Egypt: Overcoming the COVID Shock and Maintaining Growth

IMF News, July 14, 2021

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Tourism at the onset of the crisis accounted for around 12 percent of GDP, 10 percent of employment, and 4 percent of GDP in foreign currency earnings.
Immediate effects included a sudden stop in tourism, a temporary decline in domestic activity due to partial lockdowns and capacity restrictions, and a stretched government budget as tax revenues fell.
Egypt experienced capital outflows of more than $15 billion during March-April 2020.
Despite these shocks, Egypt experienced a positive growth rate in 2020, attributed to a short period of lockdown, a relatively diversified economy, and timely policy responses.

Reforms implemented since 2016 under the 2016-19 Extended Fund Facility (EFF) provided sizable buffers prior to the pandemic; measures included:
- Floating the exchange rate to eliminate currency overvaluation.
- Fiscal consolidation to reduce public debt.
- Energy subsidy reform to address a key fiscal risk and create space for social spending.
- Structural reforms to strengthen the business climate, attract investment, and increase employment opportunities, particularly among youth and women.
Fiscal support measures during the crisis included:
- Relief to businesses and workers in hardest-hit sectors such as tourism and manufacturing.
- Postponement of tax payments.
- Expansion of cash transfer programs to poor households and irregular workers.
Central Bank of Egypt measures during 2020:
- Reduced policy interest rates by 400 basis points; overnight deposit rate cut from 12.25 percent to 8.25 percent.
- Introduced initiatives to reduce pressure on borrowers and ensure liquidity, including increased access to credit at preferential interest rates and a six-month debt moratorium on existing credit.
- Objective: ensure smooth credit flow and alleviate pressures in domestic financial markets.

The IMF provided about $8 billion in financial support through a two-pronged plan:
- The Rapid Financing Instrument provided $2.8 billion in May 2020 for emergency foreign currency needs.
- The Stand-by Arrangement (SBA), approved in June 2020, provided access to about US$5.4 billion over the subsequent 12 months.
Program objectives and outcomes:
- Helped maintain economic stability and rebuild international reserves drawn down in response to the crisis.
- Supported progress on structural reforms to strengthen public finances, fiscal transparency and governance, and laws to improve the business climate.
- Policies sought a balance between supporting the economy through the COVID-19 shock and ensuring debt remains sustainable to maintain investor confidence.
As a consequence of government policy and IMF support, growth was expected at 2.8 percent for FY 2020/21.

Growth projection:
- Growth is expected to rebound to 5.2 percent in FY2021/22.
Key uncertainties and vulnerabilities:
- Outlook is clouded by uncertainty related to the pandemic, including full recovery of tourism.
- High public debt and large gross financing needs leave Egypt vulnerable to external shocks, such as higher global borrowing costs as developed economies withdraw economic stimulus.
Policy priorities and recommended reforms:
- Continue preserving economic stability and reducing public debt.
- Focus on structural reforms to encourage private-sector-led growth, including:
- Policies to increase revenue for financing health, education, and social safety nets.
- Enhance governance and transparency.
- Further develop financial markets.
- Reduce the role of the state in the economy and ensure a level-playing field for all firms.
- Improve the business environment and increase integration into global trade by reducing trade barriers and ensuring predictability of customs procedures.
- The IMF will continue to support Egypt’s reform efforts as specific policy measures are defined and implemented.

Source: IMF News — "Egypt: Overcoming the COVID Shock and Maintaining Growth" (July 14, 2021).