November 11, 2016
PRESS OFFICER: Randa Mohamed Elnagar
Phone: +1 202 623-7100Email: MEDIA@IMF.org
On November 11, 2016, the Executive Board of the International Monetary Fund (IMF) approved a three-year extended arrangement under the Extended Fund Facility (EFF) for the Arab Republic of Egypt for an amount equivalent to SDR 8.597 billion (about US$12 billion, or 422 percent of quota) to support the authorities’ economic reform program.
The EFF-supported program will help Egypt restore macroeconomic stability and promote inclusive growth. Policies supported by the program aim to correct external imbalances and restore competitiveness, place the budget deficit and public debt on a declining path, boost growth and create jobs while protecting vulnerable groups.
The Executive Board’s approval allows for an immediate purchase of SDR 1.970 billion (or about US$2.75 billion). The remaining amount will be phased over the duration of the program, subject to five reviews.
Following the Executive Board discussion, Ms Christine Lagarde, Managing Director and Chair, said:
1. “The Egyptian authorities have developed a homegrown economic program, which will be supported under the IMF’s Extended Fund Facility, to address longstanding challenges in the Egyptian economy. These include: a balance of payments problem manifested in an overvalued exchange rate, and foreign exchange shortages; large budget deficits that led to rising public debt; and low growth with high unemployment. The authorities recognize that resolute implementation of the policy package under the economic program is essential to restore investor confidence, reduce inflation to single digits, rebuild international reserves, strengthen public finances, and encourage private sector-led growth.
2.“The liberalization of the exchange rate regime and the devaluation of the Egyptian pound were critical steps toward restoring confidence in the economy and eliminating foreign exchange shortages. The new exchange rate regime will be supported by prudently tight monetary policy to anchor inflation expectations, contain domestic and external demand pressures, and allow accumulation of foreign exchange reserves.
3.“Reducing fiscal deficits considerably and thereby placing public debt on a clearly declining path is an important objective of the authorities’ program. To this end, the key policy measures are the introduction of a VAT, a reduction of energy subsidies, and the optimization of the public sector wage bill. To mitigate the impact of the reforms on the poor, the authorities intend to use part of the fiscal savings to strengthen the social safety nets. The planned fiscal consolidation is projected to reduce public debt by almost 10 percentage points of GDP by the end of the program.
4. “Structural reforms are critical for the success of the program. The aim is to address deep-seated structural impediments to growth and job creation, and create an enabling environment for private sector development. The main areas of reforms include business licensing and insolvency frameworks; public financial management, including state-owned enterprises; energy sector and subsidy reforms; and labor market reform to create jobs and increase labor market participation, especially among women and young people.
5. “Risks to program implementation are significant, but are mitigated by the strength of the policy package, frontloading of major measures implemented as prior actions, and broad political support for the objectives of the program and ambitious policy efforts.”
ANNEX
Recent Developments
Since 2011, political and regional developments have taken a significant toll on the Egyptian economy. Underlying structural challenges and the prolonged political transition led to the build-up of macroeconomic imbalances. A significantly overvalued exchange rate undermined competitiveness and depleted reserves. Weak revenue combined with poorly targeted subsidies and a growing public sector wage bill resulted in large deficits and high level of public debt.
The authorities initiated policy adjustment measures in 2014/15. The Central Bank of Egypt (CBE) devalued the Egyptian pound by 5 percent and increased interest rates to contain inflationary pressures. Fuel and electricity prices were raised, and a plan for gradual phasing out of these subsidies was developed. As a result, the subsidy bill fell by nearly 3 percent of GDP in fiscal year (FY) 2014/15. In addition, a new Civil Service law was drafted and a decision was taken to replace the General Sales Tax with VAT. In 2015/16, however, the momentum of reform slowed. Planned fuel price increases were deferred, income taxes were cut, the capital gains tax was postponed and parliamentary consideration of VAT was delayed to 2016/17.
Growth slowed in 2015/16, while inflation increased and external vulnerabilities became more acute. The economy is estimated to have grown by 3.8 percent in 2015/16. Foreign exchange shortages and the overvalued currency hampered the manufacturing sector, while tourism was hard hit by security concerns. Inflationary pressures intensified in the second half of the year. The current account deficit widened further, and in June 2016 reserves stood at about 3 months of prospective imports. The devaluation of the official exchange rate by 13 percent in March 2016 did not restore market equilibrium, and strong pressures on the exchange rate and reserves remained. By the end of September, the parallel market premium widened to more than 30 percent, and the official exchange rate was estimated to be overvalued by about 25 percent in real effective terms.
Program Summary
The authorities’ home-grown program, supported by the EFF arrangement, will address macroeconomic vulnerabilities and promote inclusive growth and job creation.
The program focuses on four key pillars:
a significant policy adjustment including (1) liberalization of the foreign exchange system to eliminate forex exchange shortages and encourage investment and exports; (2) monetary policy aimed at containing inflation; (3) strong fiscal consolidation to ensure public debt sustainability;
strengthening social safety nets by increasing spending on food subsidies and cash transfers;
far-reaching structural reforms to promote higher and inclusive growth, increasing employment opportunities for youth and women;
Fresh external financing to close the financing gaps.
The main elements of the program are as follows:
Exchange rate, monetary and financial sector policies: On November 3 the CBE liberalized the foreign exchange system and adopted a flexible exchange rate regime. Maintaining the flexible exchange rate regime, where the exchange rate is determined by market forces, will improve Egypt’s external competitiveness, support exports and tourism and attract foreign investment. This will also allow the CBE to rebuild its international reserves. Monetary policy will focus on containing inflation and bringing it down to mid-single digits over the medium term. This will be achieved by controlling credit to government and banks as well as by strengthening the CBE’s capacity to forecast and manage liquidity, improving transparency and communication. To further enhance banking sector soundness and promote competition, the CBE will review its supervisory model in line with international best practice, including Basel III principles.
Fiscal policy, social protection and public financial management:
Fiscal policy will be anchored to setting public debt on a clearly declining path and restoring debt sustainability. Tax revenues are projected to increase by 2.5 percent of GDP over the program, in large part due to the implementation of the value added tax (VAT) approved by parliament in August. At the same time, primary expenditures will be reduced by 3.5 percent owing to reduction of subsidies and containing the wage bill. The fuel price increase announced on November 3 were an important step in that direction.
Social protection programs will be strengthened to ease the adjustment process. About 1 percent of GDP out of the achieved fiscal savings will be directed to additional food subsidies, cash transfers to the elderly and low-income families, and other targeted social programs, including more free school meals. The aim is to replace poorly targeted energy subsidies with programs that directly support poor households.
The program also emphasizes strengthening public financial management (PFM) and fiscal transparency. Planned reforms in this area include regularly reviewing the operational performance of the economic authorities; improving oversight of state issued guarantees through the preparation of reports; developing a road map for pension reforms; and preparing a budget statement on economic and public finance developments will be presented to the parliament with every budget.
Structural reforms and inclusive growth . The program will help address the long-standing challenges of low growth and high unemployment. Measures will include streamlined industrial licensing for all businesses, greater access to finance to SMEs, and new insolvency and bankruptcy procedures. Job intermediation schemes and specialized training programs for youth will be encouraged. To support women’s labor force participation, availability of public nurseries will be increased and safety of public transportation improved.
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2011/12 |
2012/13 |
2013/14 |
2014/15 |
2015/16 |
2016/17 |
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|
Prel. |
Proj. |
||||||
|
Output and prices |
2.2 |
2.1 |
2.2 |
4.2 |
3.8 |
4.0 |
|
|
Real GDP (market prices) |
7.3 |
9.8 |
8.2 |
11.4 |
14.0 |
16.6 |
|
|
Consumer prices (end of period) |
8.6 |
6.9 |
10.1 |
11.0 |
10.2 |
18.2 |
|
|
Consumer prices (period average) |
|||||||
|
Public finances |
|||||||
|
General Government2/ |
|||||||
|
Revenue and grants |
21.1 |
21.9 |
23.7 |
21.9 |
20.3 |
25.5 |
|
|
Expenditures (incl. net acquisition of financial assets) |
31.1 |
35.3 |
36.7 |
33.5 |
32.0 |
33.1 |
|
|
Of which: Interest |
5.6 |
7.3 |
7.6 |
7.3 |
8.1 |
8.7 |
|
|
Overall balance |
-10.0 |
-13.4 |
-12.9 |
-11.5 |
-12.0 |
-10.0 |
|
|
Overall balance excl. grants |
-10.6 |
-13.7 |
-16.5 |
-12.6 |
-12.2 |
-10.1 |
|
|
Primary balance |
-4.9 |
-6.3 |
-5.8 |
-4.8 |
-4.4 |
-1.8 |
|
|
Gross Debt |
74.6 |
84.8 |
86.3 |
89.0 |
94.6 |
93.8 |
|
|
External |
9.3 |
10.8 |
9.9 |
8.0 |
7.7 |
10.1 |
|
|
Domestic |
65.3 |
74.0 |
76.4 |
81.0 |
86.8 |
83.7 |
|
|
Budget sector3/ |
|||||||
|
Revenue and grants |
18.3 |
19.0 |
20.8 |
19.1 |
17.6 |
22.9 |
|
|
Expenditures (incl. net acquisition of financial assets) |
28.4 |
32.0 |
33.9 |
30.6 |
29.4 |
30.5 |
|
|
Of which: Fuel subsidies |
5.8 |
7.0 |
6.6 |
4.0 |
3.0 |
2.6 |
|
|
Of which: Food subsidies |
1.8 |
1.8 |
1.7 |
1.7 |
1.5 |
1.4 |
|
|
Overall balance |
-10.1 |
-13.0 |
-13.1 |
-11.5 |
-12.1 |
-10.0 |
|
|
Overall balance excl. grants |
-10.7 |
-13.3 |
-16.7 |
-12.5 |
-12.3 |
-10.1 |
|
|
Primary balance |
-3.8 |
-5.1 |
-4.9 |
-3.7 |
-3.5 |
-0.9 |
|
|
Monetary sector |
|||||||
|
Credit to the private sector |
7.1 |
9.8 |
7.4 |
16.7 |
14.2 |
8.3 |
|
|
Reserve money6/ |
5.1 |
20.4 |
14.8 |
33.3 |
-1.6 |
16.1 |
|
|
Broad money (M2) |
8.3 |
18.4 |
17.1 |
16.4 |
18.6 |
16.7 |
|
|
Treasury bill rate, 3 month (average, in percent) |
13.4 |
13.4 |
10.9 |
11.4 |
11.8 |
19.7 |
|
|
External sector |
|||||||
|
Exports of goods (in U.S. dollars percentage change) |
-7.1 |
7.6 |
-3.2 |
-15.5 |
-15.2 |
12.8 |
|
|
Imports of goods (in U.S. dollars) |
2.7 |
2.4 |
3.7 |
1.7 |
-7.4 |
1.7 |
|
|
Merchandise trade balance |
-11.3 |
-10.8 |
-11.2 |
-11.7 |
-11.0 |
-12.5 |
|
|
Current account |
-3.7 |
-2.2 |
-0.8 |
-3.7 |
-5.5 |
-5.2 |
|
|
Capital and financial account (incl. errors and omissions) |
-3.7 |
1.1 |
0.9 |
5.5 |
4.6 |
1.7 |
|
|
Foreign direct investment (net. In billions of US$) |
-3.7 |
3.6 |
3.8 |
6.1 |
6.7 |
9.4 |
|
|
External debt4/ |
12.5 |
15.1 |
15.3 |
14.3 |
14.0 |
22.9 |
|
|
Gross international reserves 9in billions of US$) |
15.2 |
14.5 |
16.3 |
19.5 |
17.1 |
22.0 |
|
|
In months of next year’s imports of goods and services |
2.7 |
2.5 |
2.7 |
3.6 |
3.1 |
3.7 |
|
|
In percent of short-term external debt5/ |
308.8 |
138.1 |
191.9 |
280.6 |
267.8 |
283.1 |
|
|
Financing gap (in billions of US$) |
… |
… |
… |
… |
0.0 |
16.3 |
|
|
Memorandum items: |
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|
Nominal GDP (in billions of Egyptian pounds) |
1,656.6 |
1,843.8 |
2,101.9 |
2,429.8 |
2,777.8 |
3,434.1 |
|
|
Nominal GDP (in billions of US$) |
275.8 |
285.4 |
301.5 |
330.2 |
… |
… |
|
|
GDP per capita (in US$) |
3,347 |
3,370 |
3,478 |
3,710 |
… |
… |
|
|
Unemployment rate (period average, percent) |
12.4 |
13.0 |
13.4 |
12.9 |
12.7 |
12.3 |
|
|
Poverty rate (percent) |
n.a. |
26.3 |
… |
… |
… |
… |
|
|
Populations (in millions) |
82.4 |
84.7 |
86.7 |
89.0 |
90.2 |
92.3 |
|
|
Sources: Egyptian authorities; and IMF estimates and projections. |
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1/ Fiscal year ends June 30. |
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2/ General government includes the budget sector, the National Investment Bank (NIB), and social insurance funds. |
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3/ Budget sector comprises central government, local governments, and some public corporations. |
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4/ Includes multilateral and bilateral public sector borrowing, private borrowing and prospective financing (in 2011/12). |
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5/ Debt at remaining maturity and stock of foreign holding of T-bills. |
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