IMF reaches staff-level agreement to complete 3rd review under its extended-loan programme

Doaa A.Moneim , Friday 7 Jun 2024

The International Monetary Fund (IMF) has reached a staff-level agreement on the completion of the third review of the Extended Fund Facility (EFF) loan agreement, the fund said in a statement on Thursday.

Ivanna Vladkova Hollar
Ivanna Vladkova Hollar

An IMF mission led by Ivanna Vladkova Hollar held in-person discussions with the Egyptian authorities from 12 to 26 May in Cairo and virtually thereafter.

After the approval of the review by the board, which is expected “in the coming weeks” according to Hollar, Egypt will be allowed to receive $820 million as the third tranche of the loan.

The reviews from the fourth to the eighth will be completed every six months, unlocking about $1.3 billion for each tranche.

The Egyptian side and the mission agreed that the implementation of the government reform plans, as articulated in program commitments, will be key to maintaining macroeconomic stability and enhancing private sector-led growth.

“We are pleased to announce that the Egyptian authorities and the IMF have reached a staff-level agreement on the economic policies needed to complete the third review of the EFF arrangement,” said Vladkova Hollar, the IMF’s Mission Chief to Egypt after the discussions.

Hollar noted that while geopolitical tensions and their impact on the economy remain challenging, the authorities have stayed the course to preserve macroeconomic stability through fiscal discipline, tight monetary policy, and a shift to a flexible exchange rate regime.

In this respect, Hollar explained that such efforts are beginning to deliver an improved outlook, better foreign exchange availability, easing inflation, and signs of recovery in private sector sentiment.

Nevertheless, downside risks surround the economic outlook, which continues to be impacted by the repercussions of the war in Gaza and the risk of persistent trade disruptions in the Red Sea, negatively impacting Suez Canal receipts, Hollar highlighted.

“Strong policies are critical to address key risks and domestic structural challenges, including the need to boost the role of the private sector in economic activity and address the challenge of high inflation, elevated government debt, and high gross financing needs,” according to Hollar.

She also stressed that the ambitious primary balance targets would strengthen public finances and contain the risks to debt sustainability.

Egypt aims to reduce its debt from 96 percent of GDP in FY2022/2023 to below 80 percent by the end of the loan program in 2026.

Furthermore, fulfilling fiscal goals will require steps to contain fiscal risks, including those associated with state-owned companies in the energy sector, which need to gradually restore cost recovery.

Meanwhile, further efforts are needed to boost debt management to contain gross financing needs and improve debt reporting and investor relations.

In this respect, Hollar said that the divestment plan from state-run activities could help improve efficiency and attract new investment while generating additional resources for the state treasury.

She added that the mission was encouraged by the Central Bank of Egypt's (CBE) ongoing efforts to enhance its operations, including through the use of forecasting models and stronger communication, to foster progress toward a full-fledged inflation-targeting regime.

The CBE targets an inflation rate of 7 percent (+/-2 percent) in the fourth quarter of 2024 and 5 percent (+/- 2 percent) in the fourth quarter of 2026.

Hollar mentioned that strengthening financial sector resilience, governance practices, and competition in the banking sector should also be key priorities.

“Since the exchange rate unification in March, financing conditions have improved. The recent Ras El-Hekma investment deal is a positive economic development, and the mission encouraged the authorities to continue disclosing information about this project,” she said.

She added that considering the sizable potential capital inflows, proper management will be critical to avoid any disruptive macroeconomic challenges that could undermine the authorities’ objective to diversify the Egyptian economy and achieve more inclusive growth.

In response to that, Hollar revealed that Egypt is currently developing contingency plans to adequately address these challenges as needed.

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