On Tuesday, a delegation from the International Monetary Fund (IMF) was scheduled to begin discussions with Egyptian officials on reforms implemented within the framework of the fourth review of Egypt’s $8 billion Extended Fund Facility.

Reforms taken over the last three months have been bold, entailing subsidy cuts on fuel, electricity and bread which have directly affected citizens. Inflation, which had been on a downward trend, has crept slightly up in the last two months, registering 26.4 per cent in September. October’s fuel hikes are expected to be reflected in inflation figures scheduled to be released on 10 November, with some observers predicting a two per cent increase.

Sensing people’s distress, President Abdel-Fattah Al-Sisi said Egypt must “review the situation [of its loan programme]” with the IMF if it means placing unbearable pressures on the public.

The IMF was quick to respond. IMF Managing Director Kristalina Georgieva arrived in Cairo on Sunday for talks with President Al-Sisi and Prime Minister Mustafa Madbouli. In his meeting with Georgieva, the president underscored the need to take into account the challenges Egypt is facing as a result of regional and international crises which have severely impacted foreign currency reserves and budget revenues.

Georgieva’s visit reflects the level of understanding that exists between the IMF and Egypt, chief economist at Lynx Strategic Business Advisors Moataz Yeken told Al-Ahram Weekly. He believes the visit reflects the IMF’s willingness to reach a middle ground: the IMF is unlikely to forgo any of the required reforms, but it could reconsider the implementation timeframe.

While an increase in financing is not expected, statements by Georgieva highlighting the value of efforts supporting greening the economy might indicate that Egypt could soon access $1.2 billion in green financing through the IMF’s Resilience and Sustainability Facility.

In a press statement following her meetings, Georgieva expressed her appreciation of the patience of Egyptians and the “remarkable strength” they have demonstrated. She also acknowledged the reform efforts of the government, especially given the turmoil in the region.

Mohamed Abu Basha, head of macroeconomic analysis at leading investment bank EFG-Hermes, pointed out that because of reforms already implemented the foreign exchange market is working efficiently, and the subsidy bill is down after fuel prices were raised three times. The reforms have also reduced the budget deficit and achieved a larger primary surplus than the previous year despite a significant decline in Suez Canal revenues.

Minister of Finance Ahmed Kouchok said in August that Egypt’s total budget deficit dropped to 3.6 per cent of GDP during fiscal year 2023-24, with a primary surplus of 6.1 per cent, and that the government was targeting a debt-to-GDP ratio of less than 85 per cent by the end of 2025.

Georgieva is not alone in recognising that the Egyptian economy is in better shape. On 1 November, Fitch Ratings upgraded Egypt’s Long-Term Foreign-Currency Issuer Default Rating to B from B-, with a stable outlook. The rating agency said Egypt’s external finances have been bolstered, “facilitated by improved policy settings, including greater exchange rate flexibility and tighter monetary conditions” and that “FX [foreign exchange] buffers have recovered.”

There is still work to be done. Both Al-Sisi and Georgieva stressed the importance of tackling inflation, enabling the private sector to create jobs and propel growth, and encouraging investment.

To counter the inflationary pressure of reforms, Abu Basha suggested bolstering social support initiatives to protect the most vulnerable and timing the implementation of reforms to reduce their impact on inflation. The fact that the government announced it would put off further increases in fuel prices for six months is a move in the right direction, he said.

During her visit Georgieva highlighted the importance of a flexible exchange rate regime. In an interview with the daily Al-Ahram newspaper she said the right course of action is to maintain a flexible exchange rate regime and a liberalised foreign exchange system. The purpose of exchange rate flexibility is to protect the Egyptian economy from external shocks and ensure that foreign exchange is available to everyone at the same price, she said.

The exchange rate will not be a point of contention, Yeken believes, especially with the Central Bank of Egypt’s recent easing of foreign exchange provisions for non-essential goods and the slight movement of the exchange rate of the pound. Since last Thursday, the pound has edged to LE49 to the dollar after having settled at around LE48 for months. Fitch ratings also said they have “greater confidence that the more flexible exchange rate policy will prove more durable than in the past.”

Among the issues expected to come up in discussions is reigning in the footprint of the government and expanding the role of the private sector, said Abu Basha, structural reforms that are important and will not have an impact on inflation.

Yeken highlighted that the State Ownership Policy Document (SOPD) needs to be more specific about the procedures the government will adopt to speed up the reduction of its economic footprint. Launched in December 2022, the SOPD highlighted the government’s plans to increase private sector contribution to the economy to 65 per cent of GDP within three years.

Yeken pointed out that of the long list of state-owned assets slated to be sold very few have made it to the block, noting that global conditions since the war in Ukraine and the volatility in the value of the pound have caused delays. But recently there are signs this could change. A stake in the United Bank of Egypt is expected to be available through an initial public offering in the first quarter of 2025 and there have been reports that the Italian Intesa Sao Paolo group, which already owns around 70 per cent of the bank’s shares, has made an offer to buy the government’s 20 per cent stake. In late October it was also reported that five key airports will be offered to private operators.

Another point Yeken believes will be raised by the IMF is greater independence for the Competition Authority, along the lines of the CBE and the Financial Regulatory Authority.

“Its role in ensuring a level playing field and that state-owned companies are not granted exceptional privileges will be important in the future,” he explained. Currently the Competition Authority is affiliated with the cabinet.

Other issues expected to be discussed according to Abu Basha include fiscal reforms related to taxation. The IMF’s report on the third review of the loan facility said the authorities were committed to “implementing strong and decisive tax policy changes, particularly related to the value-added tax, which are crucial to the success of fiscal consolidation and domestic revenue mobilisation goals.”

In the meantime, the government has set in motion some reforms related to tax reconciliation and resolving tax disputes, and is planning tax incentives for small businesses. These reforms are an important step towards making life easier for the private sector, noted Abu Basha.

*Additional reporting by Safeya Mounir

* A version of this article appears in print in the 7 November, 2024 edition of Al-Ahram Weekly.