IMF praises Egypt’s economy after allowing 5th loan tranche

CAIRO – 6 February 2019: International Monetary Fund (IMF) praised Egypt’s economic indicators after it completed its fourth review of Egypt’s economic reform program on Feb. 4.

The review allowed Egypt to receive its fifth tranche of a $12 billion loan, raising its total endorsement to around $10 billion.

First Deputy Managing Director and Acting Chair of IMF David Lipton said that Egypt’s macroeconomic outlook is still favorable, supported by strong policy implementation. He also saw that the robust growth and narrowing of the current account deficit reflect a rebound in tourism and strong remittances, while unemployment has declined to its lowest level since 2011.

“The public-debt-to-GDP ratio declined markedly last year and is projected to decline further over the medium term due to the authorities’ fiscal consolidation efforts and high nominal GDP growth,” Lipton stated.

According to Lipton, Egypt has successfully weathered recent capital outflows, but it needs to implement consistent policy to further strengthen policy buffers by containing inflation, enhancing exchange rate flexibility, and reducing public debt.

Minister of Finance Mohamed Ma’ it stated Sunday that the ministry has succeeded in reducing the debt ratio of budget instruments (domestic and foreign) to domestic product to reach 97 percent of GDP in June 2018 instead of 108 percent of GDP in June 2017 and 103 percent in June 2016.

Lipton attributed this need to the new challenges posed by the external environment as global financial conditions have tightened.

Lipton referred to the state’s monetary policy which aims to achieve a single-digit inflation rate on the medium term. He endorsed the raise in the headline inflation recently to temporary increases in food and energy prices, “but a restrictive monetary policy stance has helped to reverse the increase and keep core inflation well anchored.”

The Central Agency for Public Mobilization and Statistics (CAPMAS) announced earlier that the annual inflation rate declined to 11.1 percent in December 2018, compared to 22.3 percent in December 2017.

“The authorities have taken important steps to deepen the foreign exchange market and allow greater exchange rate flexibility ; these steps include eliminating the repatriation mechanism,” Lipton said.

In November, the Central Bank of Egypt ended working with foreign repatriation mechanism which came in force on Dec. 5. The central bank set up the mechanism in March 2013 to ensure that foreign investors receive foreign exchange when they have a desire to exit domestic securities, both government bonds and treasury bills, or listed equities, to encourage them to return to Egypt.

Egypt’s aim to achieve a primary surplus of 2 percent of GDP during current year appears to be on track, according to Lipton, who stated that the authorities remain committed to reaching cost recovery for most fuel products by mid-2019 and implementing automatic fuel price indexation, which together are critical to encourage more efficient energy use. Combined with revenue enhancing reforms, this will help create fiscal space for high-priority spending on health and education.

Ma’it said that that Egypt achieved an increase in the value of the primary surplus in the public budget before the deduction of the interest of public debt to LE 21 billion in the first half of the current fiscal year 2018/2019, which represents about 0.4 percent, compared to a primary deficit of LE 14 billion (0.3 percent of GDP) during the same period last year.

“The authorities’ structural reform agenda aims to support inclusive growth by addressing long-standing constraints to private sector development,” he stated.

Lipton elaborated that this agenda includes reforms to improve competition policy, public procurement, management of SOEs, and land allocation. “Sustained implementation of these reforms is essential to reduce opportunities for rent seeking and to support strong and inclusive medium-term growth and job creation.”

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.