Doaa A.Moneim - Ahram
The Executive Board of the International Monetary Fund (IMF) completed on Friday the first and second reviews of Egypt’s 46-month Extended Fund Facility arrangement with Egypt and approved an expansion of the original program by about $5 billion.
The IMF said that this completion enables the government to immediately secure $820 million. The IMF originally approved the loan Program for Egypt in December 2022 with an amount of $3 billion that is extended now to $8 billion.
The IMF’s Executive Board assessed that all but one of the quantitative performance targets for end-June 2023 were met, and it also approved the authorities’ request for a waiver for non-observance of the June performance criterion on Net International Reserves on the basis of corrective actions.
“Macroeconomic conditions since the approval of the program have been challenging, with rising inflation, foreign exchange shortages and elevated debt levels and financing needs. The difficult external environment generated by Russia’s war in Ukraine was subsequently aggravated by the conflict in Gaza and Israel, as well as tensions in the Red Sea”, said the IMF.
These developments raised the complexity of the country’s macroeconomic challenges and called for decisive domestic policy action supported by a more robust external financing package, including from the IMF, according to the fund.
The IMF also noted that external shocks and delayed policy adjustment weighed on Egypt’s economic activity. In this respect, the fund explained that the country’s real GDP growth slowed to 3.8 percent in FY202/2023 due to weak confidence and foreign exchange shortages.
It projected this rate to slow further to 3 percent in the current FY2023/2024 before recovering to about 4.5 percent in the upcoming FY2024/2025 that starts on 1 July.
On inflation, the IMF said that inflation remains high, expecting it to cool over the medium term as the policy tightening takes hold.
The IMF said that the recently announced $35 billion investment deal from the Ras El-Hekma deal with the UAE has alleviated near-term balance of payment pressures and, if used judiciously, will help Egypt rebuild buffers to deal with future shocks.
Yet, the IMF affirmed that steadfast implementation of the economic policies under the program remains critical to sustainably address Egypt’s macroeconomic challenges, as does robust delivery on structural reforms to allow the private sector to become the engine of growth.
“Egypt is facing significant macroeconomic challenges that have become more complex to manage given the spillovers from the recent conflict in Gaza and Israel. The disruptions in the Red Sea are also reducing Suez Canal receipts, which are an important source of foreign exchange inflows and fiscal revenue”, said Kristalina Georgieva, the Managing Director of the IMF and the Chair of the Executive Board.
She added that the authorities have significantly strengthened the reform package underlying the Extended Fund Facility arrangement, supported by an augmentation of access.
According to Georgieva, recent measures toward correcting macroeconomic imbalances, including unification of the exchange rate, clearance of the foreign exchange demand backlog, and significant tightening of monetary and fiscal policies, were difficult, but critical steps forward, and efforts should be sustained going forward.
“The authorities’ commitment to use a large part of the new financing from the Ras El-Hekma deal to improve the level of reserves, fast-track the clearance of foreign currency backlogs and arrears, and reduce government debt upfront is prudent”, Georgieva highlighted.
“The authorities’ policies are well calibrated to entrench macroeconomic stability while protecting the vulnerable. The Central Bank of Egypt’s resolve to focus squarely on reducing inflation and to tighten further, if necessary, is key to preventing further erosion of the purchasing power of households”, she added.
Additionally, implementation of the newly established framework to monitor and control public investment will help manage excess demand, said Georgieva.
She also stressed that the pursuit of a revenue-based fiscal consolidation will put debt firmly on a downward path and provide resources for expanding the social safety net.
In this regard, Georgieva asserted that it remains essential to replace untargeted fuel subsidies with targeted social spending as part of a sustained fuel price adjustment package.
“With policies to restore macroeconomic stability in place, the stage is set for accelerating implementation of the structural reform agenda intended to deliver inclusive and sustainable growth. Withdrawing the state and military from economic activity and leveling the playing field between the public and private sectors is key to attracting foreign and domestic private investment in Egypt”, Georgieva explained.
However, attaining these goals is subject to external and local risks.
“Externally, uncertainty remains high. Domestically, sustaining the shift to a liberalized foreign exchange system, maintaining tight monetary and fiscal policies, and integrating transparently off-budget investment into macroeconomic policy decision making will be critical. Managing the resumption of capital inflows prudently will be important to contain inflationary pressures and limit the risk of future external pressures”, according to Georgieva.
