Press Release No. 19/175

IMF Team Reaches Staff-Level Agreement on the Fifth Review for Egypt’s Extended Fund Facility

May 17, 2019

• The IMF mission reached a staff-level agreement with the Egyptian authorities for the completion of the fifth and the final review of Extended Fund Facility.
• Prudent monetary and fiscal policies and a flexible exchange rate have underpinned macroeconomic stabilization and strengthened Egypt’s resilience to external shocks, while social protection measures have helped ease the burden of adjustment on the population.
• Looking ahead, we welcome the authorities focus on structural reforms as it needs to be deepened to facilitate inclusive growth and job creation for all.

An International Monetary Fund (IMF) team led by Mr. Subir Lall visited Egypt on May 5-16, 2019 to conduct the fifth and final review of Egypt’s economic reform program supported by a three-year Extended Fund Facility (see Press Release No. 16/501 ). At the end of the visit Mr. Lall issued the following statement:

“The IMF staff team and the Egyptian authorities have reached a staff-level agreement on the fifth and final review of Egypt’s economic reform program, which is supported by the IMF’s Extended Fund Facility arrangement. The staff-level agreement is subject to approval by the IMF’s Executive Board. Completion of this review would make available SDR 1,432.76 million (about US$2 billion), bringing total disbursements under the program to about US$12 billion.

Over the last three years the Egyptian authorities have carried out an ambitious home-grown reform program which has aimed to correct significant external and domestic imbalances, promote inclusive growth and job creation, and strengthen social spending. The authorities’ efforts have been successful in achieving macroeconomic stabilization, a recovery in growth, and an improvement in the business climate. GDP growth accelerated from 4.2 percent in 2016/17 to 5.3 percent in 2017/18; unemployment declined from 12 percent to below 9 percent; and the current account deficit narrowed from 5.6 percent of GDP to 2.4 percent. Gross general government debt is expected to decline according to our estimates to about 85 percent of GDP in 2018/19 from 103 percent of GDP in 2016/17. International reserves increased from US$17 billion in June 2016 to US$44 billion in March 2019. As a result, Egypt has become more resilient to the elevated uncertainty in the external environment.

“The Central Bank of Egypt (CBE) has modernized its monetary policy framework, which focuses on inflation as its primary objective under a flexible exchange rate regime. Its monetary policy stance has been appropriately calibrated, helping to reduce inflation from 33 percent in July 2017 to 13 percent in April 2019 despite occasional supply-side shocks and excessive volatility in some food prices. Addressing food supply bottlenecks by investing in logistics, storage facilities, and transport infrastructure, and reducing non-tariff trade barriers are important measures that would reduce this volatility. The CBE aims to reduce inflation to single digits in the medium term. This would help to further strengthen macroeconomic stability, reduce interest rates, and attract investment. The CBE’s commitment to exchange rate flexibility ensures that that the Egyptian pound reflects economic fundamentals, protects international reserves, and enhances the economy’s resilience to external shocks. The CBE has also established itself as a credible guardian of financial sector stability.

“Egypt is on track to achieve its three-year fiscal consolidation objective of 5.5 percent of GDP in the primary balance. The primary surplus target of 2 percent of GDP in 2018/19 is within reach, and the authorities intend to maintain this level in the medium term to keep general government debt on a steadily declining trajectory. The fuel subsidy reform is nearing a successful completion, which will be a significant accomplishment. This reform has played a critical role in creating space for spending on better targeted social programs that help the most vulnerable and in achieving the program’s fiscal objectives, supported by measures to mobilize more resources and streamline current spending. Going forward, the main priorities include raising tax revenues for much needed spending on health, education and social programs. We welcome the authorities’ plans to preserve the fiscal consolidation gains achieved during the program, further strengthen the capacity for debt and fiscal risk management, improve spending efficiency, and enhance the transparency and accountability of public finances.

“ We commend the authorities for implementing a social protection package, which eases the burden of adjustment on the vulnerable. This package was critical in garnering broad public support for difficult reforms. The reduction in regressive and inefficient fuel subsidies has provided the financial means for it. The pension increases and targeted initiatives such as Takafol and Karama, Forsa, and Sakan Karim aim to support the poorest and deliver public services to the most underserved groups. Mastura provides microfinancing to women to increase female employment. The measured increases in public sector wages and progressive tax credits have benefited the middle class. Efforts are ongoing to further improve targeting and expand the coverage of the social safety net.

“The objective of structural reforms is to generate higher and more inclusive growth and create jobs for Egypt’s young and growing population. Steady progress is being made in implementing measures that aim to increase productivity, remove barriers to investment and trade, improve governance and reduce the role of the state in the economy. The key reform areas include: improving access to finance; improving industrial land allocation; enhancing competition; strengthening transparency and management of state-owned enterprises; and fighting corruption. Timely completion of the planned measures would yield significant dividends in terms of higher investment, inclusive growth, and job creation. Staff welcomes the authorities’ strong commitment to maintain the reform momentum beyond the program, which expires in November.

“We would like to thank the Egyptian authorities, including the technical teams for their collegiality, candor, and hospitality. We look forward to our continued close cooperation and policy dialogue.

“Ramadan Kareem”