IMF Executive Board Completes the Third Review of the Extended Arrangement under the Extended Fund Facility for Egypt
IMF News, July 29, 2024
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- Published: July 29, 2024
Executive Board decision and financing
- The IMF Executive Board completed the third review under the Extended Arrangement under the Extended Fund Facility (EFF) for Egypt, allowing the authorities to draw the equivalent of about US$820 million (SDR 618.1 million).
- Egypt’s 46-month EFF arrangement was approved on December 16, 2022.
Recent macroeconomic developments and program performance
- Macroeconomic conditions have started to improve since the approval of the combined first and second reviews in March.
- Observed improvements:
- Inflation remains elevated but is coming down.
- Foreign exchange shortages have been eliminated.
- Fiscal targets (including related to spending by large infrastructure projects) were met.
- These improvements are beginning to have a positive effect on investor confidence and private sector sentiment.
- Policy stance emphasized:
- A flexible exchange rate regime remains a cornerstone of the authorities’ program.
- A data-driven approach by the Central Bank is needed to lower inflation and inflation expectations.
- Ongoing fiscal consolidation will help place public debt on a decisive downward path.
Policy recommendations and priorities
- Fiscal policy:
- Continue fiscal consolidation with strengthened revenue mobilization to create space to expand social programs.
- Pay particular attention to strengthen domestic revenue mobilization and contain fiscal risks from the energy sector.
- Generate fiscal space to expand social spending in support of vulnerable groups.
- Monetary and exchange rate policy:
- Maintain a flexible exchange rate regime and a liberalized foreign exchange system to avoid a buildup of external imbalances.
- Continue a tight monetary policy stance while using data-driven decision making to reduce inflation and expectations.
- Public investment and debt management:
- Implement the framework to monitor and control public investment.
- Allocate a portion of the financing from the Ras El-Hekma deal to reserve accumulation and debt reduction as an additional cushion against shocks.
- Boost tax revenue, deliver a more robust debt management strategy, and bring additional resources from divestment to debt reduction to create space for productive spending.
Structural reforms and private sector development
- Progress has been made on some critical structural reforms, but greater efforts are needed to implement the State Ownership Policy (SOP).
- Priority structural measures include:
- Accelerating the divestment program.
- Pursuing reforms to streamline business regulations to set up new firms.
- Expediting trade facilitation practices.
- Creating a “level playing field” that avoids unfair competitive practices by state-owned companies.
- Bolstering financial sector resilience and the governance practices and competition in the banking sector.
- Objective: steer Egypt toward private-sector-led growth that can generate jobs and opportunities.
Specific policy timing and measures highlighted
- Restore energy prices to their cost recovery levels, including retail fuel prices by December 2025, to support energy provision and reduce sectoral imbalances.
- Enhance governance of state-owned banks, advance the state-ownership policy, increase fiscal transparency, and level the economic playing field to secure greater private investment.
Risks and outlook
- Noted external and domestic risks:
- The regional environment remains difficult due to the conflict in Gaza and Israel and tensions in the Red Sea.
- Uncertainty about the duration of disruption of trade in the Red Sea is an important source of external risk.
- Domestic policy and structural challenges require decisive implementation of program commitments.
- Managing the resumption of capital inflows prudently is important to contain potential inflationary pressures and limit the risk of future external pressures.
- IMF Executive Board view (Ms. Antoinette M. Sayeh, Deputy Managing Director, and Acting Chair — selected statements):
- “Strengthened reforms under the EFF-supported program are yielding positive results. The unification of the exchange rate and the accompanying monetary policy tightening have curtailed speculation, brought in foreign inflows, and have moderated price growth. With signs of recovery in sentiment, private sector growth should be poised for a rebound.”
- “Policy settings are expected to help maintain macroeconomic stability. A sustained shift to a flexible exchange rate regime and a liberalized foreign exchange system, continued implementation of a tight monetary policy stance, and further fiscal consolidation coupled with proper implementation of the framework to monitor and control public investment should support internal and external balance. The allocation of a portion of the financing from the Ras El-Hekma deal to reserve accumulation and debt reduction provides an additional cushion against shocks.”
- “Looking ahead, implementation of the structural reform agenda is key to achieving more inclusive and sustainable growth. Reforms that boost tax revenue, deliver a more robust debt management strategy, and bring additional resources from divestment to debt reduction would create space for more productive spending, including additional targeted social spending. Restoring energy prices to their cost recovery levels, including retail fuel prices by December 2025, is essential to supporting the smooth provision of energy to the population and reducing imbalances in the sector. Enhancing the governance of state-owned banks, advancing the state-ownership policy, increasing fiscal transparency, and leveling the economic playing field are critical to securing greater private investment.”
- “Risks remain significant. Regional conflicts and uncertainty about the duration of disruption of trade in the Red Sea are important sources of external risk. Maintaining appropriate macroeconomic policies, including a flexible exchange rate regime, would help ensure economic stability. Meaningfully advancing with the structural reform program would significantly improve growth prospects. Managing the resumption of capital inflows prudently will also be important to contain potential inflationary pressures and limit the risk of future external pressures.”
IMF Press Release No. 24/293, July 29, 2024.
