Egypt’s 46-month EFF arrangement was approved in December 2022 and is expected to conclude in September 2026.

The IMF’s Executive Board approval on the third review came following an assessment of how Egypt has met its obligations and commitments under the review, especially on the monetary and fiscal levels, and the improvement the government has made in terms of raising the private sector’s share in the country’s economy.

The third review also charts a map of the country’s economy till the upcoming review, scheduled to be completed in December.

Macroeconomic indices improve
 

In its assessment, the IMF said that the macroeconomic conditions in Egypt have started to improve since the approval of the combined first and second reviews of the programme in March.

As per the IMF, Egypt has met its commitments in terms of the key macroeconomic challenges.

“The inflationary pressures are gradually abating, foreign exchange shortages have been eliminated, and fiscal targets, including those related to spending by large infrastructure projects, were met. These improvements are beginning to affect investor confidence and the private sector's sentiment positively,” the IMF explained.

Moreover, the IMF asserted the necessity of implementing the country’s commitments under the programme amid the regional tensions caused by the Israeli escalation in Gaza and its associated impacts of the Red Sea disruptions, along with “domestic policy and structural challenges.”

Flexible FX is a must
 

The fund also stressed that maintaining a flexible exchange rate regime and a liberalized foreign exchange system is crucial to avoid a buildup of external imbalances, adding that the Central Bank of Egypt (CBE) needs a data-driven approach to lower inflation and inflation expectations.

Egypt’s inflation rates have taken a downward path over the past four months (March-June), according to the latest readings published by the official statistical body CAPMAS and the CBE.

Additionally, the CBE has raised the key interest rates by 19 percent (1900 bps) since the loan programme talks with the fund began. Egypt has also depreciated its local currency four times, allowing the Egyptian pound to lose over 50 percent of its value against the US dollar.

High debt on a decline
 

The IMF noted that Egypt’s ongoing fiscal consolidation efforts under the programme are taming the high debt level and keeping it on “a decisive downward path.”

“To ensure that resources are still available to meet vital spending needs to help Egyptian families, including on health and education, particular attention will be needed to strengthen domestic revenue mobilization and contain fiscal risks from the energy sector. This will also assist in generating some fiscal space to expand social spending in support of vulnerable groups,” said the IMF.

Egypt’s overall debt declined in FY2023/2024, which ended on 30 June, to 89 percent of the GDP, down from over 95 percent in FY2022/2023. The country also targets bringing this share down to 88.2 percent in FY2024/2025, before sliding to below 80 percent in 2027.

Despite the increase in budget revenues in FY2023/2024, debt services acquired almost 60 percent of the total revenues and expenses, compared to around 25 percent in FY2022/2023.

State Ownership Policy
 

The fund further explained that while Egypt has made progress on some critical structural reforms, further efforts are required to implement the State Ownership Policy.

Egypt designed such a policy to divest some economic activities for the private sector and offer investment opportunities to be tapped under its Initial Public Offering (IPO) programme.

“Such measures include accelerating the divestment programme, pursuing reforms to streamline business regulations to set up new firms, expediting trade facilitation practices, and creating a 'level playing field' that avoids unfair competitive practices by state-owned companies,” according to the IMF.

Banking sector
 

Furthermore, the fund called for bolstering the financial sector's resilience, governance practices, and competition in the banking sector as key priorities for the government at the time being. It stressed that these measures are imperative for attaining the commitment to shifting the country’s economic growth into private-sector-led growth that can generate more jobs.

“Strengthened reforms under the EFF-supported program are yielding positive results. The unification of the exchange rate and the accompanying monetary policy tightening have curtailed speculation, brought in foreign inflows, and moderated price growth. With signs of recovery in sentiment, private sector growth should be poised for a rebound,” Antoinette M. Sayeh, the IMF’s deputy managing director and acting chair of the Executive Board, said following the board’s discussion.

Sayeh also stated that policy settings are expected to help maintain macroeconomic stability in the country.

She added that a sustained shift to a flexible exchange rate regime and a liberalized foreign exchange system, continued implementation of a tight monetary policy stance, and further fiscal consolidation coupled with proper implementation of the framework to monitor and control public investment should support internal and external balance.

Ras El-Hekma deal
 

Sayeh noted that allocating a portion of the financing from the $35 billion Ras El-Hekma deal signed with the UAE in February to reserve accumulation and debt reduction provides an additional cushion against likely shocks. 

In addition, she said implementing the structural reform agenda is key to achieving more inclusive and sustainable growth.

Sayeh also affirmed that applying reforms that boost tax revenue, deliver a more robust debt management strategy, and bring additional resources from divestment to debt reduction would create room for more productive spending, including additional targeted social spending.

Fuel subsidies
 

Restoring energy prices to their cost recovery levels, including retail fuel prices by December 2025, is essential to supporting energy smooth provision to the population and reducing imbalances in the sector, Sayeh said on phasing out the fuel subsidies under the programme.

A few days before the IMF’s Executive Board meeting, the government raised the prices of all local fuel products by up to 15 percent with a gradual increase to be applied till December 2025.

Boosting the governance of state-owned banks, advancing the State Ownership Policy, raising fiscal transparency, and levelling the economic playing field is critical to securing greater private investment, according to Sayeh.

Regional tensions pose significant risks
 

However, Sayeh noted that regional conflicts and uncertainty about the duration of trade disruption in the Red Sea are causes of potential external risks, stressing that maintaining appropriate macroeconomic policies, including a flexible exchange rate regime, would help ensure economic stability.

“Meaningfully advancing with the structural reform program would significantly improve growth prospects. Managing the resumption of capital inflows prudently will also be important to contain potential inflationary pressures and limit the risk of future external pressures,” she added.