IMF to discuss 3rd review of Egypt $8 bln loan: What is expected for country monetary, fiscal policies till end-2024

Basel Mahmoud, Monday 22 Jul 2024

Egypt is anticipated to maintain its monetary and fiscal policy tightening and keep the debt on a downturn path till December when the International Monetary Fund (IMF) is scheduled to conduct the fourth review of Egypt’s $8 billion loan programme, experts told Ahram Online (AO).

File Photo: The International Monetary Fund logo is seen inside its headquarters at the end of the IMF/World Bank annual meetings in Washington. Photo: Reuters


The IMF is anticipated to discuss the third review of the loan programme on Wednesday, which will chart the map for Egypt's policies over the next six months. This review, once approved, will unlock $820 million as a third tranche of the loan.

Continued tightening of monetary policy

Amr Hussein Elalfy, cheif of equity strategies at Rumblel Research and Thndr securities brokerage, expects the Central Bank of Egypt (CBE) to continue its sufficiently tight monetary policy until current high inflation rates are contained and expected inflation rates are stabilized in cooperation with the Egyptian government to provide strategic goods and find solutions to local supply chains.

For over two years, inflation in Egypt has maintained its double-digit rate affected by the global inflationary wave, the global supply chain disruption, and the implications of global and regional tensions.

In May, Egypt's urban inflation rate slowed to 28.1 percent year-on-year, down from 32.5 percent in April, according to the latest readings published by the Central Agency for Public Mobilization and Statistics (CAPMAS).

Both headline and core inflation rates are still well beyond the CBE's target set at seven percent (±2 percent) in the fourth quarter of 2024. The bank has also committed to decreasing the inflation rate to five percent (±2 percent) in 2026.

Head of Individual Clients at Naeem Investment Company Bassem Ahmed told AO that the CBE aims to reduce inflation rates by the end of 2024 while continuing to withdraw liquidity, implement a flexible exchange rate system, and build a strong foreign exchange reserve.

In June, Egypt's foreign reserves hit a new record to an all-time high of $46.4 billion, according to the latest figures published by the CBE.

In a statement on 6 June, the IMF’s Mission Chief to Egypt Ivana Holler said the Egyptian authorities had made significant efforts to restore economic stability, which helped improve economic conditions. However, the regional environment remained difficult, and negative risks and local structural challenges required decisive implementation of programme commitments.

She stressed that Egypt pursues prudent fiscal policies and that achieving ambitious primary balance targets will strengthen public finances and contain debt sustainability risks.

However, Holler noted that Egypt needs to improve its financial consolidation structure through stronger efforts to mobilize domestic revenue, which the fund sees as essential to create fiscal space for expanding social programmes and additional spending on health and education to support the Egyptian authorities' goal of achieving higher and more inclusive growth.

Flexible exchange rate

"The exchange rate should be based on supply and demand without much intervention. So far, we have been able to control inflation levels, which have fallen from 40 percent to around 28 percent. In addition, we started to see an improvement in net foreign assets, which have turned positive after being negative," said Bassem Ahmed, director of Individual Customer Management at Naeem Financial Services.

According to the CBE, Egypt achieved a net foreign asset surplus of $14.3 billion by the end of May, for the first time since January 2022.

"I expect exchange rates to stabilize by the end of 2024, with prices tending to rise for the Egyptian pound, while the US dollar rate is expected to range between EGP 45/$1 and EGP 48/$1," Ahmed said.

Meanwhile, Elalfy projects the US dollar rate to stabilize at around EGP 47/$1 by the end of 2024.

Rationalizing subsidies, reducing burden on budget

"I imagine Egypt's fiscal policy will continue in the same direction as before the IMF's third review, focusing on rationalization and not entering into new projects until current projects are completed. There will be an attempt to increase tax collection rates without increasing the tax rate itself, by broadening the tax base and diversifying funding sources to reduce the cost of financing," said Alalfy.

Alalfy stressed that it is necessary to maintain the primary surplus over time to reduce the overall deficit gradually.

Egypt targets a primary surplus of 3.5 percent of GDP in FY 2023/2024, which started on 1 July. If it is attained, it would be the highest since FY2020/2021.

Increasing financing needs to cover deficit

According to the Ministry of Finance data, Egypt needs around EGP 1.2 trillion to cover the overall deficit in FY2025/2024, up from EGP 824.4 billion in FY2024/2023.

Moreover, the Egyptian government expects the budget deficit to widen in FY2025/2024 to around 7.3 percent, the largest since FY2020/2021.

"For fiscal and monetary policy in Egypt, their main goals are to confront inflation and keep it below current interest rate levels, at around 28 percent. There may be a possibility of cutting interest rates in the future, helping companies expand by obtaining loans at lower rates from banks, which will reduce the cost of borrowing," said Ahmed.

"Egypt will continue to raise electricity prices to meet IMF conditions and reduce the burden on the budget, as well as fuel prices such as diesel, gasoline, and mazut," he added.

Ahmed also told AO that Egypt targets a 3.5 percent primary surplus in the FY 2025/2024 budget, with continued subsidy cuts and increased social protection programmes."

The IMF believes the Egyptian authorities' fiscal consolidation efforts remain on track. However, further efforts are needed to increase revenues in a growth-enhancing manner, create fiscal space for investment in human capital through spending on health and education with targeted social spending, strengthen domestic debt management, and contain financial risks.

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