Q&A on IMF agreement with Egypt

CAIRO – 4 July 2018: After receiving the fourth tranche of the International Monetary Fund’s (IMF) loan, the total disbarments Egypt got under the program reached $8 billion.

This step came after the board's approval of the fourth tranche on Friday, June 29, as a result of the IMF delegation’s 16 day-visit that took place in May to review the state’s reform program.

In November 2016, the Executive Board of the IMF approved a $12 billion loan as a financial assistance for Egypt to support the Egyptian economic reform program.

Upon the board's approval in November, Egypt floated its currency, losing around 50 percent of its value as part of the economic reform program which imposed taxes, including the value-added tax (VAT), and cut energy subsidies, all with the aim of trimming the budget deficit.

The Executive Board approved the first review on July 13, 2017, the second review on December 20, 2017, and the third review on June 29, 2018.

Egypt Today presents the key questions, published by the IMF, regarding its agreement with Egypt, explaining how the program is going to improve the Egyptian economy:

How much money was disbursed under the third review and what are the total disbursements so far? How much money will be disbursed after the fourth review?

Completion of the third review allows the disbursements of SDR 1,432.76 million, or about US$2 billion, bringing total disbursements under the program to date to about US$8 billion. Completion of the fourth review and subsequent reviews will allow the disbursement of about US$2 billion per review.

What measures have been implemented under the program so far?

The Egyptian authorities’ economic reform program has already shown promising results. The authorities have adopted the value-added tax, allowed the exchange rate to be determined by market forces, and reduced inefficient fuel and electricity subsidies. In addition, to improve the business climate, they passed the new industrial licensing law, the investment law, the companies law and the insolvency law.

The response from foreign investors and nonresidents has been positive: in the first six months of 2017, net portfolio inflows were almost $15.5 billion higher than in the same period of the previous year. FDI and private remittances have also increased considerably. There is a recovery in tourism, and the non-petroleum manufacturing sector – key for job creation – is showing signs of a solid rebound. At the same time, various measures have been taken to shield the poor from the adverse effects of the adjustment process.


Why are prices still so high despite the decrease in inflation and what are the Fund's recommendations to control the inflationary effects of the recent price increase?

The rise in inflation following the launch of the reform program was anticipated. It reflected the effects of increases in electricity and fuel prices, the VAT, and pass-through from the exchange rate depreciation. However, inflation has been on a declining trajectory since its peak last summer. Annual headline inflation has declined from 33 percent in mid-2017 to around 11 percent in May, anchored by interest rate hikes and other well-considered measures taken by the Central Bank Egypt (CBE).

The decline in inflation means that prices are increasing at a slower pace. Before the program, the average annual inflation was about 10-12 percent, implying that consumer price levels were increasing by this magnitude every year.

The recent increase in fuel and electricity prices, in part driven by the raise of global oil prices, is expected to have a transitory impact on inflation. The CBE remains committed to its inflation target of 13 percent by the end of 2018 and to reducing inflation to single digits over the medium term. Going forward, monetary policy decisions would need to remain data-driven and as before, be guided by the primary goal of achieving low and stable inflation and underpinned by a flexible exchange rate regime that is critical for maintaining competitiveness and adjusting to external shocks.

What are the social protection measures implemented so far to shield the most vulnerable?

Social protection is a cornerstone of the government's reform program. The authorities have put in place several programs, including: (i) more than doubling the value of cash transfer allowances offered through food smart cards – from 21 to 50 Egyptian pounds per person – and raising transfers for infant milk and children’s medicines;

(ii) expanding the social solidarity pensions to include medical coverage, as well as expanding the coverage of the Takaful and Karama programs to 2.2 million households—around 9 million Egyptians--and increasing the amounts provided;

(iii) raising pension benefits, especially for the lower pension categories;

(iv) To complement Takafol and Karama and help low income families improve living standards, the government started in June 2017 a new program “Forsa”. Partnering with private sector, Forsa links the children of the Takafol and Karama recipient families and job seekers with employment opportunities which offers them steady income.

(V) paying a one-time allowance to public employees to compensate for high inflation;

(vii) providing free school meals and new gas connections in poor districts and (viii) increasing the exemption threshold for taxes on domestic salaries.

(iv) More broadly, the faster creation of private sector job opportunities as part of the authorities’ inclusive growth strategy is expected to steadily improve living standards, including for lower-skilled workers. Some of the savings from the latest subsidy reform (around 0.3 percent of GDP) will be used in 2018/19 to mitigate the impact of the energy price reform on the most vulnerable.

How does the Fund evaluate the step of increasing fuel prices? Did the government have other alternatives to postpone increasing fuel prices?

The recent fuel price increase is consistent with the authorities’ reform program which aims to reduce budget deficits and to eliminate fuel subsidies by the end of the program in 2019.

Fuel subsidies have represented an important share of budget spending in the past, contributing to increase deficits and debt, and crowding out spending on education and health. In addition, fuel subsidies tend to disproportionately benefit the most well-off who consume more fuel products.

Gradually eliminating fuel subsidies is an important step to strengthen the macro-economic environment, create the conditions for higher growth and job creation, and gradually generate fiscal space for much needed social spending.

How does the fuel subsidy reform affect the Egyptian economy? How can Egypt avoid social unrest?

The fuel subsidy reform is part of the authorities’ reform program to restore macro-economic stability and promote higher growth. Growth has already started to rebound to 5.3 percent over the first three quarters of 2017/18 and is expected to reach up to 6 percent in the medium-term. Unemployment has also started to decline. It has declined to 10.6 percent, the lowest since 2011.

For Egypt’s homegrown reform program to continue to have support from its people, it is important to foster more inclusive growth. The Egyptian authorities are already using part of the savings from the subsidy reform to strengthen social spending and more specifically, protect the most vulnerable. Going forward, it is important to continue with sound implementation of structural reforms to create a fair business environment conducive to economic growth and job creation that benefits all.

It is also important to continue to strengthen social spending and improve the quality of public services.

What is the program doing to reduce unemployment, especially among youth and women?

The Egyptian authorities are implementing measures to increase job opportunities for youth and promote women’s labor force participation. These include specialized training programs for youth and job search schemes. To help women join the labor force, the 2016/17 budget included LE 250 million to improve availability of public nurseries.

The amount was increased to LE 500 million in 2017/18 and to LE 600 million in 2018/19. The authorities are also planning to implement gender budgeting starting in 2018/19.


Wouldn't the IMF loan add to Egypt’s debt and make the problem worse?

Countries generally turn to the IMF for financing when they have run into economic difficulties. At the time that Egypt requested the IMF program, its international borrowing costs were substantially higher compared to about 2.7 percent annual interest rate for the IMF money.

In addition, the IMF program served as a catalyst for support from other international and bilateral partners. The IMF financing helped Egypt ease the burden of economic adjustment by providing a financial cushion and more time to address the external and budget deficits which were the source of Egypt’s rising imbalances.

The economic reforms envisaged under the IMF supported program have been designed to restore confidence in the Egyptian economy and spur growth. Restoring growth is essential to improve Egypt’s debt servicing capacity and reduce its debt-to-GDP ratio. Progress has already been achieved. Egypt reached a primary budget surplus in 2017/18 for the first time and debt has started to decline.

Why are structural reforms so important for Egypt?

Egypt has a young and growing population and many Egyptians will join the labor market every year. Significant progress has been achieved to restore macro-stability and confidence in the economy.

But to create the needed jobs, Egypt needs to grow faster and increase the contribution of the private sector to growth and job creation. To this end, structural reforms aimed at improving the business environment, improving access to land and finance, strengthening competition, improving accountability and transparency of state-owned enterprises, and reducing corruption.

Removing the constraints that have weighed on higher investment and job creation in the past will help Egypt grow faster and improve the living standards of the population.

How is the IMF addressing the problem of corruption that is perceived as being widely spread in Egypt?

The IMF is helping the Egyptian authorities address the issue of corruption in Egypt both in the context of the IMF-supported reform program and its annual health check of the economy, the so-called Article IV consultation.

A main pillar of the reform program is its commitment to transparency and accountability. The authorities continue to publish economic reports and data and the state budget is discussed with Egypt’s elected parliament. This allows for better management of the state funds and accountability.

Secondly, during the 2017 Article IV consultation, the IMF highlighted the implications of high perceived corruption on growth. It recommended reforms to address market efficiencies, including strengthening competition, and improving governance and accountability of state-owned enterprises. Strengthening public procurement system and Improving transparency of land allocation are also important measures in this regard.

How can the people of Egypt share their views on an IMF engagement with the country?

The IMF is committed to being transparent about its work, to explaining itself, and to listening to the people whom it affects. IMF staff, including the IMF’s Senior Resident Representative in Cairo, is available to engage with representatives of civil society groups, parliamentarians, academics and youth leaders through information sharing, dialogue, and consultation at both the global and national level.

You can find more information here. Also, the IMF has policies in place to ensure that meaningful and accurate information—both about its own role in the global economy and the economies of its member countries—is provided to its global audiences.

We are committed to this approach in Egypt as in other countries. We also aim in our financial support for our members to improve people's living standards and protect the poor and vulnerable. Any program in support of Egypt would be guided by these principles.