Key takeaways from IMF assessment of 1st, 2nd reviews of Egypt $8 bln loan deal

Doaa A.Moneim , Sunday 28 Apr 2024

Egypt has met seven commitments out of 15 pledges under its ongoing $8 billion Extended Fund Facility (EFF) loan programme with the International Monetary Fund (IMF), according to the fund’s report released on Friday following the completion of the first and second reviews.

IMF HQ in Washington. Official Website.
IMF HQ in Washington. Official Website.


The two reviews of the deal, originally approved in December 2022, were delayed for over a year as Egypt could not fulfill its commitments amid the heavy repercussions of the ongoing global and regional tensions on its economy.

As per the report, the Gaza war and the disruptions in the Red Sea are further exacerbating pressures on the Egyptian economy, mainly the sluggish real GDP growth, foreign exchange shortage, constrained investments, and weakness of the non-oil private sector.

“Suez Canal revenues, an important source of foreign exchange for Egypt, fell almost 50 percent YoY in January 2024 (a loss of around $375 million relative to January 2023). Despite a sharp fall in remittances through banks, with foreign exchange being diverted away from the official market, the current account deficit narrowed to 1.2 percent of GDP in FY2022/23 as imports were compressed due to limited foreign exchange availability,” the report explained.

The seven commitments Egypt met include repealing the letters of credit (LCs) required for imports. However, this action has failed to fulfill its intended objective of removing an instrument for rationing import demand, the report said.

It also added that Egypt released its State Ownership Policy in 2023 and amended aspects of the competition law governing the mergers and acquisitions (M&As) in the local market although the executive regulation governing their implementation is yet to be approved by cabinet, the report added.

Moreover, the authorities expanded the coverage scale for households who are eligible for social assistance, identified tax policy measures for the current FY2023/2024 budget, which ends by the end of June, abstained from granting exemptions for commercial banks that breach net FX open position limits, and refrained from introducing subsidized lending schemes through the Central Bank of Egypt (CBE), according to the report.

Ras El-Hekma deal

The IMF’s further support to Egypt came after Egypt sealed the Ras El-Hekma coastal zone development deal with the UAE’s ADQ in February with a total foreign direct investment of $35 billion, $24 billion of which was in cash flow.

The IMF report noted that the deal has contributed to easing Egypt’s external and fiscal vulnerabilities.

“The $24 billion (6.9 percent of GDP) of resources help alleviate near-term pressures on the balance of payments and allow for a more aggressive building of buffers against future external shocks,” said the report.

It is worth mentioning that the cash flow from the deal exceeds Egypt’s real GDP growth target for the upcoming FY2024/2025 (four percent) and the estimation of the current FY2023/2024 of 2.8 percent.

The report also highlighted that the loan programme objectives were adjusted to ensure that the new financing is used judiciously to improve the level and composition of reserves, accelerate the process of the clearance of foreign currency backlogs and arrears, and reduce government debt upfront.

However, it asserted that the broader economic implications of this project, including imports and potential FDI and growth, will be incorporated into the macroeconomic framework once the medium-term investment programme gets clearer.

Financing gap through 2026

Global and regional tensions and the delayed implementation of commitments under the IMF loan programme have weakened Egypt’s external position, resulting in a sizeable foreign exchange backlog and external arrears.

The report estimated Egypt’s financing gap for the remainder of the programme, which concludes in 2026, at $28.5 billion, taking into account the inflow from the Ras El-Hekma deal and the strengthening of the reserve buffer.

“In light of the negative shocks and agreement on a strengthened policy package, the authorities have requested an augmentation of the original programme by $5 billion. Relatedly, the authorities have secured additional multilateral and bilateral assistance to fully close the financing gap,” the report clarified.

However, the report underpinned a series of challenges Egypt is expected to face while implementing the programme until its conclusion in 2026.

These challenges include the failure to sustain the shift to a liberalized foreign exchange system, the monetary policy being “too loose” to bring inflation down, and the failure to deliver a transparent and comprehensive integration of the off-budget investment programme into overall macroeconomic policy decision-making.

The report also pointed out that the intensification of regional conflicts and continued disruption in the Red Sea could further undermine the country’s growth and its external position. In addition, prolonged inflationary pressures would hurt the country’s low-income segment.

It also highlighted that Egypt’s capacity to repay the IMF faces high risks and is contingent upon full programme implementation and the materialization of all projected financing Egypt to secure.

Divestment plan

The current FY2023/2024 budget targets a primary surplus of 2.5 percent of GDP, inclusive of expected divestment inflows, as shown in the FY2024/2025 budget plan which targets a higher surplus in GDP of 3.5 percent.

“This represents a tightening of 0.4 percent of GDP relative to the initial programme projection and a tightening of 0.9 percent of GDP compared to the primary surplus for FY2022/2023,” the report explained.

The report expected tax revenues to increase by only 0.2 percent of GDP, due to the reduction of tax revenue from the Suez Canal Authority due to the Red Sea disruptions, while non-tax revenue is projected to decline by 0.2 percent of GDP, reflecting lower Suez Canal dividends.

Furthermore, it underscored that the anticipated proceeds from the divestment of state-owned assets would contribute 0.4 percent of GDP to the increase in the primary surplus and the finance ministry pledged to secure the local currency equivalent of $12 billion in proceeds from the Ras El-Hekma deal to boost the primary balance by 4.6 percent of GDP and reduce debt by the same amount.

“This one-off windfall will bring the surplus to 7.1 percent of GDP for FY2023/2024,” the report noted.

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