A $3 billion loan approved by the International Monetary Fund and reforms that will catalyse additional funding will help Egypt close a $17 billion financing gap over the next four years, the Washington-based lender said in its staff report released on Tuesday.
The IMF’s executive board approved the 46-month arrangement under the Extended Fund Facility last month and released the first $347 million.
The IMF-supported reform programme is expected to secure an additional $14 billion from Egypt’s international and regional partners, including GCC countries.
“The [Egyptian] authorities’ favourable track record under previous Fund-supported programmes and commitment to strong policies should support a solid rebound and restoration of full market access over the medium term,” the IMF said.
However, it warned of substantial risks, including the effects of Russia’s war in Ukraine, commodity price shocks and stagflation.
"These reforms will not be easy," said Ivanna Hollar, IMF mission chief for Egypt, Middle East and Central Asia, at an online press briefing on Tuesday.
"The proposed structural reforms will take time to implement and deliver the intended results of reducing vulnerabilities to shocks and bringing about a stronger growth outlook.”
The programme will be monitored through semi-annual reviews until the end of 2026, with the first review expected to be completed around March 31 and the second around September 30 this year.
Egypt asked for IMF support shortly after Russia's invasion of Ukraine last February, which has had a devastating effect on the country’s economy.
Pre-existing pressures gave way to capital outflows and large reserve losses, while high commodity prices led to rising inflation. Egypt’s dependence on Russia and Ukraine for wheat and tourism has also been a negative factor.
Between January and March 2022, gross international reserves declined by $12.1 billion to $36.9 billion.
A flexible exchange rate has been one of the key requirements for the IMF loan and the Egyptian pound has been devalued three times over the past year — in March, October and this month. The currency now trades at about 27 pounds to the dollar, down from 16 pounds.
Egypt’s annual urban consumer inflation rose sharply in December to 21.3 per cent, its highest level in five years.
Egypt previously took a three-year, $12 billion loan from the IMF in 2016, followed by a $5.2 billion standby arrangement in 2020.
The Egyptian authorities will implement key policies through the current IMF reform programme to “preserve macroeconomic stability, restore buffers and pave the way for sustainable long-term growth”.
These include a permanent shift to a flexible exchange rate, monetary policy focused on maintaining price stability, fiscal consolidation to ensure a reduction in public debt, expansion of the social safety net and structural reforms to reduce the state footprint.
The objective of the exchange rate reform policy is to avoid the buildup of a chronic imbalance in the demand for and supply of foreign currency in Egypt, which in turn has forced the central bank to abruptly devalue the pound, Ms Hollar said.
"In the past, a heavily-managed exchange rate has not served Egypt well," she said.
"These past devaluations have led to spikes in inflation and have undermined economic activity."
“The durability of the shift to a flexible exchange rate remains to be proven and the CBE [Central Bank of Egypt] may face political and social pressure to reverse course,” the IMF warned.
However, the Egyptian authorities said they are confident that the banking system can withstand the more depreciated exchange rate.
Several factors, including the GCC members’ commitment to roll over $28 billion in official deposits at Egypt’s central bank, will help mitigate debt sustainability risks, the IMF said.
A return to a sustained primary surplus of around 2.1 per cent of GDP by the 2023-24 fiscal year and towards 2.5 per cent thereafter will ensure the reduction of general government debt to around 78 per cent of GDP by 2026-27. Gross debt was at 88.5 per cent of GDP in fiscal year 2021-22.
Authorities plan to list state-owned companies on the Egyptian Exchange and offer stakes in the Sovereign Fund of Egypt’s pre-IPO fund. An initial group of companies has been identified, with a goal of raising $2.5 billion in the first phase of pre-IPO stake sales by June of this year.
The Egyptian government will publish annual reports on tax breaks, exemptions and incentives to "provide greater insight into how to go about levelling the playing field, so that private firms don't find themselves at a disadvantage", Ms Hollar said.
The IMF report said there are firm commitments for the first 12 months of financing the fund-supported programme, including from the World Bank, Asian Infrastructure Investment Bank, African Development Bank, Arab Monetary Fund and China Development Bank.
“There are good prospects for the remainder of the arrangement to be fully financed, including through multilateral support, additional external issuances and larger policy adjustments,” the IMF said.
During the adjustment period, Egypt will need to expand social spending to increase protection for the vulnerable population. For example, the government has committed to expanding the number of households benefiting from the Takaful and Karama cash transfer programmes to five million by the end of this month, and to expanding the coverage of the social registry to 50 million people by the end of this year.
Inflation is expected to ease to around 7 per cent by fiscal year 2024-25, the IMF said.
Growth under the programme is projected to gradually rise to between 5.5 and 6 per cent. GDP, which was at 3.4 per cent in 2020-21 and 6.6 per cent in 2021-22, is projected at 4 per cent in 2022-23 and 5.3 per cent in 2023-24.
