All You Need to Know About Egypt’s Commitments, Targets Under New Imf Programme

The International Monetary Fund (IMF) announced the details of its new 46-month loan programme for Egypt and its government commitments in a staff report.

The report detailed the main targets and commitments the government has pledged under the four-year programme, highlighting the risks that could affect its implementation and hinder the government’s efforts over the coming four years.

Hereunder is a sum-up of Egypt's commitments, targets, and risks as detailed in the report.

Egypt secured the $3 billion loan with exceptional access, as the country had already surpassed the cumulative access limit of 435 percent of its quota under the $5.2 billion Stand-By Arrangement loan it had secured in FY2020/21 to address the impacts of the COVID-19 outbreak.

Egypt’s capacity to repay the loan is adequate, albeit with some risks that stem from the need to stay the course of its ongoing economic reform programme amid heightened uncertainty caused by the ongoing war in Ukraine.

Risks to the global outlook affect Egypt’s prospects for a fast recovery, the pace of replenishing reserves, and the speed at which imbalances can be tackled.

These challenges could test the authorities’ commitment and ability to sustain the reforms and reduce debt risks.

Risks over the near term include exchange rate misalignment, prolonged inflationary pressures that could undermine social cohesion, and high financing costs with a further shortening of domestic debt maturities and limited external market access.

Risks over the medium term include mainly the debt sustainability driven by the lower growth and tighter domestic and external financing conditions.

Moreover, the ongoing challenging external market conditions could lead to a lower build-up of Egypt’s reserve buffers.

In addition, potential reversion to limiting exchange rate flexibility and slower-than-expected progress on structural reforms could affect the country’s medium-term outlook.

Meanwhile, COVID-19 also represents a risk, as Egypt’s low vaccination rate (38 percent fully vaccinated, 51 percent with at least one dose) leaves the population vulnerable to new waves of infection.

Main targets Egypt’s growth under the 46-month program is expected to gradually rise to between 5.5 and 6 percent, after short-term challenges including the impact of the spillovers from the war in Ukraine have dissipated, and as the state footprint is gradually replaced with a private activity.

The current account deficit is projected to improve by 2 percent of GDP over the medium term while reserves are rebuilt to an adequate range.

Under the programme, Egypt’s inflation is anticipated to decelerate to around 7 percent by FY2024/25.

The tax-to-GDP ratio is expected to increase by around 2 percent over the medium term. The government will apply new tax-related measures in FY2023/24, targeting an increase of 0.3 percent in the tax-to-GDP ratio.

The measures are expected to be announced by the end of February 2023.

Under the programme, Egypt will adopt a risk-based approach to customs procedures to reduce the time of releasing imports at the Port of Alexandria from 16 days in August 2021 to 12 days in March 2023.

Key commitments The government has committed to slowing down the implementation of public investment projects, including national projects to limit pressures on the foreign exchange market and inflation.

The government has pledged to boost the role of the private sector in growth in parallel with reducing the size of the state’s footprint in the economy, leveling the playing field between public and private institutions, and strengthening governance and the business climate to support export-driven and private sector-led growth.

Through this pledge, Egypt seeks to close the financing gap estimated at $17 billion over the programme’s four years.

Egypt has pledged to secure $13 billion in loans from international partners; including GCC countries, the World Bank, and other international financial institutions, besides the selling of valuable state-owned assets.

In this respect, the government has committed to securing $2.5 billion from selling state-owned assets by the end of FY2022/23 by selling stakes in the Sovereign Fund of Egypt’s (SFE) pre-IPO fund, which seeks to prepare state-owned companies for listing.

For the pre-IPO fund, the government has set an initial group of assets to be transferred to the SFE and has launched a global roadshow to market them to investors.

Sales of state-owned assets through the SFE, as well as sales of state-owned assets to sovereign wealth funds, will be deposited in an earmarked account at the CBE and will therefore support the goal of increasing net international reserves.

25 percent of proceeds gained from the divestment of state-owned assets will flow into the budget.

On the monetary policy front, the CBE will support the monitoring of inflation with a Monetary Policy Consultation Clause (MPCC), which will trigger consultations with IMF staff when annual headline urban CPI inflation falls outside the CBE’s inflation target of 7 percent (±2 percent), and with the Fund’s Executive Board if inflation falls outside the outer 3 to 16 percent in March 2023, and 3 to 15 percent in June 2023.

The CBE has committed to ensuring that the daily overnight interbank rate remains within 50 basis points (bps) of the mid-corridor rate.

The CBE has pledged to continue transitioning away from subsidized lending schemes so that lending rates in the economy are anchored to the policy rate.

The CBE started this process in December by handing off its subsidized lending initiative for the industrial, construction, and agricultural sectors to the Ministry of Finance.

The CBE has pledged to include any foreign currency assets it holds that could be used for reserve management purposes to replenish the international reserves to increase by $6 billion to reach $23 billion in FY 2022/2023 and $10.6 billion in FY 2023/2024.

The CBE has targeted an increase of $16.9 billion during FY 2024/25 and FY 2025/26 so that reserves are on track to reach 120 percent of the Fund’s reserve adequacy metric for flexible exchange rate regimes by the end of the program.

In FY 2022/23, the target level for international reserves will be adjusted downwards by 50 percent of any shortfall in the external bond placements denominated in foreign currency.

The CBE will not accumulate any general government external debt payment arrears and will not purchase foreign exchange directly from investors, but will operate through the market.

On the fiscal policy level, the government has committed to attaining a primary surplus of 1.7 percent of GDP in current FY 2022/23, 2.1 percent in FY 2023/24 and 2.3 percent in FY 2024/25, and FY 2025/26, to reduce the gross debt-to-GDP ratio by around 83 percent by FY 2026/27.

In case debt levels exceed this target, the government has pledged to take corrective measures including stronger fiscal adjustment through expenditure rationalisation, additional efforts in revenue mobilisation, and the sale of public assets.

The government has committed to a ceiling on the gross debt of 92.1 percent of GDP by the end of the current fiscal year.

Under its Medium-Term Revenue Strategy (MTRS), the government pledges to increase tax revenues in the current FY2022/23 and raise the tax-to-GDP ratio by around 2 percent over the medium term.

** The government will apply new tax measures in FY2023/24 (started in July 2023) to increase tax revenues by 0.3 percent of the GDP, to contribute to an increase in this ratio by at least 0.5 percentage points in the mentioned fiscal year.

The government has developed an implementation master plan and committed to designing a governance framework for the implementation of revenue mobilisation, including a steering committee and programme management office, and to establish a capacity development provider working group to align activities and timelines across donors.

For fuel prices, the government will stop implementing any formulaic decreases in fuel prices until fuel subsidies for each product subjected to the automatic mechanism have been abolished.

To alleviate the impact of such an action, the government has committed to expanding the support extended under the Takaful and Karama programme and ration cards.

It has also passed amendments to the income tax law that increase the personal income tax exemption, which provides relief to the middle-income class against the general increases in the prices of goods and services.

The government is also working on setting up additional measures to support households within the budget space available.