Interview: SBA loan for Egypt to boost second wave of structural reforms, first review to be executed in December - IMF's Jihad Azour

Doaa A.Moneim , Tuesday 14 Jul 2020

Jihad Azour, the International Monetary Fund
Jihad Azour, the International Monetary Fund's Mideast and Central Asia department director

Although IMF has downgraded all its expectations for the Middle East and Central Asia region (MCD) to -4.7 percent in 2020, 2 percent lower than its April projections, Egypt has maintained its positive outlook amid the severe impacts of the COVID-19 crisis on the region's economy.

In an interview with Ahram Online, Director of the Middle East and Central Asia Department at the International Monetary Fund (IMF) Jihad Azour explained the reasons behind revising the region’s economic outlook and the details of the SBA loan that the IMF approved for Egypt in June.

Ahram Online: How can the economic recovery process be managed by MENA governments to achieve a rebound from the COVID-19 crisis?

Jihad Azour: The COVID-19 crisis is one of the hardest economic, health and social challenges that the MENA region has faced due to several reasons, including the strict measures that have been adopted to contain the outbreak and protect the people.

These measures have coincided with the global oil prices collapsing, which has had notable impacts on oil exporting economies and affected other countries’ economies due to the significant number of their nationals working in oil-rich countries.

Despite this, we have found that MENA countries have coped with the crisis and its related implications seriously by implementing the universal measures for protecting individuals’ health, leading the region to overtake advanced countries in curbing the crisis’ repercussions and flattening the infection rate curve.

These measures were also accompanied by economic actions including monetary and fiscal procedures that have been adopted to mitigate the crisis’ impact on the economy and citizens, especially vulnerable groups.

Furthermore, there are social procedures that have been implemented in the region. Egypt, for instance, has diversified these procedures to involve raising cash transfers limits and expanding distribution nets, technology solutions and digitalisation in order to reach individuals in the informal sector, which has been the most affected by the crisis.

In addition, there were other procedures to support the economy by extending banking facilities, including pumping additional liquidity in the domestic markets and adjusting interest rate levels to secure the economic cycle in the region’s countries.

AO: How is the IMF dealing with the situation in the region?

JA: The IMF has worked over two dimensions. It kept pace with countering the crisis and supporting the region’s economic stability by including the COVID-19 crisis among the disasters covered by the rapid finance instrument (RFI), extending immediate loans to countries upon request to counter the pandemic and enable governments to increase spending on healthcare, and providing other facilities including the stand-by agreement (SBA) and the extended fund facility program (EFF).

For Egypt, the IMF delivered a $2.4 billion loan under the RFI in May to support the government in countering the pandemic, which was followed by the approval of the second facility under the stand-by agreement (SBA) that provided Egypt with a $5.2 billion loan, $2 billion of which was delivered in June, while the remaining $3.2 billion is to be disbursed following two reviews.

The SBA agreement mainly targets supporting Egypt to stabilise its economy amid the crisis and to back the second wave of its economic reform program.

AO: How has the crisis exacerbated the external debt burdens shouldered by the region’s countries?

JA: Unfortunately, the region’s public debt-to-GDP ratio is expected to see a surge to 95 percent owing to the dual effect of the ongoing crisis and the drop in oil prices.

The public debt problem in countries like Egypt and Jordan includes internal debt issues.

COVID-19 has hit all economies across the globe, and has weakened the financial power of all countries including those of the MENA region. So, countries that were already witnessing high-level debt are currently witnessing exacerbated debt levels.

AO: How does the IMF gauge the region’s ability to manage the economic recovery process?

JA: All the world now, including the MENA region, is experiencing a transition phase during which economies are reopening after the easing of lockdown measures.

On the other hand, new cases have started to emerge in some countries, which has forced them to impose extra measures amid increasing fears of a second wave of COVID-19.

The transition phase also includes protecting the people from the expected second wave of the virus.

Consequently, it is necessary for the region’s countries to work on the following three pillars: complementing government efforts to protect citizens’ health, maintaining the procedures that have been taken to protect the economy as much as possible -- especially in countries with high financial capabilities -- and setting a plan for reviving the economy.

AO: What is such a plan expected to encompass?

JA: Such a plan is expected to tackle macroeconomic weak points and to reinforce the economy’s ability to recover over the medium and long terms.

In this regard, technology has emerged as one of the positive instruments amid the crisis, contributing to providing many services and uplifting the level of economic effectiveness, especially since two-thirds of the region’s population is under the age of 30.

Thus, the plan to increase investments in the technology sector can result in positive outcomes in the region.

Moreover, the plan should include a vision for training personnel to enable the region’s countries to have an effective workforce, especially since some sectors are expected to remain severely affected for years and to witness significant shifts, including the tourism sector.

It is also necessary for the region’s countries to reconsider social coverage strategies, as the crisis has uncovered the weak points in the social and health systems in the region.

AO: How do you view the calls for entrenching regional integration to deal with the harsh impacts of the ongoing crisis?

JA: Actually, the crisis proves the need to strengthen common regional and Arab action, which will help create a wider economic space and secure the recovery of economic activity among the region’s countries.

Of course, there is a need for regional integration in this phase and over the long term.

AO: How do you evaluate the measures Egypt has taken so far under its plan to coexist with COVID-19?

JA: Egypt’s robust economic reform program, which was adopted in November 2016 and completed in July 2019, has enabled the country to enter the crisis with strong buffers, giving it the chance to counter the crisis successfully and keep the gains from its reforms.

AO: How can the two loans Egypt obtained under the RFI and SBA facilities help it recover and keep its economic reform program’s gains?

JA: The RFI loan has neither terms nor conditions to be executed by the Egyptian authorities, but it is expected to back Egypt’s balance of payments and secure liquidity for the country to boost the healthcare sector as a priority in the current phase.

For the SBA loan, it is a one-year program that will support the second wave of Egypt’s reforms, especially structural reforms, and maintain the gains from the first wave of reforms. In addition, it will leave ample room for private sector participation in the economic development process and secure its competitiveness with the public sector.

AO: According to the SBA loan program, Egypt should receive two tranches of the loan following two reviews. On what will the two reviews be based?

JA: As the economic policy framework supported by the SBA aims to maintain Egypt’s macroeconomic stability, the reviews will see how the authorities protect necessary social and health spending while avoiding an excessive build-up of public debt, keeping low inflation and financial stability while maintaining a flexible exchange rate and implementing key structural reforms to strengthen transparency, governance, and competition.

The program also has fiscal measures to be fulfilled including appropriating additional allocations for health spending, an expansion of Takafol and Karama’s cash transfer social programs, and extending temporary support for the most severely impacted sectors.

For the monetary policy, the program stipulates that the Central Bank of Egypt (CBE) is to continue to pursue a data-driven monetary policy based on anchoring inflation expectations within the target range of 9 percent (±3 percent) on average for the fourth quarter of 2020.

In this regard, the SBA program suggests that a flexible market-driven exchange rate remain an important part of the policy framework to help absorb external shocks and maintain competitiveness, with intervention limited to disorderly market conditions.

AO: When are the two reviews scheduled to take place?

JA: One of the reviews is semi-annual and the other will be carried out by the end of the loan duration. The program has started since the IMF’s executive board approved the agreement on 21 June over one year.

The coming review will take place in December.

AO: What are the procedures that Egypt is expected to adopt to give a wider space for the private sector to operate?

JA: Actually, there are a number of actions that Egypt has already taken in this regard, especially the financial inclusion, initiatives and facilities introduced through the CBE so as to provide additional financing for SMEs, which do not have enough access to finances.

There is a need to bolster the competitiveness of public services and make use of the benefits to production resulting from the drop in oil prices, which will lead to a decline in production costs.

In addition, Egypt has to work to improve the business environment for wider economic horizons, develop investment laws, and adopt mechanisms to facilitate one-stop shop corporations.

AO: How can Egypt manage the increased external and internal debt in the short and medium terms?

JA: There is no doubt that Egypt has managed to improve and immunise its economy against likely shocks under the EFF program, which allowed Egypt to implement its economic reform program in November 2016 by obtaining a $12 billion loan.

Egypt has managed to raise the economic growth level significantly, which exceeded 5 percent before COVID-19. The country has also managed to reduce deficits and attain an initial surplus, enhance the monetary situation by increasing net foreign reserves, and develop tools that have managed to curb inflation rates.

Based on this, Egypt has managed to deal with the crisis’ harsh implications with minimal losses.

However, the crisis has hit a number of vital sectors of the Egyptian economy, including tourism, exports and the Suez Canal, which has seen a drop in revenues due to the contraction of global trade.

All these repercussions require taking social and health measures and maintaining the gains of the country’s economic reforms to ensure economic stability and avoid any negative impacts.

Furthermore, we saw that Egypt has managed to enter the international markets successfully and a number of Gulf countries have financed deposits for Egypt to alleviate financial burdens over the coming years.

AO: Do you think that increasing public investments, increasing private sector involvement in business and development, and imposing extra fees on citizens in the FY2020/2021 budget will result in improved macroeconomic signs for Egypt?

JA: The procedures that are included in the FY2020/2021 budget are on the right track and the IMF has already backed them through the SBA loan program.

Egypt’s economic development process in the coming period will focus on clear measures, including its human capacity, which is young and educated. So, it is important for the country to expand in technology investments that can help compensate for job losses amid the crisis, give greater scope for the private sector by giving it access to finances and enabling it to participate effectively in infrastructure and other investment projects.

These actions will contribute to increasing direct investment levels, which will be a tool to secure finances for the productive institutions in Egypt.

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