The IMF declared the completion of the third review of Egypt’s $8 billion loan programme on 29 July, after which the country received the third tranche of its loan valued at $820 million.

The fourth review is expected to be completed on or after 15 September, while the fifth review will be on or after 15 March 2025.

Egypt’s outlook
 

The report said that this expected recovery will happen mainly due to the structural reforms put under the programme to promote the business climate and that private activity will gradually replace state activity.

Moreover, the report noted that inflation is anticipated to decrease over the upcoming 12 months as the policy tightening goes into effect and base effects unroll.

Over the past four years, Egypt's inflation rates have kept their downward trend, reaching 24.4 percent and 25.2 percent for the core and headline inflation rates, respectively, in July.

Meanwhile, the report declared that the current policy rates are adequate after recent surges in key policy rates by a cumulative amount of eight percent (800 bps) in the first quarter (1Q) of 2024, which is adequate to put inflation on a downward trajectory. Nevertheless, a tight monetary policy is needed to ensure a maintained reduction of inflation.

In addition, the report noted that the country's debt-to-GDP ratio is expected to go on a downward trend despite the currency depreciation after unifying the exchange rate.

The IMF attributed this projection to the government's plan to direct half of the financing from the $35 billion Ras El-Hekma deal to reduce the debt ceiling.

Under the programme, Egypt targets to tame the debt-to-GDP ratio to below 80 percent by 2027, down from 98 percent posted in FY2022/2023, as per the fund's estimations.

Optimistic indices vs risks
 

The report indicated that projections for net international reserves (NIRs) for both FY2023/2024 and FY2024/2025 were revised upwards, in addition to an upward revision for the forecasts of net portfolio flows for FY2024/2025 taking into account the growing demand for issuances of Egypt’s bond and T-bills.

On the other hand, the report projected external debt service to rise in FY2024/2025 because of the rise in short-term debt (T-bills) obtained by non-residents.

It also projected significant risks to its outlook, focusing on whether Egypt can sustain a flexible exchange rate regime and a liberalized foreign exchange system.

The IMF also declared fears that the monetary policy is too flexible to decrease inflation and that the energy prices are not properly adjusted as they remain under the levels of cost recovery.

Additionally, the report tackled the regional conflicts surrounding Egypt, especially the prolonged disruption of the Red Sea, which limit growth, fiscal revenues, the divestment process, and external position.

There are also risks of Egypt being infected with a similar situation to the Dutch disease where cheaper imports and costlier exports might be disadvantageous to critical sectors such as manufacturing and agriculture. This might happen due to a faster influx of investments which can result in overheating adding upward pressure to the currency.

The big rise in portfolio inflows could increase the risk of the reversals of capital flows and external vulnerabilities. This is particularly noticeable given the potential size of Ras El-Hekma at a value of $150 billion, making up around 50 percent of the current GDP.

Reforms, near-term priorities
 

The report stated that the main structural and operational reforms are planned to target the institutional setup of debt management, the regulatory setup, domestic debt market development, and enhanced debt reporting and investor relations.

Furthermore, it revealed that the near-term priorities include operationalizing the revised primary dealership setup by the end of September and publishing an updated medium-term debt management strategy by the end of December.

They also include making the domestic financing utilize market mechanisms, like auctions, gradually eliminating the short-term recourse to private placements, and limiting recourse to the overdraft facility at the Central Bank of Egypt (CBE) to within the statutory limit. This will significantly enhance the quality and transparency of the financing mix.