Amid a myriad of local and regional economic and political challenges, the latest of which is the escalating situation in Gaza, the Egyptian government is anticipating setting a date for the first and second reviews of the loan agreement it finalised with the International Monetary Fund (IMF) last year.
The reviews, initially scheduled in March and August, were delayed due to the government’s reluctance to fully liberalise the exchange rate for fear of the resulting inflationary pressures on Egyptian households. Egypt’s inflation rate has been increasing over the last four months, witnessing record highs of 38 per cent in September.
Director of the IMF’s Middle East and Central Asia Department Jihad Azour talked to Al-Ahram Weekly about what has been achieved in Egypt’s economic reform programme as well as about what has yet to be done.
IMF Managing Director Kristalina Georgieva has said the Fund will set a date for sending a mission to Egypt to carry out the first and second reviews of Egypt’s economic reform programme. When do you expect this to take place?
The reform programme consists of a set of measures that are being implemented in successive stages. It is the execution of these steps that determines the date of the revision. The Egyptian government has indeed carried out many reform measures and has improved its performance in several areas. But it is essential to continue.
In order to overcome global and regional crises, the Egyptian government and the IMF are cooperating to ensure more stable trajectories for the Egyptian economy in the medium and long term, combining flexibility in economic performance with an increase in social-protection programmes. The IMF management is in continuous communication with Egypt, and a team will visit Egypt soon, presumably before the end of the year.
Is there an intention to merge the first and second revisions and disburse the two tranches of the loan together?
It has been agreed with the Egyptian government to merge the first and second revisions.
What reform measures has Egypt implemented thus far?
Egypt has made progress on several fronts. In the area of public finances, a series of reforms and measures have been adopted, in addition to the measures taken by the government to achieve a balance between the public and private sectors. Indeed, a set of laws has been promulgated concerning public institutions. This is a good thing, because we need to give more space to the private sector and reconsider the size of the public sector.
The IMF forecasts a decline in the economic growth rate in Egypt over the next two years. What are the reasons for this?
The Egyptian economy has experienced several shocks, especially the war between Russia and Ukraine, which has led to a significant increase in food prices, especially since Egypt has important trade relations with the two countries. In addition, tourist traffic has been heavily affected by the war, not to mention the rise in oil prices and the high inflation rate globally, which has led to an increase in inflation in Egypt, a rise in the balance of payments deficits and expectations of a decline in the growth rate.
It is on this basis that the IMF’s programme was developed to protect the Egyptian economy from the negative impact of global developments. For example, the gradual reduction of public debt is one of the most important objectives of the programme in Egypt, after rising global interest rates caused inflation rates and the cost of borrowing to increase in emerging countries such as Egypt.
When can we expect an economic recovery in Egypt?
The economic recovery depends in part on domestic factors through continued reforms, lower inflation rates, and the return of investor confidence. That is what the Egyptian government is doing right now. There are also external factors related to the gradual improvement in the global economic performance, which in turn leads to an increase in the level of demand in major economies such as China. The IMF expects the global economy to recover next year. This will have a positive impact on Egypt.
The IMF-prescribed flexible exchange rate would come at a cost to Egyptian businesses as well as households. How do you see the benefits and shortcomings of this?
A flexible exchange rate means a flexible exchange-rate policy and not necessarily a fall in the pound’s exchange rate. The objective of this policy is to protect the Egyptian economy against external shocks because it is supply and demand in the markets that determine the exchange rate. Although exchange-rate flexibility comes at a cost due to global shocks, it is the best way to strengthen the foreign currency reserves at the Central Bank of Egypt (CBE). It is this system that is adopted in developed economies in Western Europe and in rapidly developing countries such as India.
The flexibility of the exchange-rate policy also helps transform the economy to be export-oriented and protect it against fluctuations in global financial markets in times of crisis. For these reasons, the IMF recommended that Egypt move to this system in order to protect economic stability and give monetary policy-makers in the country the opportunity to focus on the main objective of regularising prices and combating inflation, in addition to allowing the Central Bank an opportunity to focus on solving the inflation problem. This has been the IMF’s philosophy regarding Egypt since the development of the successful economic reform programme in 2016 and continued until 2020.
What about the adverse impacts the reforms will have on Egyptian citizens?
People are primarily interested in the impact of the reforms on prices, which are currently high. This problem must therefore be remedied. We can also strengthen the country’s social-protection programmes, which have proven their effectiveness since 2017, even during the Covid-19 pandemic. This is why the Egyptian government must strengthen the Takaful and Karama (Solidarity and Dignity) programme, in order to include the greatest number of beneficiaries. This is an essential element that must be taken into consideration.
Is it possible to increase tax revenues in Egypt?
Tax reforms constitute an essential factor in achieving tax justice, on the one hand, and the diversification of sources of revenue, on the other. I think Egypt has untapped space to increase budget revenues by abolishing tax exemptions, which can help to achieve social justice.
The Middle East region is facing consecutive shocks, the latest of which is the conflict in Gaza. How could this impact the region’s economies?
The war in Gaza will have an impact on the region in the medium and long term. It is difficult to predict the economic impact of what is happening in the region or even what will happen in the future. But there must be enough financial reserves in the countries of the region to avoid shocks. Oil prices have become stable again after a five per cent increase in the first days of the war, which is a cause for comfort.
What are the IMF’s growth forecasts for the Middle East region?
We expect GDP growth in the Middle East and North Africa (MENA) region to slow to 3.1 per cent in 2023 from around 5.7 per cent in 2022, due to slowing growth in the oil-exporting countries. We expect inflation rates in the region to remain at 15 per cent in 2023 before falling next year.
How do you assess the way in which the countries in the region are coping with the successive crises?
The countries in the MENA region responded to the pandemic with rapid and strict measures, but they still face a difficult environment and successive challenges that generate uncertainty, notably the oil-exporting countries. These have been affected by a double shock represented by the economic impact of widespread closures and a sharp drop in demand for oil and consequently the collapse of prices.
* A version of this article appears in print in the 19 October, 2023 edition of Al-Ahram Weekly
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