Egypt commits to structural reforms, fuel and FX flexible prices to achieve economic stability, IMF report

Doaa A.Moneim , Tuesday 10 Jan 2023

Egypt has committed to the International Monetary Fund (IMF) to endure structural reforms in its macroeconomic schemes, fuel prices and foreign exchange policies (FX) as well as its debt structure among several monetary and fiscal policies, according to the fund staff report released on Tuesday.



According to the report, Egypt’s real GDP growth is expected to slow down to four percent in the current FY2022/23 from an initial projection of five percent.

This is the third time Egypt downgrades its projections for its growth since the Russian-Ukrainian conflict.

In the report, the IMF published Egypt's letter of intent dated 30 November 2022 and signed by Central Bank of Egypt chief Hassan Abdalla and Finance Minister Mohamed Maiit as part of the Extending Fund Facility (EFF) 46-month program that is set to provide Egypt with a loan of $3 billion.

According to the document, Egypt’s current account deficit is projected to be 3 percent of GDP in the current FY2022/2023 and the fiscal position, which has been affected negatively since the COVID-19 outbreak, is expected to remain strained in the near term.

The government committed to the IMF to attain 5.5-6 percent in real GDP growth over the medium term and to rein in inflation so that it returns to seven percent.  It estimated the inflation to maintain its high levels in the near term.

Furthermore, the government announced its plan to slow down the implementation of public investment projects, including national projects, to reduce the financing gap. The gap is estimated at $17 billion over four years by the IMF, up from $16 billion.

Prime Minister Mostafa Madbouly issued on Monday a number of regulations for state bodies to rationalise public expenditure amid the ongoing global economic crisis. Such measures include, among other things, postponing new projects that require US dollars and that have not yet been launched.

Reduce state footprint

The government also pledged to enhance the role of the private sector in the country’s economic growth while reducing the size of the state’s footprint in the economy. It also announced its intent to work on leveling the playing field between public and private institutions and on strengthening governance and the business climate to support export-driven and private sector-led growth.

The Cabinet released in December the State Ownership Policy that targets raising the private sector’s share in Egypt’s economic activity to 65 percent, up from the current 30 percent. According to the policy, the state will exit from 79 economic activities over a period of three years.

Exchange rate flexibility

The Egyptian pound is traded at EGP 27.69 against the US dollar for selling on Tuesday down from EGP 19.60 on the 1st of October, according to CBE official exchange rate.

The government said that the CBE is moving towards a flexible exchange rate regime since October. Other measures taken by the CBE since October include the abolition of the Letters of Credit system for imported goods.

The IMF praised these measures in its report. According to the IMF, "bold policy actions by the CBE in October to reverse unsustainable policies and those by the government to shield the Egyptian population from the full impact of the crisis are welcome steps in the right direction".

The CBE has hiked since March the key interest rates by eight percent and devaluated the local currency against the US dollar by over 60 percent through three depreciation waves.

"The CBE has clarified this policy shift in a public statement by highlighting that the exchange rate would adjust to reflect underlying market and balance of payments dynamics. Instructions in Letter No. 49, issued on 13  February, requiring letters of credit for import financing will be repealed (structural benchmark), thus ensuring that importers do not face delays in accessing foreign exchange and that backlogs in clearing imports do not continue", according to the letter.

Meanwhile, the CBE has also eased the direct provision of  FX from reserves to government entities to allow such demand to be reflected in the FX interbank market, according to the letter.

"Interventions by the CBE in the FX market, if necessary, will be guided by a volatility-based intervention framework. To limit the decline of banks’ net foreign assets when external pressures emerge, the CBE will continue not granting exemptions for commercial banks that breach net foreign exchange open position limits and will apply sanctions to any banks that violate the limits, in accordance with the regulations (continuous structural benchmark)", according to the letter.

Moreover, the CBE committed to facilitate the monitoring of individual banks’ net open position, net foreign assets, and foreign exchange transactions on the interbank market by providing these data to the IMF team.

Inflation reduction

The government said that the elevated food and energy prices and the depreciation of the Egyptian pound are expected to keep headline inflation above the CBE’s target of 7 percent (±2 percent) previously set through the fourth quarter of 2022.

Egypt’s inflation maintained its acceleration in December, hitting its highest in almost four years.

The CBE pledged to support the monitoring of inflation with a Monetary Policy Consultation Clause (MPCC). It also announced that it will consult with IMF staff when the annual headline urban CPI inflation falls outside the CBE’s inflation target of 7 ±2 percent. In addition, it said it would consult with the Fund’s Executive Board if inflation falls outside the outer bands of 3 to 18 percent in December 2022, 3 to 16 percent in March 2023, and 3 to 15 percent in June 2023. 

On Tuesday the Central Bank issued its inflation report for December 2022 indicating that the annual core inflation rate recorded 24.4 percent compared to 21.5 percent in November 2022.

Rebuilding international reserves

The CBE committed to increase the net international reserves (NIR) by $6.0 billion to reach $23.0 billion in the current FY 2022/2023 and $10.6 billion in FY 2023/2024, with a targeted increase of $16.9 billion during both FY 2024/2025 and FY 2025/2026.

In case the non-president holdings of local currency T-bills and T-bonds rebound more strongly than projected, the IMF committed to adjust its target level of net international reserves by 50 percent of any excess relative to baseline projections and will meet this through purchasing foreign exchange transparently from the market.

Since the onset of the war in Ukraine, $25 billion have fled the market driven mainly by the tightening policy the US Fed has adopted and the interest rates hikes in Egypt.

During the current FY 2022/23, CBE’s target for the international reserves will be downgraded by 50 percent amid the ongoing challenges, according to the letter.

Egypt's NIR stand at $34 billion in December 2022 down from $40.9 in February 2022 prior to the war.

Debts ceiling

Egypt set a ceiling on the gross debt of GDP ratio of 92.1 percent of GDP by end of the current FY2022/2023, targeting a primary surplus of 2.1 percent of GDP in FY 2023/2024 and 2.3 percent of GDP in FY 2024/25 and FY 2025/26, with a view to decreasing this ratio to about 83 percent of GDP by FY 2026/2027.

To achieve this, the government committed to increase the tax-to -GDP ratio through its Medium-Term Revenue Strategy (MTRS) during the current FY2022/23 by around two percent over the medium term with a focus on improving the progressivity of the tax system and avoiding unduly constraining productive activity and exports.

"To make near-term progress beyond the existing important efforts on revenue administration, we will identify and quantify, with support from IMF technical assistance, specific tax policy measures to be implemented in FY 2023/2024 for at least 0.3 percent of GDP, to contribute to an increase in this ratio by at least 0.5 percent in FY2023/2024. In addition, we will implement several measures to help bolster fiscal transparency, improve revenue administration, and raise tax revenues".

Fuel prices

The government also committed to fully implement the fuel price indexation mechanism.

The government committed in this regard to refrain from applying any formulaic decreases in fuel prices until fuel subsidies, for each product subject to the mechanism, have been eliminated in the FY 2021/2022. 

Egypt has a fuel pricing committee that reviews fuel prices quarterly. The committee has kept prices unchanged in its October review and is set to announce its new January prices in the days to come.

Increase social spendings

The government plans to extend support through Takaful and Karama and provide temporary relief to the middle class against inflationary pressures. It also intends to increase personal income tax exemption (at a cost of 0.1 percent of GDP).

"Accompanying the monetary policy measures in March, the government announced an accompanying package of fiscal and social protection measures worth EGP 130 billion, which included expanding the coverage of the Takaful and Karama cash transfer program and introduced a strategic plan to support food security. Additional social support was announced in September and is currently being rolled out," the letter read.


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