Editorial: Back on track

Al-Ahram Weekly Editorial
Tuesday 30 Apr 2024

On Friday, the IMF released its first and second reviews of the reforms adopted by the Egyptian government as part of the two parties’ December 2022 agreement.

 

The reviews followed the IMF’s approval of an augmentation to the initial deal to provide Egypt with $8 billion rather than $3 billion.

The reviews were due for March and May 2023 but the government’s slippage on some of the requirements – adopting a fully flexible exchange rate, and widening the private sector role by divesting more state-owned companies – had delayed it.

The importance of the reviews, published in an IMF Staff report, is that they include an assessment of state policies since the end of 2022 as well as an outline of the policies that the government committed itself to adopting for the duration of the deal, till the end of 2026.

Macroeconomic conditions since the approval of the programme have been challenging due to spiralling inflation, the foreign currency crunch and increasing debt levels. The conflict in Gaza and disruptions in the Red Sea have only exacerbated those challenges.

The report stated that external shocks and delayed policy adjustments weighed on economic activity, slowing the growth rate to 3.8 per cent in the fiscal year 2022/23 due to weak confidence and foreign exchange shortages, and it is projected to slow further to three per cent in the current fiscal year ending June.

Burdened by an unprecedented dollar crunch that had manifested in a thriving parallel market where the dollar went at a premium of 40-50 per cent of its official level, in the last three months Egypt has shown willingness to introduce changes long called for by the fund.

“Recent measures towards correcting macroeconomic imbalances, including unification of the exchange rate, clearance of the foreign exchange demand backlog, and significant tightening of monetary and fiscal policies, were difficult, but critical steps forward,” the report noted.

While highlighting both regional and domestic risks to the government’s ability to comply with its commitments, the report had some positive expectations for the economy. It said that external financial market conditions for Egypt could ease more than expected and large capital inflows could return. Markets have responded positively to the announcement of the Ras Al-Hekma deal and the unification of the exchange rate, with the spread on Egypt’s sovereign bonds – the difference between the yields on government instruments, compared to that of the US treasury – tightening by almost 300 basis points since the deal was announced.

It also expected “a significant increase in foreign direct investment associated with the deal”. This would boost the growth outlook. A faster than expected decline in inflation is projected, especially if it was proven that parallel market rate was factored in the prices of goods and services or with the appreciation of the exchange rate due to the return of confidence in the economy and the policies directing it.

This will however come at a price. Leafing through the report shows that the government is committing itself to a number of tough measures. These include sustaining a flexible exchange rate regime and a liberalised foreign exchange system, reducing inflation and reducing debt.

Another important commitment is fiscal tightening through reducing spending on large national infrastructure projects together with more transparency on off-budget spending.

The IMF praised the fact that Egypt met seven of the 15 structural policies it recommended. These include releasing the state ownership policy document, discarding the use of letters of credit, and expanding the scope of social protection programmes. It also noted the need for more progress in keeping the retail fuel pricing mechanism updated to reflect increases in fuel subsidies, and the publication of audit reports on fiscal years on time, together with releasing detailed reports on tax expenditure.

Egypt has been muddling through myriad economic challenges. The influx of the foreign currency through the Ras Al-Hekma deal, the IMF augmented agreement, the World Bank, the EU and other international bodies provides it with a rare opportunity to rearrange its priorities and put things back on track.

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

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