IMF Expects Further Economic Reforms Ahead Of Egypt’s First Review

April 26, 2023


Egypt is currently struggling to fulfill the commitments it pledged to the International Monetary Fund (IMF) under the Fund’s Extended Fund Facility (EFF) program it had approved for the country in December 2022 amid various economic challenges faced by the North-African country.

“Egypt has to do more in terms of the reforms it commits under the loan program. The private sector must play a greater role, the local currency must be liberalized more and the interest rates must be further flexible. These are key challenges Egypt needs to navigate on its way to the first review. What has been done so far is not enough,” sources familiar with the ongoing IMF discussions told Business Monthly.

The IMF approved in December a $3 billion EFF-loan deal for Egypt —extending over 46 months—that allows the country to receive $347 million over eight tranches through the end of the program. Egypt had filed for this loan to navigate the harsh repercussions of the Russian-Ukrainian on the national economy.

The European conflict and its consequences of soaring global inflation, high-interest rates, supply chain disruptions, and commodities price hikes hit the Egyptian economy with EGP 130 billion in losses, according to the Prime Minister’s statements a year ago.

As per the IMF deal’s time scale, the first review was scheduled on March 15, 2023, which should have set the stage for the Egyptian authorities to receive the second tranche of the loan by the end of March. Yet, the IMF’s Board of Directors’ meeting that discussed the review results has not been scheduled on the board’s calendar as of yet.

Both sides have not further explained the reasons behind the delay.

Delayed review

In order to explore ways to accelerate the process of the deal’s first review, a delegation of Egyptian officials headed to Washington DC to participate in the IMF’s/World Bank Group (WBG)’s spring meetings from April 10-16. The delegation included the ministers of finance and international cooperation, besides the Governor of the Central Bank of Egypt (CBE), Hassan Abdallah, who is also Egypt’s Governor at the IMF.

The IMF’s loan deal-related documents indicate numerous challenges that could hinder Egypt from fulfilling its commitments. According to these documents, Egypt’s capacity to repay the loan is adequate, but with some risks that come from the need to stay the course of its ongoing economic reform program amid heightened uncertainty caused by the escalating war in Ukraine.

In addition, risks to the global outlook affect Egypt negatively in its way for a rapid recovery, the pace of replenishing reserves, and the speed of its macro economy imbalances to be tackled.

“Over the near term, the exchange rate misalignment and the prolonged inflationary pressures could undermine social cohesion, and high financing costs with a further shortening of domestic debt maturities and limited external market access. Risks over the medium term include mainly the debt sustainability driven by the lower growth and tighter domestic and external financing conditions,” documents viewed by Business Monthly showed.

The documents also pointed out that the ongoing challenging external market conditions could affect the build-up of Egypt’s reserve buffers, warning that potential reversion to limiting exchange rate flexibility and slower-than-expected progress on structural reforms could affect the country’s medium-term outlook.

During the meetings, the IMF Mission Chief for Egypt, Ivanna Vladkova Hollar, stated that the Egyptian authorities and the IMF staff had fruitful discussions in preparation for the first review mission of Egypt’s reform program supported by the Fund.

“Discussions addressed a number of issues related to program implementation and the outlook for the Egyptian economy, and will continue virtually towards starting the first review mission,” said Holler.

According to the sources, the first review is expected to be conducted before the end of the current FY2022/2023, which ends by the end of June, as the program provided that two reviews are set to be conducted every fiscal year through the end of the program in second half FY2025/2026.

Private sector role

The IMF requested the Egyptian side to provide more practical procedures to level the field with the private sector, which still suffers troubles in either doing business or initiating new businesses in the local market.

As per the IMF’s estimations, Egypt is experiencing a financing gap of $17 billion. Egypt committed to financing the lion’s share of this gap from the sales of the state-owned assets with more than $8 billion over the course of the EFF loan program.

Through its World Economic Outlook updated report released during the meetings, the IMF lowered its projections for Egypt’s real GDP growth to 3.7 % in 2023, which is lower than October’s and January’s forecasts of 4.4% and 4%, respectively.

This was the second time the IMF revised the country’s forecasts since October, which indicates the pressures the Egyptian economy is currently facing.

During a press conference held during the IMF/WBG the Fund’s managing director said that liberalizing the exchange rate, increasing the opportunity for the private sector to deliver jobs and lead Egypt’s growth, as well as slowing down the long-term investment projects the country is implementing are key in to conduct the first review, in particular, and to the success of the program in its mission, in general.