Finance Minister Ahmed Kouchouk said on Sunday that Egypt hopes for constructive and positive talks with the International Monetary Fund (IMF) as it prepares for the fourth review of Egypt’s economic programme. Kouchouk was speaking at the close of the annual IMF/World Bank meetings which took place from 21-26 October in Washington. On completion of the fourth review, Egypt anticipates $1.3 billion of financing.

Cairo is also expected to host IMF Managing Director Kristalina Georgieva. Speaking during a press conference on October 24, she said she would visit Egypt in around 10 days to see for herself what is happening in the country and “look into the support of the Fund from the perspective of what is best for the Egypt”.

Georgieva’s comments came on the heel of statements by President Abdel-Fattah Al-Sisi that Egypt may “review the situation [of its loan programme]” with the IMF if it means placing unbearable pressures on the public.

Two weeks ago, the government raised fuel prices for the third time this year. Ending fuel subsidies is one of the preconditions Egypt committed to as part of its 45-month $8 billion agreement with the IMF. The latest hike increased fuel prices by up to 17 per cent.

Intended to cut government expenditure on subsidies, increased fuel prices feed inflation. Though it has gradually cooled over the past year — inflation fell from 36 per cent in November 2023 to 26 per cent in September 2024 — it remains high, and subsidy cuts on bread and electricity have hit households hard. Regional turmoil, affecting the government’s hard currency revenues, is also pushing it to tighten spending.

Egypt is losing 70 per cent of the revenues it used to collect from the Suez Canal because of the impact of conflict, Georgieva said, acknowledging the negative affect of regional tensions on the Egyptian economy. “It is bearing a very significant cost of what is happening in the neighborhood, plus the conflict in Sudan.”

“We have been very open to adjust the Egyptian or any other programme to what is best to serve people,” she continued. But “we are not going to do our job for the country and for the people of the country if we pretend that action that needs to be taken can be foregone because the only thing that happens is the price of this action goes up.”

She added that Egypt will be best served by not delaying reforms because delay makes the cost higher “and that cost ultimately falls on the shoulders of people”.

It is not clear what shape the discussions of the agreement will take.

“Macroeconomic conditions today show that the programme, in its design and finance, is still appropriate,” said IMF Director of the Middle East and Central Asia Department Jihad Azour during a press conference on 24 October.

James Swanston, Middle East and North Africa Economist at UK-based research house Capital Economics, wrote that “comments from President Al-Sisi over the past week pushing back against the pace of reforms under the current IMF deal have alarmed investors a little but the bigger picture is that Egypt’s economy is in a far better and healthier position than it was 12 months ago”.

Former IMF assistant director Khaled Sakr told Al-Ahram Weekly that regularly revisiting the details of reform programmes is a normal process given that IMF programmes are subject to semi-annual or quarterly reviews. In each review, IMF staff agree with the government on adjustments to the programme based on progress in reform implementation and recent economic developments.

Sakr attributed Egypt’s fiscal tightening associated with the reform programme to the fact that the gap between the government’s revenue and expenditure, including large debt servicing costs, cannot be covered by available financing from the IMF and other sources but must be filled by achieving a substantial primary fiscal surplus.

The IMF has limits on how much it can lend to each country, he said, and Egypt is already its second largest borrower after Argentina.

Now Egypt has access to more financing and has used it responsibly, to pay down some of its debt and improve its reserves and the net foreign asset position of its banks, it is logical to reconsider the degree of fiscal tightening under the reform programme.

“A slower yet still ambitious pace of fiscal consolidation would allow a rephasing of subsidy reduction. This will facilitate a more gradual increase in fuel and other prices which will help reduce inflation,” said Sakr.

He added that it is critical to improve public debt management by rolling over short-term loans to longer-term ones to reduce yearly debt service.

Public debt reduction under the programme was extremely ambitious, Sakr noted. It was to be reduced from about 100 per cent of GDP to about 80 per cent by the end of the programme, and to 60 per cent of GDP over the medium term.

“Such a rapid reduction requires large primary fiscal surpluses which restrict social spending and stifle growth.”

According to Sakr, targeting a more reasonable yet still ambitious primary fiscal surplus will provide stronger assurances to creditors and rating agencies over the sustainability of the reforms from both an economic and political point of view.

“Excessively tight programmes can be a recipe for failure. Maintaining confidence requires strengthened credibility in the commitment to implement reforms, even at a slower pace, and strict adherence to the government’s decision not to embark on any new mega projects.”

He explained that at times of high inflation and external balance of payments pressures it makes more sense to focus on utilising the idle capacity in sectors than undertake new investment expenditure that will compete with existing companies for foreign currency and the domestic material and financial resources they require to increase output.

Sakr stressed that while investments are necessary to boost output, employment and exports, they must be carefully timed. Implementing them before fully stabilising the exchange rate and inflation would only exacerbate shortages and could lead to a balance of payments crisis.  

In the meantime, he recommends that reforms, especially those aimed at reducing the administrative and fiscal fee burden on small and medium enterprises (SMEs) owned by less affluent citizens and which play a positive role in creating jobs and reducing poverty, be expedited.

While the recent reform package to simplify the taxation system and tackle the hurdles facing small as well as large factories is a step in the right direction and needs to be sustained and built upon, “much more needs to be done by state entities to accelerate structural reforms aimed at reducing the bureaucratic burden on citizens and enterprises, especially SMEs, and levelling the playing field to allow the private sector to create more output, jobs and exports”.

* A version of this article appears in print in the 31 October, 2024 edition of Al-Ahram Weekly