The head of the International Monetary Fund’s mission to Egypt, Uma Ramakrishnan, spoke to Ahram Online about forecasts for the Egyptian economy in light of the repercussions of the COVID-19 crisis and how the country can maintain sustainable growth and maximise economic and social gains.
Ahram Online: How is the Egyptian economy affected by the COVID-19 pandemic? How can these repercussions be reduced, with expectations if the pandemic continues?
Uma Ramakrishnan: First let me thank you for taking the time to do this interview. As in other countries, Egypt’s economy is being impacted by the COVID-19 pandemic both because of necessary containment measures as well as through the sudden stop in tourism and decline in other export receipts, drop in remittances, and lower revenues from the Suez Canal. Also, at the peak of the global risk aversion during March/April, there was nearly $16 billion in capital outflows. The combination of these factors—although partially offset by a fall in imports due to the fall in domestic demand—have put significant pressure on the balance of payments. For all these reasons, coupled with the global recession, With the global economy in a recession and domestic activity curtailed by necessary measures to contain the spread of the virus, growth is expected to significantly decline. Moreover, government revenues are falling at a time when expenditure pressures are increasing to meet the health and social protection needs.
Before we talk about growth rates, as you know, Egypt’s fiscal year starts in July of every calendar year. The growth rates of 2 percent projected for FY2019/20 and FY2020/21 have been revised down from previous forecasts due to these factors. The projection for FY2019/20, reflects the strong growth of 5.6 percent (y/y) during the first half of the fiscal year (July-December 2019) and subsequently the expected significant impact of the COVID-19 crisis during the last quarter (March-June 2020). A gradual recovery is expected in the second half of FY2020/21, in line with global projections in the IMF’s World Economic Outlook. That said, there is significant uncertainty around the growth outlook because it depends on how deep and how long the current COVID-19 crisis lasts. The Egyptian government is prepared to take additional policy measures to maintain stability if the crisis is deeper or more prolonged than currently envisaged.
AO: How do you evaluate the measures taken by the Egyptian government and Central Bank of Egypt to confront the pandemic, including allocating 100 billion pounds as a financial guarantee, in addition to supporting irregular employment, reducing interest, supporting the industrial and contracting sectors?
UR: The government’s strong and bold economic reforms implemented since 2016 and the reserves—or what we call buffers—that the policies helped build put Egypt on a strong footing ahead of the current crisis. This includes the fiscal space-savings- created by the energy subsidy reform, the modest inflation, substantial international reserves, and the expanded social safety net. These elements gave room to the authorities to move swiftly to put in place a comprehensive package with important fiscal, monetary, and financial sector measures to protect lives and livelihoods of the Egyptian people. In particular, measures were introduced to support the health sector, assist directly impacted sectors like tourism, provide grants for those in the informal sector, and expand help to the poor and vulnerable. The Central Bank of Egypt (CBE) also initiated measures to ease pressures in domestic liquidity and credit conditions.
AO: Egypt recently obtained new rapid financing from the IMF to confront COVID-19. How can this finance contribute to reducing the economic effects of the crisis?
UR: The Rapid Financing Instrument (RFI) was part of the IMF’s two-step support to the Egyptian authorities’ proactive response to COVID-19. The RFI—approved in May—provided immediate financing of $2.8 billion to respond to the crisis, including for health, social protection, and support for the most affected and vulnerable groups. The second step was the request for a 12-month Stand-By Arrangement (SBA) with access to $5.2 billion in financing to help the Egyptian government preserve the macroeconomic gains of the past four years—while continuing to ensure adequate health and social spending—and further advance a focused set of structural reforms to put Egypt on a strong footing for sustained recovery. Together, this financing will help provide budget support, catalyze financing from additional multilateral and bilateral sources, and help reinforce the authorities’ ongoing balanced policy efforts.
AO: The previous economic reform program succeeded in achieving its goals, so what are the criteria for the success of the new program?
UR: The government’s goal is to address the current crisis and place Egypt on a strong footing for economic recovery. In this regard, the objective of the authorities’ program supported by the SBA is to safeguard the hard-earned macroeconomic stability with the necessary policy framework and continue implementing a key set of structural reforms that enable private sector growth in Egypt.
On macroeconomic policies, fiscal policy will provide much-needed support to the most-affected individuals and sectors. Fiscal policy is being eased in FY2019/20 and FY2020/21 to support the economy and address the crisis spending needs, including increases in health spending (26 percent) and social protection (10 percent). The government is also introducing some new revenue measures under the development fee law including a green fee on the consumption of fuel products. Crisis spending, however, needs to be balanced with avoiding excessive increase in public debt. Thus, once recovery begins, the government is committed to resuming debt reduction to maintain medium-term fiscal sustainability.
The fiscal structural reforms will support the government’s ongoing efforts to update its medium-term revenue strategy to mobilize additional revenue to meet the much-needed higher spending in health, education and social protection. The authorities are also updating their medium-term debt strategy to support a reduction in the gross financing need and reduce public debt vulnerabilities.
Monetary policy will continue to anchor inflation expectations within the central banks’ target range of 9+/-3 percent for 2020Q4. In addition, the authorities are committed to preserving exchange rate flexibility and allowing orderly exchange rate adjustments. Maintaining financial sector stability with the ongoing strong supervision and close monitoring of any emerging risks will remain a key priority.
Structural reforms will aim to continue strengthening the framework for public finances, improve governance and transparency, and enable private sector-led growth. Specifically, public financial management will be upgraded to improve the budget process, amendments to the competition law will help level the playing field across various economic stakeholders, and transparency will be improved with detailed financial information for SOEs and Economic Authorities.
AO: Can Egypt benefit from the debt initiative in light of the current crisis and what are its conditions?
UR: The debt relief initiative by the G20 is targeted at low-income countries and therefore does not apply to Egypt.