The International Monetary Fund released about $820 million in funding to Egypt after the completion of the third review of its extended loan programme but called for more reforms in the Arab world's most populous country.
The Egyptian authorities’ recent efforts to “restore macroeconomic stability have started to yield positive results”, the fund said on Monday.
“Inflationary pressures are gradually abating, foreign exchange shortages have been eliminated, and fiscal targets (including related to spending by large infrastructure projects) were met. These improvements are beginning to have a positive effect on investor confidence and private sector sentiment,” the IMF said.
Egypt, struggling with a severe economic crisis, has been implementing an IMF-backed economic reform programme since 2022 which saw it devalue its currency four times and substantially cut food and energy subsidies, though some remain in place.
This month, the country increased fuel prices as part of a plan to gradually remove subsidies by December 2025, a requirement under its agreement with the IMF.
The move marked the second time the government has raised prices since the IMF expanded its loan programme by $5 billion in March.
The government's efforts to lift subsidies have been met with resistance from citizens who say their living costs have been soaring in recent years. The situation has been exacerbated by continuing power cuts, which have disrupted daily life and led to anger among Egyptians.
A data-driven approach by the Central Bank is needed to lower inflation and inflation expectations, the IMF said on Monday.
Despite decreasing by about 10 per cent since it hit a record high of 38 per cent in September last year, inflation remains at almost three times what it was before the IMF deal was finalised in 2022, said analyst Moustafa Badra.
“High inflation remains a concern for citizens and economists alike. The prevailing expectation is that it will remain high until well into 2025 when the tight monetary policy that the Central Bank has been implementing at the IMF's behest will take effect,” he said.
“We expect the bank to keep interest rates high until it sees inflation abating.”
Part of the IMF-mandated reforms includes switching from in-kind subsidies to a cash system, a difficult process that will most likely take a lot of time and effort to get right, Mr Badra explained.
“The simple reality is that the in-kind subsidy system cannot work any more. When you factor in the population increase and the sheer cost of keeping even just bread subsidies as they are, it is simply not possible. The in-kind system has also allowed for subsidies to be widely exploited by undeserving citizens and this needs to change,” he said.
One of the government's most difficult tasks is going to be taking inventories of the beneficiaries of its various subsidised sectors including food, water, electricity and fuel and ensuring that only the most deserving are receiving support from the government.
“The government is exerting a lot of efforts to stabilise everything but it is a difficult time. The situation is infinitely complex and will require time, patience and deft manoeuvring,” he added.
Continuing fiscal consolidation efforts will help place public debt on a “decisive downward path”, the fund said.
“To ensure that resources are still available to meet vital spending needs to help Egyptian families, including on health and education, particular attention will be needed to strengthen domestic revenue mobilisation and contain fiscal risks from the energy sector.”
“This will also assist in generating some fiscal space to expand social spending in support of vulnerable groups.”
The fund also said that the regional environment remains difficult amid the Gaza war and tensions in the Red Sea.
Earlier this month, Egypt's Suez Canal, a critical component of the country's economy, reported a 23 per cent drop in annual revenue for the fiscal year 2023-24, mainly due to the effect of attacks by Yemen's Houthis on cargo vessels in the Red Sea.
Total revenue for the 12 months ending on June 30 was $7.2 billion, a decline from $9.4 billion during the same period in the previous year, the Suez Canal Authority said.
The number of ships passing through the canal also fell during the period: 20,148 vessels, carrying 1 billion tonnes, transited the canal in 2023-24, compared with 25,911 with 1.5 billion tonnes in the previous fiscal year.
“Risks remain significant. Regional conflicts and uncertainty about the duration of disruption of trade in the Red Sea are important sources of external risk,” said Antoinette M Sayeh, deputy managing director and acting chair of the IMF.
“Maintaining appropriate macroeconomic policies, including a flexible exchange rate regime, would help ensure economic stability,” she said.
Managing the resumption of “capital inflows prudently” will also be important to contain potential inflationary pressures and limit the risk of future external pressures, she added.
The fund also called for more efforts to introduce the state ownership policy initiative, including enhancing its divestment programme, streamlining business regulations to set up new firms, expediting trade facilitation practices, and creating a “level playing field” that avoids unfair competitive practices by state-owned companies.
It also called for better management practices and competition in the banking sector.
“Reforms that boost tax revenue, deliver a more robust debt management strategy, and bring additional resources from divestment to debt reduction would create space for more productive spending, including additional targeted social spending,” said Ms Sayeh.
