Elnagar of the IMF Communications Department. This is Chris Jarvis our Mission Chief for Egypt.

Chris is going to give some opening remarks to welcome you and then we are going to take your questions. Chris.

MR. JARVIS: Thanks for joining us today. I thought it might be helpful, just at the beginning, if I explained what are the papers that have been released today. There are two major ones. One is the memorandum of economic and financial policy or MEFP, and that’s the government statement and the Central Bank statement of what its policies are during the program.

And then the second document is the Staff Report, and that is the explanation that we write explaining the authority’s home grown program to our Executive Board and to the public. I think they make interesting reading and are well-worth looking at.

Just as a general description of what home grown contains. I would say take your minds back to last summer and what the situation was last summer. Egypt was facing three major problems then. The first was a shortage of foreign exchange and precariously low reserves, and, generally, a balance of payments problem. That is, more money going out to the country then coming into the country.

The second problem was a high budget deficit, about 12 percent of GDP last year, and rising debt with general government debt nearly as high as the whole GD at about 95 percent of GDP. The third problem is the long term structural problem of low growth with growth being only about 2 ½ percent on average over the last five years, and high unemployment with unemployment at 12.7 percent.

So the program is really designed to fix all of those three problems. How does that happen? Well, first, the foreign exchange problem. The main way of solving that is to have a more flexible exchange rate so that in the exchange market there’s an equilibrium of balance between the supply and demand of foreign currency. And as many people want to sell foreign currency as want to buy it, and that’s what’s been achieved by the depreciation of the exchange rate.

On the budget, the government proposed a package of measures which involved some increases in taxes through the implementation of value added tax which is a very modern efficient tax. Some cuts in fuel subsidies, control of the public sector wage bill, and to off-set some of the effects of that increases in social spending amounting to about 1 percent of GDP. That money is going on food subsidies to expand the coverage of Takaful and Karama, and also for some smaller programs like stepping up free school meals.

And then the issue of growth and employment. The exchange rate liberalization will help with that because it will encourage exports and create jobs in the export sector. But there’s also some important structural measures that the government is pursuing. In particular, reform of the industrial licensing system which is way too complex, and which has been a block on people growing businesses.

And also, reform of bankruptcy law because the current bankruptcy procedures are too punitive and they discourage people starting businesses. There’s also important structural reforms being planned to make it easier for women to go into the workforce, some increase in funding for public sector nurseries. And, perhaps most importantly, a study that this government’s doing on how to improve the safety of public transportation to make it easier for women to get to work and back home again safely.

So those are some of the main elements of the program. You may ask, how’s it going? Our answer would be, so far, so good. Exchange rate liberalizations are always difficult. The one in Egypt’s actually got off to a pretty good start. The exchange rate appreciated quite a bit, more than we expected. But it does seem to have stabilized at the new level and there’s potential for an appreciation of the exchange rate as the situation sorts itself out. That is often the case in countries that liberalize their exchange rate regimes.

On the budget the government is following through on its plans. Parliament passed the VAT. The government cut fuel subsidies, and it’s also rolling out its program for increasing spending. On the structural measures we’re also seeing legislation being sent to Parliament in the major areas that we talked about with the government, and these have the prospect to really improve living standards in Egypt over the next three years. Thank you.

MS. ELNAGAR: Okay. We’re going to take some questions now, and I want to remind our viewers that we have Arabic interpretation, so you can hear us in Arabic too. There are a lot of questions. We’re going to try to go through them as much as we can, and there are a lot of repeated questions. So not saying your name does not mean that we didn’t answer the question, so we’re going to start now.

Okay. We’re going to start with an online question When would the loan second tranche be delivered, and what’s your assessment of the governmental economic reform since receiving the first tranche? The IMF loan was just referred to the Parliament for approval after Egypt received the first tranche. Any comments?

MR. JARVIS: First, assessment progress. Things are going pretty well, as I said. The government is doing what it said it would do and the Central Bank is doing what it said it would do. I think that’s already showing some results.

The next tranche of the loan is due to be disbursed in the spring. Our expectation is that we would have another visit to Cairo to assess in more detail how things are going towards the end of February, and then we would expect to the Board, all being well, on the release of the second trance in late April.

There’s a question about Parliament. I have seen that the government recently sent a description of the program to Parliament for its discussion. We very much welcome a discussion by Parliament and the public of the program. And I hope that this briefing and the information that we put out today it can help in full discussion.

MS. ELNAGAR: Online question,what is the recipe you gave the government to achieve the reforms rightly? And there is another question from Naveen on social protection, and what can the program -- how can that program achieve social protection and help the poor classes during the transfer -- the reforms’ process?

MR. JARVIS: It’s interesting you used the metaphor a recipe. I would just extend that a little bit and say that every kitchen is different, let’s say, and every kitchen has different things in it. So, you know, we don’t use a standard recipe. We draw on the experience of other countries to advise Egypt. But this is a home cooked meal and one which really reflects that particular circumstances and particular preferences of Egypt and of our Egyptian counterparts.

On social protection, I mean, this was one of the key elements of the program for ours and also for the government. We wanted to make sure that the most vulnerable people would be protected from the initial effects of the program because there are initial costs in this kind of adjustment. One of the good things is that the budget adjustmentwas sufficiently strong that it frees up resources to spend more social protection.

That’s some of the things that I mentioned. Food subsidies will be important, extending Takaful and Karma will be very important. There’s all kinds of smaller programs, I think covering subsidized transportation for children, infant formula and children’s medicines are protected, and the expenditure may be increased under the program. These very specific measures.

I do also want to say, you know, there may be a feeling, well, what about the broader middle class? What is the protection for them or what is the support for them? And I would say that the goal of this program is to improve everybody’s living standards and improve them in a very broad way. It takes a while to get to that better place when you’re in a bad starting position.

But with the right policies and if they’re followed the prospects of raising growth and reducing unemployment and raising living standards for everybody. You know, there was a politician in the U.S.A. who said -- who asked the question in a presidential election, are you better off now than you were four years ago? I think it would be -- what I would hope is that when Egyptians ask themselves at the end of this program, are you better off then you were three years ago? They’ll be able to answer with a resounding yes.

MS. ELNAGAR: Online queston, not withstanding the high level of political support the program enjoys, how can you judge the political risk accompanying the program given the high inflation rate and the resulting erosion of real incomes?

MR. JARVIS: Well, you know, we focus quite carefully on risks to programs. And we set out those risks in our Staff Report, and we talk about what are the things that mitigate those risks. And I would encourage people to look at that.

Now, I actually read them again this morning as a, sort of, mental check how we were doing on those, and so far many of the risks we identified have not materialized. For example, the risks that the adjustment in the foreign exchange market might be very volatile and very disruptive. That hasn’t really happened.

The risk that the government wouldn’t follow through on its policies in the early period. And that hasn’t happened either. Not everything has turned out as we expected a couple of months. Some things are better. Some things are worse. I would say the exchange rate is more depreciated than we expected. That may not last for much longer or it may continue for a while.

One impact of that is that headline inflation has been slightly higher though not actually much higher than we expected. I think the key thing will be what happens in the next few months. Does the inflation stay high or does it come down?

We would expect it to come down during the second quarter of this calendar year and we'd also expect growth to pick up during this calendar year. Those are I would say are important metrics of success of the program.

What is mitigating the risks? That's also important. And there, the political commitment is very important because what will help bring inflation down is sticking to the policies that the government decided to adopt particularly containing the budget deficit because it's high budget deficits, ultimately, that lead inflation. And also sticking to the plan to limit the increase in the money supply that the central bank is following, because, again, it's high money supply that leads to high inflation.

If the government and the central bank are able to stick to those policies, I think there are very good prospects of inflation coming down and of growth picking up.

MS. ELNAGAR: Okay. We are going to take another question online question the IMF is being criticized for breaching transparency rules with regards to Egypt's loan and did not follow guidelines for similar loan requests. It is also a breach of Article 127 of the Egyptian constitution which requires presenting all international agreements to the Parliament. What is your position if the Parliament refuses this loan? Do you think the Parliamentary approval is only superficial noting that some ministries did not participate in negotiating the program and they considered the negotiations opaque?

MR. JARVIS: Well, I hope that we were fairly transparent in the negotiations and we certainly tried to be. You know, to return to that recipe, that metaphor of the recipe earlier. Sometimes during the cooking process, you maybe don't want everybody looking into the kitchen. And you don't want to have too many cooks in but we actually tried to bring in many ministers. We had meetings with many ministers in the government because we wanted broad government support.

We also met some Parliamentarians during our last visit to Egypt. And now, the government is rolling out this program to Parliament and involving it. We're certainly aware of the constitutional requirement to present such agreements to Parliament. And we very much welcome that the government is now doing that.

MS. ELNAGAR: Online question on why has it taken so long to publish the staff report and annex document? What were the contentious points regarding publication were any delays made compared to the loan documents?

MR. JARVIS: Well, I would say sometimes it takes a while to get from agreement to publication of these documents. And partly that's because both we and the government wanted to make sure that we had everything right. That there weren't any mistakes in the staff report, factual errors, or ambiguities which would lead to confusion and that process took a little while.

And then, most recently we've been ready to publish for a couple of weeks now but there is this process going on in Egypt with the Minister of Finance in particular rolling out the program the rest of the government and to the Parliament. And we wanted to harmonize our publication with that process.

MS. ELANAGAR: Online question, are there any other countries you point to with broadly similar conditions to those in Egypt in which similar IMF reforms have succeeded in improving living standards. What should we compare the Egyptian experience with?

MR. JARVIS: Okay. Well, there are a couple of ones in large emerging economies which have had similar effects. I would point to say, Turkey, and Brazil. Those programs go back a few years. A lot of my experience was in Eastern Europe and you had ‑‑ though they had tremendous success some of those programs culminating in the Eastern European countries which were members ofthe European community. And they really put themselves on a path to prosperity.

But I do want to emphasize that every program is different and has to be designed to work for the country which has that program. So I would say that we were not following closely a template from other countries.

I would also hope that this program will give ‑‑ will be viewed as a successful example for other countries. It's in the early stages yet. There's a long way to go but I think Egypt's made a very good start on that.

MS. ELNAGAR: online question onwhen do we expect inflation to go down?

MR. JARVIS: Okay. Maybe the best way to answer that is to say, well, why has inflation gone up? And we think that it's gone up for several reasons. The first is that it's a direct effect on prices of specific commodities especially arising from the fuel price increases. To some extent arising from the introduction of VAT that we don't see the price effects of that as particularly large.

The other reason is the depreciation of the exchange rate and imports costing more. And there's a certain amount of pass-through into domestics. There's what we call pass‑through is when the cost of either imports directly or imported components of domestically produced goods go up. And that gets passed on into prices.

I would expect that if policies are kept reasonably tight, that process would stop and we would expect to see not further depreciation of the exchange rate, possibly, appreciation, possibly, broad stability in the exchange rate. So we wouldn't see a continued input into inflation from the cost of imports.

That in itself should help to produce a fall in the headline of inflation. And we would expect the monthly increases in inflation to drop sharply by the second quarter of this year and the headline rate of inflation to fall, to begin to fall then as well, and by the second half of this year, I think you would expect us ‑‑ we would expect to see quite significant falls in inflation.

MS. ELNAGAR: Online question on the value of the pound and whether the 18.50 is a fair value for dollar.

MR. JARVIS: Well, it's the market value. I mean, one of the things that we've been really impressed by is that the central bank has got out of the business of supplying foreign exchange and that's been very helpful in the sense, not only in the sense that it allows a true market to form but it also prevents the rate, the exchange rate, from being heavily influenced by expectations about what the central bank might do.

The commercial banks have stepped up to the plate and have helped to create a well-functioning market in foreign exchange. And that's reflected in the current rate. As to what the rate might be, we don't make predictions about exchange rates. I did say that this exchange rate is more depreciated than we expected given the fundamentals, what we see fundamentals.

Now it may be that we were wrong at the fundamentals but I think what's more likely is that there have been what's called some overshooting of the exchange rate. That is, in the initial period after an adjustment the exchange rate is more depreciated than it later turns out to be. And that's our current expectation. But as I say, we don't make predictions about specific levels of it.

The important thing is that it's a genuine equilibria exchange rate in the sense that as many people want to sell foreign exchanges, buy foreign exchange, and that, I think, has already been achieved which is a tremendous improvement in terms of increasing the availability of foreign exchange in Egypt.

MS. ELNAGAR: To tag along the foreign exchange, there is a question from online. Questioner asks if there is continued growth of deposits in local currency. Therate at the end of September declined from 24.4 percent compared to corresponding periods last year --

MR. JARVIS: Sorry, was that September?

MS. ELNAGAR: Yes. As the growth rate of deposits in local currency re-increased during the corresponding period last year to 29.9 percent. What does this mean?

Mr. JARVIS: Well, I’m not -- I’m not familiar with those precise numbers, but if you’re looking at September, that’s before the program started so I’m not sure that’s particularly meaningful.One thing that we have seen is an inflow of deposits into the banking system --

attracted by high interest rates. And we’ve also seen people bringing foreign exchange into the banking system. Both of those, I would say, are very welcome developments and signify confidence both in the banking system and in the new exchange rate rating (phonetic).

MS. ELNAGAR: Okay. We have a question, and I think this is -- we’re getting close to our end -0 Over the past decades -- again, it’s on social protection -- Egyptian governments hide away from unpopular reforms for fear of provoking unrest. Is spending one percent from the GDP enough for social spending and protecting the poor?

MR. JARVIS: It’s always good if you can spend more to protect the poor. I think it’s the right amount in the current circumstances. There’s a balance between spending more to do what you can to ease the process adjustment and also making sure that, that process (continues so that the whole broad population of Egypt can be better off in the longer run. Adjustment of a budget deficit, bringing a high budget deficit down is always difficult, and there are always some people that lose in that process. But it has to be done; otherwise, people lose a lot more. If debt becomes unsustainable, if the deficit becomes unsustainable that leads to inflation which hurts everyone, and the poor most of all. And that’s why it’s important to stick to these policies and stick to the process.

MS. ELNAGAR: Okay. We’re going to tag along, again, social protection, and an online questioner is asking, what about the government employees and middle-class? What do you think, and how can the government protect them from the decline in their salaries related to inflation?

MR. JARVIS: Right. It’s a difficult issue, and on that I would say, if you look at the broad path of government salaries of the last few years, you saw some very large increases in the period -- especially in the second half of 2013, for example. That was one of the contributing factors towards the very high public deficit. The government has a plan to -- for wage increases for public sector workers and also for numbers of public sector works, and that’s embedded in the budget and in the civil service law, and we support that plan. But I would say it’s one of the -- one of the important things that wages are kept restrained during this process. That’s really essential if inflation is to be restrained as well, because if you get very high wage increases that’s going to translate into higher deficits if it’s in the public sector, or into higher prices if it’s in the private sector, and both of those things feed inflation which is self-defeating in terms of the real wage -- the real wages that people have.

MS. ELNAGAR: Online questioneris asking if you have said that the current foreign exchange rate is the market value. Can you please confirm.

MR. JARVIS: Yes, it’s a market value. It’s the rate at which people are prepared to buy and sell freely, and one of the great achievements so far is that there is such a rate. It’s not confined to the shadows of the parallel market anymore. There’s a true market rate, and everybody can see that.

MS. ELNAGAR: We have two more questions and that’s the end of it. One is on what are the key benchmarks Egypt must hit in order to receive the next tranche?

Mr. Jarvis: Well, we set benchmarks for the end of December. All the things like the money supply, credit from the central bank, and the size of the government deficit, and also the level of international reserves. We don’t have final information for the end of December yet. The early indications we have are the -- our benchmarks are likely to be met. That’s the first stage in the process of unlocking the next tranche. The second step is to make sure that, more broadly, the policies are on track. The policies will deliver the results that they’re supposed to deliver, not just for what’s already passed in December but for the remainder of this year as well, and that’ll be the main topic of conversation during the visit to Cairo that we will have to discuss the program and the first review of the program the end of February.

MS. ELNAGAR: One last question which is, why did the CBE choose money targeting rather than inflation targeting.

MR. JARVIS: Good question. We see the central bank as transitioning towards inflation targeting over the next -- over the next couple of years , and there’s already to some extent a framework for inflation targeting. But not all of the conditions for just relying on inflation targeting are in place yet, so as a mediate step, we and the central bank agreed that it would be useful to have money targeting during the program.

MS. ELNAGAR: Okay. With this, we’re going to be ending our press briefing. Thank you for joining us, and we would like you to check our publications on There’s going to be a transcript for this briefing.

IMF Communications Department

PRESS OFFICER: Randa Mohamed Elnagar

Phone: +1 202 623-7100Email: