Since 2016, Egypt has signed two loan deals with the International Monetary Fund (IMF) and worked on liberalising its exchange rate, streamlining its public expenses, increasing revenues by introducing new taxes, and adopting plans to widen the role of the private sector in the economy.
The reforms,despite coming with inflationary pressures, have supported the economy, as was seen by its resilient performance during the Covid-19 pandemic, and have been translated into a more flexible exchange rate, higher international reserves, and a larger primary surplus among other developments.
Last week, the fund’s board approved the disbursement of the fourth tranche of the loan it signed with Egypt in 2022, upped in value to $8 billion in 2024. Cairo has so far received about $2 billion of loan disbursements in the current deal.
The fund praised the government’s decisive actions to implement structural reforms and also allocated an additional $1.3 billion to achieve climate-related goals.
Since March 2024, the government has made considerable progress in stabilising the economy and rebuilding market confidence despite a challenging external environment marked by persistent and successive external shocks, including regional conflicts and trade disruptions in the Red Sea, Nigel Clarke, deputy managing director and chair of the IMF’s Executive Board, was quoted as saying in a statement released on Tuesday.
“GDP growth has shown signs of recovery, inflation is gradually moderating, and foreign-exchange reserves are at adequate levels. Fiscal consolidation under the loan-supported programme has progressed, with the government achieving a primary fiscal surplus of 2.5 per cent of GDP (excluding divestment proceeds) in financial year 2023-24, alongside a declining debt-to-GDP ratio,” he said.
Meanwhile, the fund called for the more decisive implementation of the reforms, including boosting domestic revenues, accelerating divestment plans, sticking to a free exchange rate and allowing energy prices to reach cost-recovery levels.
The IMF called on the state to work on ways of boosting revenues, a demand that Maha Rashied, an economist at Dcode Economic & Financial Consulting, believes points to a broad set of tax reforms already underway.
“This includes streamlining the VAT laws, with a focus on revising exemptions. There is also a focus on improving tax-collection efficiency through anti-fraud measures, payroll tax automation, and enhancing tax compliance in areas like e-commerce,” she said.
Rather than introducing entirely new taxes, the emphasis is on broadening the existing tax base, closing loopholes, and strengthening enforcement to sustainably increase revenues.
Ali Metwally, an economic advisor at the UK-based IBIS Consultancy, said that given the government’s fiscal constraints, targeted increases or adjustments in customs duties or selective taxes, particularly on luxury or imported items, might be introduced gradually, aiming to curb imports and ease pressures on the currency reserves without significantly fuelling inflation.
“The primary focus of the IMF recommendations typically centres around compliance, enforcement, and efficiency rather than imposing entirely new taxes that could negatively impact business sentiment,” Metwally said.
The review came after the fund agreed to a slight adjustment of the fiscal consolidation plan the government committed itself to when signing the deal. This is related to the government achieving a four per cent, rather than a 4.5 per cent, primary surplus in 2025-26 “in the light of the difficult external conditions, as well as the challenging domestic economic environment.”
The surplus is supposed to increase to five per cent in 2026-27. The primary surplus reflects the difference between the state’s revenues and expenses after deducting debt payments and services.
“The government has shown a clear willingness to tighten fiscal policy over the past year, with cuts to the controversial baladi bread subsidy programme and increases in the price of fuel and electricity and efforts to cap public spending. However, spending on the new social welfare package has made meeting the target hard,” said a note by Capital Economics, a London-based research group.
The government announced a social support deal two weeks ago that included increases in minimum wages for public-sector employees as well as in pensions and one-off assistance to the neediest during the holy month of Ramadan.
Commenting on the possibility of meeting the 4.5 and five per cent primary surplus targets, Rashied noted that the 3.5 per cent primary surplus target for the current fiscal year (2024-25) is already the highest Egypt has seen in its recent history, and with continued improvements in tax collection and steady fiscal discipline, it appears achievable.
“However, reaching the medium-term targets of four per cent and five per cent will depend on maintaining this momentum and avoiding external shocks or pressures that could strain public finances,” she noted.
As for privatisation, The IMF has been highlighting its slow pace since the initial deal was signed in 2022. Since then, the number of finalised privatisation deals has not exceeded five.
The slow pace, especially concerning deals with Gulf investors, can be linked to a mixture of valuation disagreements and strategic reservations by the government, according to Metwally.
He indicated that there were numerous reports throughout 2024 and in early 2025 pointing to delays in major privatisation deals, mainly due to substantial valuation gaps.
“The delayed privatisation deals of Wataniya Petroleum and Safi were largely due to differing valuation perceptions, with Egypt seeking to maximise the proceeds, while Gulf investors pushed for discounted valuations reflecting currency and geopolitical risks,” he said.
Another reason for the slow privatisation, according to Rashied, is that while the government’s State Ownership Policy Document outlines the inclusion of various sectors, some segments, including military-owned companies, have seen more cautious steps due to the strategic nature of these assets and the need to structure deals transparently.
The government last year said it will be selling ten companies in 2025, including Banque du Caire.
However, geopolitical risks are feared to be weighing down the market now that Israel is back to bombing Gaza and the US is attacking the Houthis in Yemen. “This does pose short-term challenges by impacting investor sentiment and increasing perceived risk premiums,” Rashied said.
However, she believes investors often differentiate between temporary instability and long-term fundamentals. Strong reform signals, like recent currency adjustments, fiscal measures, and IMF-backed reforms, can offset some of these concerns. The key will be consistency and clarity in the reform path to sustain investor interest over the medium term.
Another point highlighted in the statement is that Egypt needs continuous vigilance in the future to prove that the exchange rate is “truly flexible” as the currency still “fluctuates within a limited range”.
Egypt devalued its currency in March 2024 by an initial 30 per cent, and it then lost a further 10 per cent to reach LE50.7 to the dollar.
“While the recent exchange rate movement hasn’t seen large fluctuations, it is the first time we’ve observed lasting flexibility, even if within a limited range. However, given the inflation gap between Egypt and its trade partners, we expect the pound to gradually depreciate under a flexible exchange-rate policy,” noted Rashied.
Metwally noted that the IMF has explicitly requested Egypt to allow the pound to move more freely, even if this results in a slight increase in the rate, because artificial stability could lead to renewed pressures in the future.
He expects the rate to reach LE51 in 2025, LE53 in 2026, LE54 in 2027, and LE56 in 2028.
The IMF also stated that plans for “energy prices to reach cost-recovery levels” are likely to be followed through this year. Cutting energy subsidies has come as no surprise, with Prime Minister Mustafa Madbouli stressing last year that Egypt would phase out fuel subsidies by the end of 2025.
Last week, he said that key products like diesel and gas cylinders will remain subsidised to protect vulnerable groups.
Statements by officials, as well as expert estimations, point out that the cost of different fuels is higher than its sale price. For example, octane 80 is sold at LE13.75 per litre, while its cost is LE16.5, which means that if totally unsubisdised its price would increase by 16.5 per cent.
Increases of 18 and 12 per cent would lead to 92 and 95 octane fuel reaching LE18 and LE19 per litre, respectively.
“Incremental adjustments of around eight per cent to 12 cent per quarter for diesel and four per cent to five per cent for 80 octane fuel might be politically more manageable,” Metwally said.
From an inflationary perspective, phased adjustments would spread inflationary pressures across multiple months, leading to a gradual rather than sudden spike, he noted. One-off hikes could trigger immediate sharp inflation spikes, potentially raising monthly inflation by an additional four to six per cent instantly, risking social unrest.
Phased adjustments would see more controlled but persistent inflationary pressures likely adding around one to two per cent per quarter to headline inflation throughout 2025, with cumulative inflationary effects potentially around five to seven per cent annually, he concluded.
Madbouli last October ruled out any fuel price increases if global oil prices stabilised at $70 a barrel. The current average oil price ranges between $67 and $69, while the general budget for the current fiscal year set the price at around $82.
Since 2014, the authorities have raised fuel prices 12 times, the last of which was last October. Last year alone saw three increases in petroleum product prices to decrease spending on subsidies. The overall value of fuel subsidies in the budget is LE155 billion.
* A version of this article appears in print in the 20 March, 2025 edition of Al-Ahram Weekly
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