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

IMF News, January 18, 2017

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

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Bibliographic details

• Published: January 18, 2017

Situation and key macroeconomic challenges identified

• IMF released the Staff Report and the memorandum of economic and financial policy (MEFP) for Egypt’s request for a $12 billion IMF Extended Fund Facility.
• Three major problems identified last summer:
  • Shortage of foreign exchange and precariously low reserves; a balance of payments problem (more money going out of the country than coming in).
  • 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.
  • Long-term structural problem of low growth (growth being only about 2 ½ percent on average over the last five years) and high unemployment (unemployment at 12.7 percent).

Program design and main policy measures

• Exchange rate policy:
  • Move to a more flexible exchange rate to achieve equilibrium between supply and demand of foreign currency; depreciation implemented and has stabilized at the new level.
  • The Central Bank has stepped back from supplying foreign exchange, allowing a market rate to form (market example cited: 18.50).
• Fiscal measures:
  • Implementation of value added tax (VAT).
  • Cuts in fuel subsidies.
  • Control of the public sector wage bill.
  • Reallocation of resources to increase social spending amounting to about 1 percent of GDP (to expand food subsidies, Takaful and Karama, and smaller programs like free school meals).
• Structural reforms to raise growth and employment:
  • Reform of the industrial licensing system.
  • Reform of bankruptcy law.
  • Measures to increase female labor force participation (increase funding for public sector nurseries, study to improve safety of public transportation).
• Monetary framework:
  • Money targeting chosen during the program as a transitional step while conditions for full inflation targeting are being developed; the central bank is seen as transitioning towards inflation targeting over the next couple of years.

Social protection and distributional considerations

• Social protection is a key program element to protect the most vulnerable from initial adjustment costs.
• Specific protections include expanded food subsidies, extension of Takaful and Karama, subsidized transportation for children, protection of infant formula and children’s medicines, and stepped-up free school meals.
• Social spending amount specified: about 1 percent of GDP.
• IMF view: restricting wage increases and containing the deficit are important to curb inflation and protect real incomes in the medium term; higher public wages in prior years contributed to the large public deficit.

Progress, timing, and conditionality for financing tranches

• Assessment of progress to date: “so far, so good” — authorities are following through on stated policies; some risks identified in the Staff Report have not materialized so far.
• Timing for next tranche:
  • Next tranche due to be disbursed in the spring.
  • IMF mission expects a visit to Cairo to assess progress towards the end of February.
  • Expectation of Board release of the second tranche in late April, subject to successful review.
• Benchmarks and review:
  • Benchmarks set for end-December include money supply, credit from the central bank, size of the government deficit, and level of international reserves.
  • Early indications noted that end-December benchmarks are likely to be met; the February visit will review whether broader policies remain on track for the remainder of the year.

Inflation, exchange rate, and outlook

• Reasons for recent inflation increase:
  • Direct effects from fuel price increases.
  • Some effect from VAT introduction (described as “not particularly large” in price effect).
  • Depreciation of the exchange rate and pass‑through from higher import costs.
• Expected path:
  • If policies are kept reasonably tight, IMF expects monthly inflation increases to drop sharply by the second quarter of this calendar year, with headline inflation beginning to fall then.
  • By the second half of this year, IMF expects quite significant falls in inflation, conditional on policy implementation.
• Exchange rate observations:
  • Current rate described as a market value (rate at which people are prepared to buy and sell freely).
  • IMF does not make specific exchange rate predictions; noted possibility of initial overshooting followed by stabilization or appreciation.

Risks, transparency, and political economy

• Risks to the program were set out in the Staff Report; mitigation relies on political commitment and adherence to fiscal and monetary policies.
• On transparency and parliamentary involvement:
  • IMF notes meetings with many ministers and some parliamentarians during mission visits.
  • Government has sent the program description to Parliament for discussion; IMF welcomes parliamentary and public discussion.
  • Publication timing: Staff Report publication took time to ensure factual accuracy and to coordinate with the government’s rollout to Parliament and the rest of government.
• Political risks from high inflation and erosion of real incomes acknowledged; IMF emphasizes that sticking to policies (contain deficit, limit money supply growth) mitigates those risks.

Banking system and deposits

• Observations:
  • Inflows of deposits into the banking system have been observed, attracted by high interest rates.
  • Increased foreign exchange brought into the banking system has also been recorded.
• Specific deposit growth figures mentioned (September reference in question):
  • Growth rate of deposits in local currency at end of September declined from 24.4 percent compared to corresponding period last year, when it was 29.9 percent. (IMF staff noted those September figures predate the program start and may be of limited relevance.)

Comparable experiences and lessons

• Countries cited with broadly similar experiences at large emerging-economy scale: Turkey and Brazil.
• Earlier successful transformations in Eastern Europe referenced as illustrative of programs that put countries on paths to prosperity.
• Emphasis that programs must be country-specific (“home grown”), not one-size-fits-all, while drawing on international experience.

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, IMF Communications Department

References

• Arab Republic of Egypt and the IMF
• Transcripts
• PRESS CENTER
• https://www.imf.org/en/home