Cairo: An International Monetary Fund mission led by Ivanna
Vladkova Hollar held in-person discussions with the authorities during
January 17-February 1 in Cairo. The mission continued virtually over the
last few weeks to finalize key aspects of the agreement. At the conclusion
of the discussions, Ms. Vladkova Hollar issued the following statement:
“We are pleased to announce that the Egyptian authorities and the IMF team
have reached staff level agreement on the economic policies needed to
complete the first and second reviews of the EFF arrangement. Amid
significant macroeconomic challenges that have become more complex to manage
with the impact of the recent conflict in Gaza on tourism and Suez Canal
receipts, staff also considered the authorities’ request for an
augmentation of IMF support to Egypt from SDR 2.35 billion (equivalent to
about US$ 3 billion) to SDR 6.11 (equivalent to about US$ 8 billion). This
agreement is subject to approval by the IMF Executive Board. The
comprehensive policy package seeks to preserve debt sustainability, restore
price stability, and reinstate a well-functioning exchange rate system,
while continuing to push forward deep structural reforms to promote private
sector-led growth and job creation.
“The authorities are showing strong commitment to act promptly on all
critical aspects of their economic reform program supported by the IMF.
Policy discussions and program reforms revolved around six pillars.
“First, the authorities have taken decisive steps to
move toward a credible flexible exchange rate regime. This reform, which has started with the unification of the exchange rate
between the official and parallel markets will (i) help increase the
availability of foreign exchange and eliminate the current backlog of unmet
foreign exchange demand, and (ii) re-establish a well-functioning interbank
market for foreign exchange. There was agreement that a flexible exchange
rate regime would help Egypt manage external shocks and would support the
authorities’ decision to move toward a full-fledge inflation targeting
regime over time.
“Second,
additional monetary policy tightening to reduce inflation, and reverse the recent dollarization trend. In this regard, we welcome
the recent decision by the Central Bank of Egypt to increase the policy
rate by 600 basis points, in addition to the 200 basis points undertaken
last month.
“Third,
fiscal consolidation to preserve debt sustainability. The authorities agreed to maintain fiscal prudence over the medium-term
and step-up efforts to mobilize additional domestic revenues, including
through the rationalization of tax exemptions as well as to use a
substantial part of divestiture proceeds to reduce debt.
“Fourth,
a new framework to slow down infrastructure spending including projects
that have so far operated outside regular budget oversight. In particular, the authorities noted that they would limit the total
amount of public investment from all sources (i.e., budget, State Owned
Enterprises, economic authorities, and other entities), and the Prime
Minister has issued a decree that sets up a monitoring mechanism under his
supervision, with participation from all relevant authorities present, and
to be headed by Central Audit Agency.
“Fifth, the authorities also agreed on the
need to provide adequate levels of social spending
to protect vulnerable groups. In this regard, in addition to the expansion
of the Takaful and Karama cash transfer program in 2023, they recently
announced an additional EGP 180 billion social protection package for
FY2024/25. The authorities also indicated that they would continue to
provide support to ensure adequate living conditions for low and
middle-income households that have been hit particularly hard by rising
prices.
“Finally, the implementation of the State Ownership Policy and
reforms to level the playing field
will be key to unleash private sector growth. In this context, recent
reforms eliminating preferential tax treatment and exemptions for
state-owned enterprises are a step in the right direction. The accelerated
pace of FDIs and divestiture programs since mid-2023 is a positive
development that should contribute to improved confidence by markets and
investors.
“Egypt’s international and regional partners will play a critical role in
facilitating the implementation of the authorities’ policies and reforms.
In this context, the recent investment deal in Ras ElHekma alleviates the
near-term financing pressures.
“The IMF team would like to thank the authorities for the constructive
dialogue, warm hospitality and strong cooperation to finalize the reform
package in support of the completion of the first and second reviews under
the EFF arrangement. A Board meeting is expected before the end of March”.