Egypt’s public debt is assessed to be sustainable, but not with a high probability. Its level is high and gross financing needs are large, the International Monetary Fund (IMF) said in its report on Egypt issued late Tuesday.
While the impact on economic activity of the coronavirus pandemic has increased risks, several factors, including the high share of domestic currency debt issued locally and held by domestic financial institutions, retention of credit ratings by major ratings agencies with a stable outlook since the crisis started, and sizeable buffers coming into the current crisis, contributed to alleviate such risks, according to the report.
The report also said that while the Covid-19 crisis will lead to a higher public debt than previously projected in 2019/2020 and 2020/2021, the primary surplus is expected to return to two percent of GDP from 2021/2022 and public debt is projected to resume its downward trajectory.
Meanwhile, Covid-19 crisis has had a significant and immediate negative impact on Egypt’s economy, creating an urgent balance of payments need, according to the report.
Real GDP growth is expected to decline from an average of 5.5 percent in FY2017/2018 and FY2018/2019 to 2.8 percent in 2020/2021, according to the report.
Additionally, Egypt’s growth is projected to recover to 5.5 percent over the medium term. Average inflation is expected to increase from about six percent in FY2019/2020 to nine percent in 2020/2021 and decline to seven percent in the medium term. Effective interest rates on general government debt are projected to decline, reflecting the decline in inflation forecasts, according to the report.
Regarding Egypt’s financing gap, the report estimated it at $14 billion during FY2019/2020 and 2020/2021.
The inflation rate is expected to surge to 8.2 percent in 2020/2021, up from 5.8 percent in 2019/2020, and to increase to 8.7 percent in 2021/2022 before bouncing back in FY2024/2025 to reach 7.2 percent, while unemployment is expected to stand at 8.6 percent amid the crisis without further projections for the coming fiscal years.
Egypt’s current account balance is projected to decline by -4.6 percent in FY2020/2021, up from 4.3 percent projected in FY2019/2020, to drop by -2.7 percent FY2021/2022, and to fall by -2.6 percent in FY2024/2025, according to the report.
The trade balance is expected to recede by -8 percent in FY2020/2021, and to continue to decline until FY2024/2025 when it is projected to decline by -11.3 percent, according to the report.
Net foreign direct investment (FDI) is projected to decline to two percent, down from 2.6 percent in FY2018/2019 and three percent in FY2017/2018, and to increase by 2.8 percent in 2021/2022 and by 3.7 percent in 2024/2025.
Net foreign assets are expected to increase to EGP 179 billion in FY2020/2021, up from EGP 176 billion in FY2019/2020, but to bounce back to reach EGP 341 billion in FY2021/2022 and to jump to EGP 1.130 trillion in FY2024/2025.
“The government of Egypt has responded to the crisis with a comprehensive package aimed at tackling the health emergency and supporting economic activity. The authorities acted swiftly to allocate resources to the health sector, provide targeted support to the most severely impacted sectors, and expand social safety net programs to protect the most vulnerable”, IMF first deputy managing director and acting chair Geoffrey Okamoto said in a statement.
He added that the IMF’s emergency support under the Rapid Financing Instrument (RFI) will help limit the decline in international reserves and provide financing to the budget for targeted and temporary spending, aimed at containing and mitigating the economic impact of the pandemic.
“The authorities are committed to full transparency and accountability on crisis-related spending, including through publishing information on procurement plans and awarded contracts, as well as ex-post audits of such spending,” according to Okamoto.
Additional expeditious support from multilateral and bilateral creditors will be needed to close the remaining balance of payments gap, ease the adjustment burden, and preserve Egypt’s hard-won macroeconomic stability, said Okamoto.
In May, the IMF’s Executive Board approved Egypt’s request for emergency financial assistance of $2.7 billion (100 percent of quota) under the RFI to meet urgent balance of payments needs stemming from the outbreak of the Covid-19 pandemic, while Egypt received in June the first tranche of the stand-by agreement loan worth $2 billion, out of $5.2 billion, to back the second wave of Egypt’s reforms.