Egypt Takes Proactive Approach to Limit the Pandemic’s Fallout
IMF News, July 9, 2020
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- Published: July 9, 2020
Overview
- Publication date: July 9, 2020
- As part of Egypt’s two-step request for IMF financing to respond to COVID-19:
- $2.8 billion was approved in May under the IMF’s Rapid Financing Instrument.
- $5.2 billion was approved under the 12-month Stand-By Arrangement (SBA).
Economic impact of COVID-19 on Egypt
- Channels of impact:
- Virus containment measures.
- Sudden stop in tourism.
- Fall in exports.
- Drop in remittances.
- Lower revenue from the Suez Canal.
- Capital flows:
- At the peak of global risk aversion during March and April, Egypt experienced capital outflows of nearly $16 billion.
- Balance of payments and growth:
- Combination of the above factors put considerable pressure on the balance of payments.
- With the global economy in recession and domestic activity curtailed, growth is expected to significantly decline.
- Fiscal pressures:
- Revenue is falling just as the government needs to urgently ramp up spending on health and social protection.
IMF support and financing strategy
- Two-step IMF engagement:
- First step: $2.8 billion under the Rapid Financing Instrument (approved in May) to respond with health and social spending for the most vulnerable groups.
- Second step: 12-month SBA with access to $5.2 billion to help preserve economic gains of the past four years, ensure adequate health and social spending, and advance structural reforms for sustained recovery.
- Objectives of IMF-supported program:
- Preserve economic gains of the past four years.
- Continue adequate health and social spending.
- Further advance structural reforms to position Egypt for sustained recovery.
Protection of poor and vulnerable populations
- Three-pronged government approach:
- First:
- Increased allocations for health spending since the onset of the pandemic.
- Expanded coverage under conditional cash transfer programs Takaful and Karama (Solidarity and Dignity).
- New programs to provide cash transfers to irregular workers substantially affected by the crisis.
- Distribution of medical and sanitation kits to poor villages.
- Collaboration with NGOs to provide additional support to the needy.
- Second:
- Commitment to a minimum level of spending for health and social programs to ensure continued provision of critical social protection.
- Third:
- Undertake a review of social spending—initially focusing on social protection, then on health and education—to assess adequacy and efficiency and identify areas for improvement.
- The World Bank is supporting this review.
Policy measures under the Stand-By Arrangement to support recovery
- Fiscal policy stance:
- Fiscal policy is being eased to support the economy and address crisis needs.
- Crisis-related spending increases include:
- Health spending (26 percent).
- Social protection (10 percent).
- Measures to partially offset the revenue shortfall include promoting green recovery through a fee on the consumption of fuel products.
- Debt and medium-term fiscal sustainability:
- Crisis spending needs to be weighed against avoiding an excessive increase in public debt.
- Once recovery begins, the government aims to resume debt reduction and maintain medium-term fiscal sustainability.
- Authorities are updating their debt strategy to reduce debt vulnerabilities and working to mobilize additional revenue to accommodate higher social spending.
- Monetary and financial sector framework:
- Authorities are committed to maintaining low and stable inflation.
- Preserve exchange rate flexibility and allow orderly exchange rate adjustments.
- Maintain financial sector stability with ongoing strong supervision and close monitoring of emerging financial risks.
- Structural reform commitments:
- Continue structural reforms begun under the Extended Fund Facility, including:
- Improve the budget process.
- Increase transparency on the financial operations of state-owned enterprises and economic authorities.
- Strengthen competition by helping level the playing field.
- Amend the customs law to improve Egypt’s investment climate.
Role of earlier reforms in building resilience
- Reforms since 2016:
- The economic reform program adopted from 2016 greatly enhanced the economy’s resilience.
- Before the pandemic:
- Growth was above 5 percent.
- International reserves were comfortable.
- Debt was on a downward trajectory.
- Government had embarked on additional reforms to enhance the business environment and adopt a private sector-led growth model to enhance job creation.
- These steps enabled the government to swiftly launch a comprehensive pandemic response.
- Despite significant progress to reduce poverty and inequality, challenges remain.
Transparency and accountability for crisis spending
- Commitments on disclosure and auditing:
- Government will publish details of all crisis-related spending in a consolidated manner on the Ministry of Finance website.
- Government will post procurement plans and contracts awarded for emergency responses to COVID-19, including names of the companies concerned and information on beneficial ownership.
- The Accountability State Authority will audit crisis-mitigating inflows as well as spending and publish the results after the end of the fiscal year.
International Monetary Fund; July 9, 2020