Egypt is ramping up efforts to fulfil its commitments to the International Monetary Fund (IMF) under the Extended Fund Facility (EFF) loan programme that was announced on the IMF staff level on 27 October. It acquired the first tranche of a new IMF loan of $347 million in December.

The programme’s first review, which sets the stage for Egypt to receive the second tranche of the $3 billion loan, was scheduled on 15 March. However, as the Egyptian side has yet to meet some of the obligations agreed upon, the meetings for the review are still not scheduled on the IMF’s Executive Board calendar.

To finalise the loan deal, the Egyptian side committed itself to a number of reforms including widening the private-sector role in the economy, reviving the privatisation programme of state-owned entities, limiting the role the government and military play in the economy, tightening the budget deficit, expanding the social safety net, and shifting to a flexible exchange-rate regime.

Kristalina Georgieva, managing director of the IMF, told the Weekly that Egypt, like many other members of the IMF, has experienced extraordinary pressures as a result of the economic shocks of recent years. The situation has been exacerbated by Egypt’s dependency on grain imports from war zones.

The Egyptian delegation attending the World Bank Group (WBG) and IMF Annual Meetings in Washington from 10 to 16 April discussed Egypt’s efforts to fulfil its pledges in order to start the loan deal’s first review.

The delegation included Governor of the Central Bank of Egypt (CBE) Hassan Abdallah, also Egypt’s governor at the IMF, Minister of Finance Mohamed Maait, Egypt’s deputy governor at the IMF, and Minister of International Cooperation Rania Al-Mashat, Egypt’s governor at the World Bank.

According to Georgieva, the IMF is preparing to carry out the loan deal’s first review without giving more details. “The teams are working, and I am confident that we would have a good outcome. I want to say that we have seen in Egypt a deeper understanding of the complexity of both the domestic and global environments,” Georgieva said.

She told reporters that the government needs to slow the pace of the implementation of large infrastructure projects. “Under the present circumstances these projects, which are otherwise very important and very good for Egypt, could undermine macroeconomic stability, especially if we take into consideration the speed at which these projects, which were originally conceived under different circumstances, were carried out,” she said.

After the WBG/IMF Meetings conclusion on 16 April, IMF mission chief for Egypt Ivanna Vladkova Hollar said that Egyptian government and the IMF staff had had fruitful discussions in preparation for the first review mission of Egypt’s reform programme.

If the first review is approved by the IMF’s Executive Board, Egypt will receive the second tranche of the loan also worth $347 million. But the delay in conducting the first review indicates that the programme could extend beyond the originally planned duration of 46 months.

While both the Egyptian delegation’s members and the IMF staff declined to give further details on the outcome of the discussions, sources familiar with them told Al-Ahram Weekly that the IMF has a number of reservations, mainly regarding the slow pace of the privatisation programme and demands related to tax policy, as well as applying a more flexible exchange rate and using monetary policy tools, namely interest rates, to contain inflation.

Since the start of the loan discussions in March 2022, Egypt has devalued the local currency three times, with the Egyptian pound currently trading at almost LE31 compared to LE15 in February 2022 against the dollar. It increased interest rates by a total of 10 per cent during the same period.

“The IMF requires the Egyptian side to develop clear action plans in terms of empowering the private sector to play a leading role in local economic activity with more stakes in state-owned companies to be offered to the private sector. Offering minority stakes (five to 30 per cent) in the state-owned assets that are being prepared to be sold do not meet the Fund’s aspirations,” the sources told the Weekly.

Egypt announced in February a list of 32 state-owned companies operating in 18 economic activities that would be offered up for sale. Later, the government said that it plans to add a further eight companies to the list.

According to the State Ownership Policy Document published last year, the country intends to raise the private sector’s share in the economy to 65 per cent, up from the current 30 per cent.

“For the IMF, this policy is a general strategy that needs to be translated into action plans that reflect the good intentions of the government to introduce real support to the private sector, eliminating the problems investors are still facing in doing business and all the advantages the government bodies are enjoying,” said an anonymous source.

The IMF estimates the financing gap Egypt is likely to experience during the 46-month loan deal to be $17 billion. According to the Egyptian authorities’ pledges under the programme, this gap will be bridged by selling state-owned assets mainly to member states of the Gulf Cooperation Council (GCC).

Moreover, Egypt plans to secure $2.6 billion from the World Bank in 2025-26, $400 million from the Asian Infrastructure Investment Bank, $300 million from the African Development Bank, $600 million from the Arab Monetary Fund in 2023-24, $1 billion from the China Development Bank, and $8.6 billion from the sale of state-owned assets.

US credit ratings agency Standard & Poor’s (S&P) revised Egypt’s credit outlook last week from stable to negative, a step that means Egypt’s economic measures may be insufficient to stabilise the exchange rate and attract foreign currency inflows to meet its financial obligations to lenders.

While the agency expects external funding to come from multilateral and bilateral lenders, it noted that “risks to the disbursement of funds have increased.” It added that Egypt risks “further sharp currency devaluations, higher inflation, and rising interest rates” due to delays in structural and currency reforms.

The IMF downgraded its forecasts for Egypt’s real GDP growth to 3.7 per cent in 2023, lower than its previous outlook of 4.4 per cent in October and four per cent in January, according to a report issued on the sidelines of the WBG/IMF Meetings.

It also downgraded its expectations for the country’s real GDP growth in 2024 to five per cent, down from the 5.3 per cent it expected in January. The IMF’s projections for the country’s GDP growth are below the government target of 4.1 per cent set for the 2023-24 fiscal year, which starts on 1 July.

The World Bank has also revised down its forecasts for Egypt’s real GDP growth in the 2022-23 fiscal year, which runs through the end of June, and the 2023-24 fiscal year to four per cent in each, down from the 4.5 per cent it projected in December 2022.

Furthermore, the IMF projected Egypt’s general government gross debt to climb to 92.9 per cent of GDP in 2023, the highest ratio seen since 2018 when it stood at 87.9 per cent.

The IMF report showed that the projected gross debt ratio in Egypt is higher than in other emerging markets and developing economies. However, it expects the ratio to decline to 87 per cent in 2024 and 78 per cent in 2028.

Speaking to the Weekly, director of the IMF’s Middle East and Central Asia Department Jihad Azour said that Egypt is experiencing a challenging time, as is the case for the rest of the world, amid the repercussions of the Russian-Ukrainian conflict.

Azour said that the priority for the country was to activate monetary policy instruments to lower inflation and keep it under control. “Ccountries where inflation has exceeded the target need to use monetary policy by hiking interest rates to curb inflation,” Azour said.

CBE Governor Hassan Abdallah told the Weekly that Egypt has taken bold actions on monetary policy in recent years in order to deal with ongoing economic challenges and that it will not hesitate to do more.

“The CBE’s primary focus in the current period is curbing inflation. We are targeting a seven per cent (±2 per cent) inflation rate by the fourth quarter of 2026,” Abdallah said.

The CBE’s Monetary Policy Committee (MPC) is scheduled to convene on 18 May to review key interest rates in the light of economic developments on the local and global levels.

“We have recently established a new agreement with Egypt that is centred around four primary pillars. The first pillar aims to maintain economic stability by addressing inflation through monetary policy instruments. The second focuses on protecting the economy from external shocks through flexible fiscal and exchange-rate regimes. The third pillar aims to address the issue of growth by implementing structural reforms and accelerating their progress. Finally, the fourth aims to maintain and expand the social programmes that Egypt has already implemented and continues to implement,” Azour said.

Under the current IMF programme, Egypt targets to gradually raise its real GDP growth to between 5.5 and six per cent, improve the current account deficit by two per cent of GDP over the medium term while reserves are being rebuilt to an adequate range, bringing the country’s inflation down to around seven per cent by the 2024-25 fiscal year, and increasing the tax-to-GDP ratio by around two per cent over the medium term.

Sources told the Weekly that the government is bracing to announce new tax-related measures in the coming 2023-24 fiscal year, targeting an increase of 0.3 per cent in the tax-to-GDP ratio. They said that these measures are anticipated to be announced during April or May.

The Egyptian authorities are currently in discussion with the IMF on securing a $1 billion loan from the fund’s recently created Resilience and Sustainability Facility (RSF) to support the county’s climate-related policy goals.

* A version of this article appears in print in the 27 April, 2023 edition of Al-Ahram Weekly