A Chance for Change: IMF Agreement to Help Bring Egypt's Economy to Its Full Potential

IMF News, November 11, 2016

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Canonical URL: A Chance for Change: IMF Agreement to Help Bring Egypt's Economy to Its Full Potential

IMF has approved a three-year, $12 billion loan to support the government’s home-grown comprehensive economic reform plan.
Loan provided under the Extended Fund Facility and includes measures to protect the poor.
Publication date: November 11, 2016.

Political instability, regional security issues, and the global economic slowdown have amplified Egypt’s long-standing structural problems.
Fixed exchange rates: Keeping the Egyptian pound fixed to the U.S. dollar undermined external competitiveness, depleted foreign reserves, created foreign exchange shortages, reduced investment, and occasionally caused food shortages.
High government deficit and public debt: Weak revenue, poorly targeted subsidies, and a growing public sector wage bill resulted in large deficits and a public debt level nearing 100 percent of GDP.
Low growth: Structural issues constrained growth and employment; growth has not been inclusive and failed to generate enough jobs, especially for young people and women.

Program seeks to restore macroeconomic stability, promote growth and employment, and implement structural reforms to create jobs.
Program described by IMF Managing Director Christine Lagarde as "by the Egyptian government, for the Egyptian people, and to help the Egyptian economy."
Emphasis on reviving growth prospects by restoring stability and confidence and implementing reforms.

Maintain a flexible exchange rate regime:
- Aim: improve external competitiveness, support exports and tourism, attract foreign investment, and allow the Central Bank of Egypt to rebuild international reserves.
- Monetary policy will focus on containing inflation and bringing it down to mid-single digits over the medium term.
Strengthen government revenues:
- Value-added tax (VAT) adopted in August 2016 to help strengthen budget revenues.
- VAT includes exemptions for most staple foods consumed by the poor to protect vulnerable segments.
Implement energy subsidy reforms:
- Rationale: subsidies are not well-targeted, benefit mostly the non-poor, skew production toward energy-intensive industries, and away from labor-intensive, job-creating enterprises.
- Expected outcome: free up resources for priority areas such as health, education, research and development, and social protection.
Fiscal consolidation:
- Aim: ensure medium-term public debt sustainability.

About 1 percent of GDP from fiscal savings will be directed to additional food subsidies and cash transfers to the elderly and poor families.
Resources for social programs such as school meals, subsidies for infant milk and children’s medicine, and vocational training for young people will be preserved.
Free school meals funding will be greatly increased.

Improve business climate through measures such as streamlining industrial licensing and facilitating access to finance for small and medium-sized enterprises.
Objective: boost job creation and address high unemployment, particularly among young people and women.
Specific measures to support female labor force participation: make more public nurseries available and improve the safety of public transportation.

Egypt described as having immense potential: dynamic and young population, large market size, favorable geographic location, and access to important foreign markets.
Positive developments cited: opening of the parallel Suez Canal, large investments in the energy sector, and discovery of a major gas field.
With sound implementation of the program, growth could rebound to 6 percent by 2021—similar to the levels in 2005-2010.
Quote from IMF Mission Chief for Egypt Chris Jarvis: “The government’s reform program supported by the IMF aims to raise growth, make it easier for women and young people to find work, and protect the poor and other vulnerable groups.”

A flexible exchange rate regime to remove overvaluation, rebuild reserves, and provide buffers for external shocks;
Monetary tightening to contain inflation;
Fiscal consolidation to ensure medium-term public debt sustainability;
Strengthening social safety nets and increasing pro-poor spending to offset impact of the reforms on the vulnerable; and
Structural reforms to promote inclusive growth, create jobs, increase and diversify exports, improve the business environment, and strengthen public finance management.

IMF Communications Department, November 11, 2016.