In an exclusive interview with Ahram Online, director of the Middle East and Central Asia (MCD) at the International Monetary Fund (IMF) Jihad Azour shared the IMF’s expectations for the Egyptian economy in 2020 and 2021, and the new updates concerning the stand-by agreement (SBA) loan to Egypt.
Egypt will be the only country in MENA to see positive growth in 2020, projected at 3.5 percent, according to the IMF's updated report on the MCD economic outlook that was released on Monday.
According to Azour, achieving a budget surplus will be good for the country amid the challenges posed by the COVID-19 pandemic.
Ahram Online: Given that the second tranche of the SBA’s one-year program’ loan to Egypt will be decided in December, how does the IMF see the performance of Egypt’s structural reform program that is financed by this loan that is worth a total of $5.2 billion?
Jihad Azour: Concerning the SBA program for Egypt, we cannot talk about the coming review before the completion of the IMF’s mission in Egypt’s work related to the program.
The mission is currently in talks with the Egyptian government in this regard and the answer to this question will come in light of the results of these talks.
Yet, in general, all signs point to Egypt working in the right framework; and again, talks with the Egyptian government and the Central Bank of Egypt (CBE) regarding the country’s implementation and commitment to the terms and conditions of the first tranche of the loan will set out how Egypt is committed to the SBA's program measures.
With the anticipated second review that will take place in December, Egypt is expected to receive $1.6 billion as the loan’s second tranche.
AO: The IMF’s updated report on MCD region’s economic outlook noted that the weaknesses that the Egyptian economy has faced because of the crisis will be reflected in 2021’s figures…what kind of weaknesses will push Egypt’s growth to decline to 2.2 percent in 2021?
JA: Given that Egypt’s fiscal year (FY) does not follow the calendar year, as it extends from June (of a year) to July (of the next year), the updates of the country’s economic conditions in 2020 are a result of what has happened in 2019 due to the pandemic crisis.
COVID-19 has certainly impacted the Egyptian economy harshly, as is the case with all kinds of economies across the world; and that is what pushed the government forward in its policies to counter the crisis and its associated impacts through the pre-emptive and precautionary measures it has taken, including implementing social distancing, and attenuating domestic economic activity.
On the other side, the crisis required additional spending to contain its severe economic repercussions. Moreover, there are a number of Egyptian economy sectors that have been harshly affected because of the reduction in global trade amid the crisis, especially tourism, trade, and exporting sectors.
All these indices suggest that there will be reflections of the crisis on the Egyptian economy in 2021, especially on the public budget.
AO: How far do Egypt’s economic and structural reform programs support the Egyptian economy to counter the drop in growth in 2021?
JA: The SBA program has specific goals, including maintaining the economic stability that the country has attained under the extended fund facility (EFF).
The EFF, which ended in July 2019, enabled Egypt to restore good levels of economic growth, which have helped in building its international reserves in the CBE and decreasing the inflation rate gradually. These gains helped the country counter the crisis at a lower cost.
The program also aims to achieve low rates of budget deficit and to keep the gains of the monetary policy that Egypt has implemented under the economic reform program, including exchange rate flexibility and international reserves enhancement, with a projection that Egypt’s FY 2020/2021 will achieve an initial surplus.
Meanwhile, the program is focused on achieving structural reforms, including improving the business environment through upgrading the investment climate, by which enabling Egypt to attract more foreign investments over the coming phase.
AO: What is the IMF’s projection for Egypt’s FY 2020/2021 budget initial surplus?
JA: Egypt’s current FY 2020/2021 budget is expected to achieve an initial surplus of 0.5 percent of GDP, down from 1.8 percent in FY 2019/2020 due to the economic activity slowdown in the wake of the pandemic.
But achieving a budget surplus is good for the country amid the ongoing challenges.
AO: During the IMF and World Bank’s annual meetings, which ended on 18 October, there were calls for expanding taxes as an effective way to address the economic challenges imposed by the pandemic. Can that be applied in Egypt within the current 2020/2021?
JA: Improving or expanding the taxation base can be carried out through addressing the distortions that the tax system suffers, including reconsidering the categories of the community that enjoy some form of tax exemption, which minimises the tax system's efficiency and undermines tax justice.
There is no doubt that improving the tax system will increase the state’s revenues and reduce costs on the private sector.
AO: According to the World Bank’s recent report, Egypt’s public debt to GDP ratio is expected to exceed 90 percent owing to the crisis…how can the country deal with such a serious challenge in light of the decrease in revenues amid the crisis?
JA: All countries across the world are suffering now from the elevating levels of debt, because of the ongoing COVID-19 crisis that is driving the decline in the economic growth levels and the increase in deficit levels in the public budget in each country.
One of the main objectives of the economic reform program in Egypt is to put public debt on a downturn path, to ease the pressure on the economy.
This could be achieved through a number of trajectories, including uplifting the economic growth levels, which means that if Egypt can regain the levels of growth it reached before the pandemic, which ranged between 5 percent up to 6 percent, its economy will witness a lower public debt level.
It also includes declining the budget deficit that will, in return, reduce the state’s financing requirements.
In this regard, one of the key targets of Egypt’s economic reform is to attain a budget surplus to GDP ratio of 2 percent, excluding the public debt burdens, which helps in alleviating the budget deficit, and precludes this deficit, to transform to an accumulative debt in the future.
These trajectories can integrate with declining debt costs by decreasing interest rate levels. Based on that, addressing the elevating public debt challenge can be accelerated if these trajectories were adopted.
AO:What did the IMF think of Egypt’s decision to issue sovereign green bonds, which are the first of its kind in MENA region?
JA:Global financial markets witnessed a negative shift a few months after the onset of COVID-19, especially investment inflows heading from these markets to emerging markets, while a number of countries have exited global financial markets under the pressure of the pandemic.
Yet, a number of these countries have managed to return to global financial markets yet again, including Egypt.
Issuing green bonds was a critical action that asserts the importance of investing in the environment of Egypt and the positive outlook of the investors to the Egyptian bonds, in addition, is diversifying the financing resources by attracting new investors through trading these bonds in the financial and stock markets.
AO: What is the IMF's projection concerning inflation and unemployment rates in MENA, in general, and in Egypt, in particular?
JA: The crisis has caused a decline in jobs, owing to the slowdown, in a number of key sectors. Combined with the drop of remittance inflows to the region owing to the dual shock of the pandemic and the collapse in global oil prices.
The IMF expected that MENA would experience a 5 percent drop in jobs.
MENA was witnessing already high levels of unemployment before the pandemic outbreak, reaching 12.5 percent, exceeding other countries levels by 2-3 percent.
Yet, the most critical issue in this regard is the notable increase in unemployment among young people in the region that records up to 27 percent of MENA’s population, which is the highest globally; that places pressure on social dimension and on rejuvenating economic activity in the future.
AO: What is the IMF’s expectation on the inflation rate in Egypt?
JA: The inflation rate in Egypt dropped in an accelerated pace in the past few years, according to the official figures, reaching about 3.3 percent currently.
The IMF expected this rate to go down to 5.7 percent in 2020 and 6.2 in 2021.
AO: Which factors play a role in the Egyptian economic outlook in case of a second wave of the virus?
JA: Reaching a vaccine for the virus, global oil prices, rejuvenating global economic activity and its impact on supply, in addition to the increase in global demand will affect the coming phase's outlook.
AO: How do you see the Egyptian monetary policy and the 3.5 percent cuts that the CBE has introduced since the onset of the pandemic?
JA: The procedures that the CBE has implemented in this regard aimed at supporting and rejuvenating funds extended to the private sector amid the crisis.
The decline in inflation rate paved the way, on the other hand, to introduce an additional 0.5 percent cut to interest rates in July.
That said, the CBE takes decisions concerning interest rate limits in light of global supply and demand, in addition to the indices of liquidity availability in the domestic market.
*Correction: An earlier version of this interview mistakenly mentioned that Azour said Egypt is expected to witness an inflation rate of 2.7% in 2020, and 2.6% in 2021. We regret the error.