Towards economic recovery

Sherine Abdel-Razek , Wednesday 1 May 2024

Egypt’s augmented agreement with the IMF comes with a long list of recommendations.

Kristalina Georgieva
IMF Managing Director Kristalina Georgieva


Egypt will receive an extra $600-$700 million from privatisation deals during the current fiscal year. Excluding the Ras Al-Hekma deal, this will bring privatisation receipts to about $2.8 billion, a figure expected to increase to $3.6 billion in FY2024-25.

Moving forward, the government is planning a sector-by-sector approach to privatisation focused on transactions that generate large flows of foreign exchange according to the IMF staff report released last week.

In addition to outlining the outcome of the first and second reviews of Egypt’s reform programme which came on the back of an augmented deal that saw the sum offered to Egypt increase from $3 billion to $8 billion, the report highlights government commitments under the agreement.

Macroeconomic conditions since the approval of the original deal in 2022 have been challenging due to spiralling inflation, the foreign currency crunch, and increasing debt levels, says the report. It pointed out that the conflict in Gaza and disruptions in Red Sea traffic have compounded the challenges Egypt is facing.  

External shocks and delayed policy adjustment have weighed on economic activity. Growth slowed to 3.8 per cent in FY2022-23 due to weak confidence and foreign exchange shortages and is projected to slow further to three per cent in FY2023-24.

Measures taken during the last three months to correct macroeconomic imbalances, including unification of the exchange rate, clearance of the foreign exchange demand backlog and the tightening of monetary and fiscal policies, were praised in the report as “difficult but critical steps”.

“While the recent sizeable investment deal in Ras Al-Hekma alleviates the near-term financing pressures, implementation of the economic policies under the programme remains critical to address Egypt’s macroeconomic challenges. Robust delivery on structural reforms will be critical to lock in the benefits of the improved financing environment,” said the report.

According to the IMF, sticking to a flexible exchange rate is one of the main challenges facing Egypt’s ability to repay the fund.

On 6 March, the Central Bank of Egypt (CBE) allowed the pound to plummet from LE30.85 per dollar to LE49.5. Since then, the pound has moved up and down in a very narrow range, trading at LE47.85 on Tuesday.

“With market forces not yet prevailing due to the presence of some restrictions, despite eased, we could not tell whether the prevailing exchange rate reflects the market-clearing one. There is also no reason to assume otherwise with the elimination of the backlog and the recovery of net foreign assets and reserves,” said Maha Rashied, an economist at Dcode Economic and Financial Consulting.

Ali Metwally, director of economic intelligence at UK-based ITI Consulting, agreed, noting that while it is apparent that the CBE is allowing some flexibility, it may be not fully adhering to a completely flexible exchange rate due to the high emerging market and geopolitical risks.

“The IMF will accept this exchange rate system in the short term as long as the authorities close the gap with the parallel market and undertake reforms that strengthen the currency against the dollar.”

Both Rashied and Metwally stress that a flexible exchange rate doesn’t mean authorities never support their currency. Central bank intervention may sometimes be necessary to correct misalignments, calm disorderly markets, and accumulate essential reserves.

The integration of off-budget spending into macroeconomic policy decision-making will be critical, according to IMF Managing Director Kristalina Georgieva. Off-budget is the term often used by officials to refer to the source of financing mega national projects.

Prime Minister Mustafa Madbouli recently issued a decree obliging all public entities to report annual projected and executed investment spending to a cabinet-level committee chaired by the Central Auditing Organisation (CAO).

Rashied welcomed the decree, noting that greater budget transparency has become an international commitment.

The report also noted that fuel price increases are needed. Egypt raised the prices of fuel a month ago on the back of the dollar exchange rate and since the beginning of FY2019-20 has applied a quarterly price adjustment mechanism on all petroleum products.

“Looking ahead, we will continuously implement in full the retail fuel price indexation mechanism and in cases where the mechanism suggests a reduction in fuel prices, we will refrain from doing so until the level of fuel subsidies for products covered by the mechanism since FY2021-22 has been eliminated,” said the Egyptian government’s letter of intent submitted to the IMF and included in the report.

Fuel subsidies for 2024-25 are projected to reach LE331 billion, compared to LE254 billion in the current fiscal year.

“It remains essential to replace untargeted fuel subsidies with targeted social spending as part of a sustained fuel price adjustment package,” said Georgieva.

The extent of government agencies’ borrowing from the government — equivalent to 7.5 per cent of GDP in 2021 and 2022 — and the Ministry of Finance’s extra use of the CBE’s overdraft facility, are problems the report calls on the government to tackle.

“There are tens of economic authorities in Egypt working with independent budgets which, in total, amount to the entire state budget. These economic authorities are technically guaranteed by the government and have access to state-backed loans that do not show on the budget,” explains Rashied.

“These unproductive entities receive the majority of available credit, add to the budget’s real deficit and effectively crowd out the private sector.”

Metwally says growing overdrafts and debt obligations to the CBE increase the government’s debt servicing burden over time. “Interest payments on borrowing divert scarce resources away from essential public services such as healthcare, education, and infrastructure development, limiting the government’s ability to address socio-economic challenges and meet the needs of its citizens.”

After accounting for the inflow from the Ras Al-Hekma deal, the IMF estimates the size of the financing gap — the difference between Egypt’s foreign currency receipts and obligations till the end of 2026 — at $28.5 billion.

The gap, says Metwally, wouldn’t have been considered such a problem in the absence of persistent global shocks, and is comparable to the gaps faced by other emerging economies. At eight per cent of GDP, Egypt’s financing requirements are much lower than Turkey, Morocco, and Argentina, and just a little higher than Mexico, Poland, and South Africa.

Rashied notes that the gap can easily be filled by bilateral and multilateral financial support received from the World Bank and the European Union, the state asset divestment programme and future FDIs.

On the Ras Al-Hekma deal, the report provided detailed allocations for the money, the bulk of which should be directed to improving the level of reserves, fast-tracking the clearance of foreign currency backlogs and arrears, and reducing government debt.

“These are very important uses of funds, especially in the short term, to support stabilisation of the market. But neglecting dollar-generating investments could undermine long-term sustainability. Diversifying investments to promote economic growth and export competitiveness would be advisable,” says Metwally.

Before exchange rate unification, limited foreign exchange availability led to foreign exchange demand backlogs at banks of $7-$8 billion which have now been cleared, and contributed to the accumulation of an estimated $4.5 billion of external arrears to foreign oil companies.  

“Without investments that enhance productivity and generate FX, there is a risk of a future dollar crunch. To avoid this, there needs to be careful consideration of Egypt’s FX dynamics and the sustainability of its external position,” says Metwally.

* A version of this article appears in print in the 2 May, 2024 edition of Al-Ahram Weekly

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