INTERVIEW: Egypt’s public debt to GDP ratio projected to fall below 80% over medium term, anchored by primary balance of 2%: IMF’s Mauro

Doaa A.Moneim , Wednesday 7 Apr 2021

Mauro told Ahram Online that the Egyptian authorities appropriately relaxed the fiscal stance to address the crisis, announcing a comprehensive and targeted stimulus package in March 2020

Paulo Mauro
Deputy Director in the IMF’s Fiscal Affairs Department Paulo Mauro.

The International Monetary Fund (IMF) expects emerging markets and developing economies to see a slower recovery from the pandemic compared to advanced economies owing to COVID-19 and the delay in vaccines roll out.

In an exclusive interview, Ahram Online discussed with the Deputy Director in the IMF’s Fiscal Affairs Department, Paulo Mauro, the findings and insights included in the IMF’s fiscal monitor report, which was released on Wednesday as a part of the IMF and the World Bank’s spring meetings.

For Egypt, Mauro said that Egypt’s fiscal policy should focus on supporting recovery while maintaining medium-term sustainability.

Ahram Online: How can uneven vaccine deployment affect the fiscal situation in both emerging markets and low-income developing countries?

Paolo Mauro: The global economy is recovering, but progress is uneven with many emerging and developing economies (EMDEs) at risk of falling behind. If vaccination in EMDEs lags behind advanced economies, the human and economic losses will be severe.

EMDEs with weaker health systems, limited access to global capital markets, and little policy space face greater risk of scarring (bankruptcies, long-term unemployment, poverty). A potential tightening of financial conditions, as advanced economies recover, could lead to a slower and more protracted recovery for EMDEs, especially those with large financing needs.

This highlights the need for global cooperation on areas like vaccination and further efforts on debt relief to low-income countries, where debt vulnerabilities remain especially high. The international community needs to increase funding for COVAX —the multilateral mechanism for equitable access to vaccines.

Since the pandemic started, actions were taken to provide low-income developing countries with grants, concessional loans, and debt relief to address a steep rise in public debt. The IMF has provided more than $100 billion to 86 countries (including Egypt).

AO: To what extent will inequality, inefficient spending management, and the lack of access to basic services affect the fiscal position of emerging and developing countries, and thus hinder the recovery process in such economies?

PM: Unequal access to basic public services has made the impact of COVID-19 worse. Furthermore, when spending management is inefficient, governments may waste part of the spending allocated to basic services, restricting the capacity to provide much-needed healthcare, education, and training.

Our fiscal monitor documents that inefficiencies in health, education, and investment spending can be large. This can lead to lower productivity and economic growth (e.g., poorer education leads to lower human capital). In turn, this results in lower revenues and potentially higher fiscal deficits.

Governments can tackle inequality and strengthen fiscal positions. Better targeting social spending can reduce poverty at a lower fiscal cost. Improving public finance management processes can reduce waste. The capacity to mobilise domestic revenues can also be boosted by tax administration reforms, such as their digitalisation.

AO: What are the key pillars that fiscal policy in such economies need to include to be able to navigate the ongoing challenges imposed by the pandemic?

PM: The most important and urgent priority is to bring the pandemic under control, including through vaccination. Meanwhile, fiscal policy must remain agile and tailored to the evolution of the crisis, with continued focus on protecting lives and livelihoods.

In view of financing constraints, support measures should be targeted to the hardest-hit and most vulnerable households, as well as firms that are more likely to remain viable after the crisis.

Going forward, fiscal policy should balance the need for public finance sustainability with the risks of premature withdrawal of support measures. Credible medium-term fiscal frameworks should set a path for rebuilding fiscal buffers at a pace contingent on the recovery and country circumstances — access to financing, debt levels, and the extent of the scarring of the economy.

To accumulate the resources needed to improve access to basic services, strengthen social protection, and reinvigorate efforts to achieve the sustainable development goals, the strategy will require measures to increase domestic revenue mobilisation, promote digitalisation, and improve transparency and governance.

AO: For Egypt, as one of the developing countries, how do you see the fiscal measures it has been adopting since the onset of the pandemic?

PM: The Egyptian authorities appropriately relaxed the fiscal stance to address the crisis, announcing a comprehensive and targeted stimulus package in March 2020.

Stimulus measures focused on virus containment efforts, health, and social spending. They also supported the most hard-hit sectors, including tourism, manufacturing, and exporting sectors, which employ a large share of Egypt’s labour force, and the most vulnerable and liquidity constrained individuals and businesses, such as irregular workers and small and medium enterprises.

Additional resources have been allocated for adequate compensation of public health sector professionals and procurement of inputs for the sector.

To contain the increase in debt, which is already significant, the authorities used the buffers accumulated during the pre-pandemic period to moderately relax the primary fiscal surplus target for FY2020/21 and reallocated resources from non-essential spending within the budget.

AO: What is the procedures Egypt needs in this regard to achieve fiscal stability amid the ongoing challenges and in light of the high level of debt?

PM: Egypt’s fiscal policy should focus on supporting recovery while maintaining medium-term sustainability. The authorities are cognisant that they need to balance development needs with policies to bring high public debt back to the downward trend that prevailed prior to the COVID-19 crisis.

Following the appropriate relaxation of the fiscal stance to address the crisis, they are committed to returning to a higher primary balance going forward. Should further policy support be needed, the authorities could consider reallocating spending within the defined fiscal envelope to provide targeted support for vulnerable groups and sectors, while maintaining their broader fiscal objectives.

Returning eventually to the pre-pandemic 2 percent primary surplus target will be important to underpin a strong decline in public debt and bolster market confidence. In that context, improving revenue mobilisation is key to create fiscal space for meeting the sustainable development goals.

The authorities’ active debt management policy is also crucial to continue to lengthen average debt maturity and thereby reduce Egypt’s vulnerability from high gross financing needs.

AO: What are your projections for Egypt’s public debt over the short and medium term?

PM: We project Egypt’s general government debt to peak at 93 percent of GDP in FY2020/21 before resuming its downward trajectory. Over the medium term, debt is projected to fall below 80 percent of GDP, anchored by a return to the primary balance of around 2 percent.

AO: What are the key issues Egypt has to prioritise and to focus on concerning its spending policy?

PM: The immediate priority for Egypt is to entrench the economic recovery in a balanced manner while maintaining flexibility and policy space to respond to another wave of COVID-19 disruptions if needed.

Work should also start on adjusting the structure of public spending with a view to supporting continued poverty reduction and building human capital. Investments in areas such as infrastructure, health, and education should be given priority to foster inclusive growth. Revisiting the role and size of the state-owned enterprises sector will help create an environment that promotes private investment. Greater transparency in public finance management, including in the area of public procurement, would also be beneficial to the business climate.

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