Egypt-IMF: A major step forward

Doaa A.Moneim , Friday 5 Apr 2024

IMF Mission Chief for Egypt Ivanna Vladkova Hollar discusses the fund’s agreement with Egypt and expected developments in the local economy with Doaa A. Moneim

Ivanna Vladkova
IMF Mission Chief for Egypt Ivanna Vladkova


Egypt will receive $820 million from the International Monetary Fund (IMF) next week, IMF Mission Chief Ivanna Vladkova Hollar said in a press conference on Monday. 

The sum equals the tranches due for disbursement following Egypt’s passing of the first and second reviews of its loan agreement with the IMF. The reviews, which had been on hold since the programme was first signed in December 2022 because of Egypt’s delay in implementing certain reforms, were finally completed earlier this month. 

The value of the disbursement following the third review, scheduled in June, will be around the same level of the first and second reviews. Starting with the fourth review, each disbursement is expected to be about $1.3 billion provided the conditions for the review are met, Hollar explained to Al-Ahram Weekly in an interview that followed the press conference. 

The remainder of the reviews are expected to happen every six months.

 “At each individual review, the expectation is that the conditions that we’re seeing now in the market are going to continue to hold, in the sense that we do not see a return to a system of foreign-exchange rationing and lack of foreign-exchange availability,” Hollar said. 

The last review of the programme is scheduled to be completed in the autumn of 2026. 

Hollar highlighted the fact that in June’s review the IMF will look into the $1.2 billion extra long-term climate financing that Egypt will be applying for under the IMF’s Resilience and Sustainability Facility.

 “To qualify, countries need to have in place a strong set of policies that are intended to address the bases of climate change,” she added.

The IMF expects Egypt’s real GDP growth to slow down to three per cent in the current 2023-24 fiscal year, before rebounding to over four per cent in the upcoming fiscal year. The slowdown, Hollar explained to the Weekly, is the result of external factors, mainly the effect of the conflict in Gaza and the disruptions in the Red Sea. 

However, she said, Central Bank of Egypt (CBE) moves to hike interest rates by six per cent and to float the pound will contribute to the recovery of the country’s real GDP growth in fiscal year 2024-25. 

The CBE actions, together with import backlog clearances and the inflow of foreign exchange by international partners, are behind the growth forecast of the next fiscal year to 4.5 per cent, Hollar noted.

The impact of the Ras Al-Hekma investment deal Egypt signed in February with the UAE on the country’s economy is not yet built into growth projections. “Whereas we know the size of the initial flows to Egypt, we don’t yet have a lot of information regarding the pace of investment flow to develop the area, which is likely going to require additional investment besides that from the ADQ,” the UAE fund making the investment, she told the Weekly.

Hollar said that it was necessary for the authorities to make sure that the new resources are used prudently in a way that improves the outlook for Egypt and boosts its economic growth. She added that measures to maximise the gains of the inflows will be discussed in coming reviews.

The Egyptian authorities, according to Hollar, have committed to making the most of the foreign-exchange inflows. First, the CBE will direct a chunk of the inflows to strengthening its international reserves in order to have enough foreign-exchange buffers in the face of future shocks.

Having stronger buffers is something that investors look at when they consider the risk of investment in Egypt. 

Second, the government has committed to using 50 per cent of the local currency proceeds from the Ras Al-Hekma transaction to reduce public debt. Reducing public debt increases the country’s credit worthiness and thus reduces the cost of borrowing by the government, she noted.

She added that the inflows, together with the new policies the Egyptian authorities are embarking on, have generated greater confidence in the country’s economy. It is important for Egypt to capitalise on the foreign-exchange inflows, as the availability of foreign currency is one of the main criteria foreign investors use when deciding whether to invest in a country, she said.

On the currency, Hollar stressed that it is important for the authorities to continue to manage domestic demand for imports and to cover the needs of large infrastructure projects.

She said that the IMF had discussed with the Egyptian authorities the importance of having better management, oversight, and control of off-budget public sector investments. 

Regarding the IMF programme’s long-term aspect, Hollar told the Weekly that the IMF’s support is for structural reforms that will increase the capacity of Egypt to generate foreign exchange.

The IMF backs reforms that will allow the private sector to grow and expand into sectors that generate more exports and therefore raise the capacity of Egypt to generate more foreign-exchange inflows, she said.

She underscored the need to see reforms that “strengthen the capacity of the private sector to operate in this environment and have the private sector be the engine of growth.”

For this to happen, there must be an attractive business environment and incentives for the private sector as well as guarantees of fair competition. That is why, according to Hollar, it is important to annul practices giving state-owned firms a competitive advantage over private companies. 

“Private firms competing in the same industry with public firms should pay the same amount of taxes in the absence of specific tax exemptions for the state-owned body. Egypt should start levelling the playing field between the private and public sectors,” Hollar said.

As the loan programme extends until the end of 2026, Hollar told the Weekly that the IMF will continue to set new benchmarks to make sure that the private sector enjoys all the benefits of the public-sector entities.

The IMF is working to help strengthen the role of the Egyptian Competition Authority, because this body has the capacity to monitor uncompetitive practices and impose fines on violators.

Regarding the inflation rate, the IMF expects Egypt’s inflation rate to remain high over the short term, before declining to 25 per cent in fiscal year 2024-25 and shrinking further to 15 per cent by end of that fiscal year.

“It’s very important for the CBE to continue to set monetary policy with an understanding of what are the drivers of inflation and whether they will persist in a way that would require an additional tightening of monetary policy,” she said.

“The central bank should stand ready to tighten if we see inflation pressures continue.”

Hollar added that based on price movements since devaluation it is obvious that the hikes in the dollar parallel market rate have been factored into prices, so there is no room currently for further adjustments that might lead to an increase in inflation rates.

 “The effect of monetary policy tightening will start to take hold and prices will come down,” she said.

The escalation in prices was due to the fact that there were shortages of some commodities and the hoarding of goods as a result of limited foreign-exchange availability. 

Now that the foreign-currency shortage is being solved, it is likely that some of these factors pushing up prices will also dissipate. “The point is to tighten monetary and fiscal policy to take away some of the pressures on inflation,” Hollar highlighted.

She said that more cuts to energy subsidies may take place. Under the IMF programme, Egypt is committed to “continue reducing energy subsidies through using the fuel price adjustment mechanism to bring domestic prices into line with international energy markets,” she said.

Two weeks ago, the government introduced hikes to fuel of between eight and 30 per cent. It raised fuel prices by eight to 21.2 per cent last month around three months after electricity prices were hiked by 16 to 26 per cent. 

* A version of this article appears in print in the 4 April, 2024 edition of Al-Ahram Weekly

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