Egypt responded to COVID-19 crisis with timely, prudent policy: IMF

Doaa A.Moneim , Thursday 24 Jun 2021

The IMF stressed it will remain closely engaged with the Egyptian authorities and continue supporting the country’s reform agenda

File Photo: The International Monetary Fund (IMF) headquarters building is seen in Washington, U.S., taken on April 8, 2019. REUTERS

Egypt responded to the COVID-19 crisis with timely and prudent fiscal and monetary easing, which helped alleviate the health and social impacts while safeguarding economic stability, debt sustainability, and investor confidence, according to the International Monetary Fund (IMF) following its approval on the final review of Egypt’s $5.4 billion stand-by agreement (SBA) loan.

On Wednesday, the IMF’s executive board announced it has completed the second and final review of Egypt’s economic reform programme supported by a 12-month SBA, allowing the country to receive about $ 1.7 billion as the third tranche of the loan.

The IMF said that Egypt’s near-term fiscal and monetary policies should continue to support the recovery while continuing to preserve macroeconomic stability, as risks to the outlook stemming from global uncertainty and Egypt’s high public debt and gross financing needs remain.

It added that deepening and broadening structural reforms will be essential to address post-pandemic challenges, strengthen buffers, and unleash Egypt’s enormous growth potential with benefits for its people.

The IMF’s executive board approved Egypt’s request to obtain the SBA loan on 26 June 2020 to support the country’s second wave of its economic reform programme during the COVID-19 crisis, which focuses on advancing key structural reforms.

The programme aimed to address balance of payments needs arising from the pandemic and support the authorities’ efforts to maintain macroeconomic stability while preserving achievements made over the prior years.

Meanwhile, Egypt’s structural reform agenda aims for more inclusive and sustainable private sector-led growth to create durable jobs and improve external resilience, according to the IMF.

It noted that this requires sustained efforts to improve resource allocation by reducing the role of the state and enhancing governance, strengthening social protection, improving the business environment, deepening financial markets, and increasing integration into the global trade.

“Egypt entered the COVID-19 crisis with sizable buffers thanks to reforms implemented since 2016. Faced with unprecedented domestic and global uncertainty, the authorities’ policies struck a balance between ensuring targeted spending to protect necessary health and social expenditures and preserving fiscal sustainability while rebuilding international reserves,” the IMF explained.

Egypt’s real GDP growth is expected to reach 2.8 percent in FY2020/2021, which will conclude by the end of June, before rebounding to 5.2 percent in FY2021/2022, according to the IMF.

Over the near-term, the government’s fiscal and monetary policies aim to support the recovery while continuing to preserve macroeconomic stability, according to the IMF.

“The Egyptian authorities have managed well the economic and social impact of the COVID-19 pandemic. Proactive economic policies shielded the economy from the full brunt of the crisis, alleviating the health and social impact of the shock while maintaining macroeconomic stability and investor confidence. The economic recovery is underway, but the outlook is still clouded by uncertainty related to the pandemic. High public debt and large gross financing needs leave Egypt vulnerable to shocks or changes in financial market conditions for emerging markets,” said IMF Deputy Managing Director Antoinette Sayeh.

She added that Egypt’s budget target for FY2021/22 strikes an appropriate balance between supporting the recovery and maintaining public debt on the projected path.

The expected pickup in Egypt’s growth should allow a return to the pre-crisis primary surplus as of FY2022/2023 to put public debt back on a downward trajectory, according to Sayeh.

Yet, Egypt needs to continue progress on fiscal structural reforms in order to ensure additional space for high priority spending on health, education, and social protection.

On the monetary policy level, Sayeh said that the Central Bank of Egypt’s (CBE)’s monetary policy has helped anchor inflation expectations, as inflation remains below the CBE’s target range.

“This provides a scope for the monetary policy to further support the recovery as warranted by inflation and economic developments. Continued progress on strengthening the monetary framework will also support monetary transmission. Two-sided exchange rate flexibility is essential to absorb external shocks and maintain competitiveness,” Sayeh illustrated.

She also noted that Egypt’s banking system remains resilient, urging to continue supervisory vigilance to closely monitor lending standards.

The IMF’s executive board commended Egypt’s strong performance under the SBA programme, lauding the satisfactory performance against the fiscal targets, including spending on health and social protection.

Amid the uncertainty the pandemic imposes, the executive board agreed with more gradual fiscal consolidation to support the economic recovery and insured the importance of returning to the pre-COVID-19 primary surplus from FY2022/23 onwards.

They also welcomed Egypt’s medium‑term revenue strategy and the medium-term debt strategy as key instruments for lowering the high public debt and gross financing needs while creating space for priority spending.

Yet, they called on Egypt to continue progress towards greater fiscal transparency, including for state-owned enterprises.

The IMF stressed it will remain closely engaged with the Egyptian authorities and continue supporting the country’s reform agenda.

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