20230109-IMF-Arab_Republic_of_Egypt_Request_for_Extended_Arrangement_Under_the_Extended_Fund_Facility-Press_Release_and_Staff_Report_107页_2mb

Egypt's Request for Extended Arrangement Under the Extended Fund Facility (EFF)

Core Content

The Arab Republic of Egypt has requested a 46-month Extended Fund Facility (EFF) arrangement of approximately US$3 billion (SDR 2,350.17 million, equivalent to 115.4 percent of quota). This arrangement aims to address macroeconomic vulnerabilities, restore external buffers, and support inclusive, private-sector-led growth. It also includes access to the newly created Resilience and Sustainability Facility (RSF), which could provide up to an additional SDR 1 billion to support climate-related initiatives.

Main Objectives and Policies

The program focuses on three pillars:

1. Exchange Rate and Monetary Policies:

   • A durable shift to a flexible exchange rate regime to absorb external shocks and rebuild reserves.
   • Monetary policy aimed at reducing inflation and improving transmission mechanisms.
   • The Central Bank of Egypt (CBE) has increased interest rates and introduced FX forwards and derivatives to enhance market functionality.

2. Fiscal Policy:

   • Fiscal consolidation to ensure a downward trajectory in public debt-to-GDP ratio.
   • Expansion of social spending and strengthening of social safety nets to protect vulnerable populations.
   • Implementation of public financial management reforms to improve fiscal sustainability.

3. Structural Reforms:

   • Reduction of the state's economic footprint by divesting state-owned assets.
   • Enhancing the business environment, reducing trade barriers, and improving transparency and governance.
   • Reforming the public sector to level the playing field between state-owned enterprises (SOEs) and private companies.

Key Components of the Program

• Balance of Payments Support: The EFF will help meet Egypt's balance of payments needs and catalyze an estimated US$14 billion in additional financing from international and regional partners, including GCC countries.
• Social Protection Measures: A significant social protection package worth EGP 130 billion (1.7% of GDP) was announced to address the cost-of-living crisis, including the expansion of the Takaful and Karama program.
• Exchange Rate Adjustments: The CBE shifted to a flexible exchange rate regime in October 2022, leading to a 16.2% depreciation of the EGP on the first day of trading. This was accompanied by monetary tightening and reforms to the FX market.

Risks and Challenges

• Exchange Rate Misalignment: Despite the shift to a flexible regime, there are concerns about the durability of this move and potential political or social pressure to reverse it.
• Fiscal Pressures: Fiscal consolidation may face resistance due to rising living costs and public discontent.
• Structural Reform Delays: Implementation of reforms could be slow, and vested interests may hinder progress.
• Global Uncertainty: Ongoing geopolitical tensions, such as the Russia-Ukraine war, and the potential re-emergence of the pandemic pose risks to economic recovery and growth.

Program Modality and Financing Strategy

• IMF Disbursement: The first disbursement under the EFF was SDR 261.13 million (about US$347 million).
• Regional and International Partners: The program is expected to unlock significant additional financing, including through state asset divestment and investments from regional partners.
• Sovereign Risk and Debt Sustainability: Egypt is assessed as meeting the criteria for exceptional access, with an adequate capacity to repay the IMF, although risks remain due to high public debt and global financial conditions.

Supporting Documents

• Staff Report: Completed on December 2, 2022, following discussions with Egyptian officials from October 27 to December 16, 2022.
• Assessment of Financial Exposure: Part of the documentation to evaluate the IMF's financial position and Egypt's liquidity needs.
• Performance Criteria and Targets: Indicative targets for FY2022/23, including inflation and debt-to-GDP ratios.

Key Economic Indicators

• Inflation: Expected to converge back to around 7% by FY2024/25.
• Public Debt: Projected to decline to 78% of GDP by FY2026/27.
• Current Account Deficit: Expected to improve to 2% of GDP over the medium term.
• Reserves: Rebuilding to an adequate range is a key objective.

Conclusion

The IMF Executive Board approved the 46-month EFF arrangement for Egypt, which is expected to catalyze additional financing and support the country's efforts to restore macroeconomic stability and implement structural reforms. The program is underpinned by a strong policy framework, with the authorities showing commitment to maintaining exchange rate flexibility and pursuing fiscal and structural reforms. However, risks remain due to global uncertainties, the need for sustained policy implementation, and potential political challenges.