The International Monetary Fund (IMF) has published its detailed report on the third review of Egypt’s Extended Fund Facility (EFF) loan program. Initially approved in December 2022 for $3 billion, the program was expanded to $8 billion in March 2024 to address Egypt’s economic challenges exacerbated by global and regional geopolitical tensions.
Here are the key changes and highlights from the IMF’s latest report:
Central Auditing Organization Reports
The requirement for timely publication of the Central Auditing Organization’s annual audit reports has been rescheduled from March 2024 to November 2024. This adjustment reflects the authorities’ ongoing amendment of the CAO law to incorporate this requirement within the law itself rather than through a decree.
Recapitalization Plan for CBE
The deadline for preparing a recapitalization plan for the CBE has been extended to August 2024. While authorities have made an initial estimate of the recapitalization needs, additional time is needed to finalize the strategy.
Fuel Prices
The IMF has adjusted the benchmark related to the quarterly implementation of the retail fuel price indexation mechanism. It now requires a firm commitment to restore fuel prices to cost recovery levels by December 2025. This adjustment aligns with the government’s gradual increase in petroleum product prices to manage inflation and achieve a break-even point for fuel subsidies by December 2025.
Egypt’s Net International Reserves (NIR)
Egypt has significantly surpassed its NIR targets, bolstered by increased nonresident inflows into local currency treasury bills. As of the end of July, Egypt’s NIR reached a record level of nearly $46.5 billion, according to the latest figures from the CBE.
Exchange Rate Unification and Monetary Policy
The IMF recognized that the unification of the exchange rate and recent monetary policy tightening have helped curb speculation, attract foreign inflows, and moderate inflation. Although inflation rates have declined in recent months, they remain above the CBE’s target range of 7% (±2%).
Ras El-Hekma Deal
The $35 billion deal signed with the UAE has significantly reduced the CBE’s overdraft facility and boosted gross reserves. Proceeds from the deal have also contributed to maintaining stability in Egypt’s economic outlook.
Monetary Policy Settings
The IMF emphasized that the current monetary policy settings, including recent rate hikes, are appropriate to sustain a downward trend in inflation.
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The report estimates that the Suez Canal lost 60% year-on-year in receipts due to disruptions in the Red Sea amid escalating geopolitical tensions in the region.
Despite the decline in Suez Canal revenues, the IMF anticipates a positive shift in the overall Balance of Payments (BoP) due to substantial inflows from the $35 billion Ras El-Hekma deal and nonresident holdings of treasury bills, both of which significantly boost the financial account.
The IMF projects that the Central Bank of Egypt’s (CBE) monetary policy adjustments and reduced government monetary financing will help alleviate inflationary pressures. However, inflation is expected to remain high, with an average projection of 21.2% for FY2024/2025, decreasing to 10.2% by FY2026/2027—well above the CBE’s target of 7% (±2%).
The report also revealed that the Egyptian government is exploring various options to mobilize domestic resources, including implementing a carbon tax to support emissions reduction in alignment with the EU’s Carbon Border Adjustment Mechanism, and introducing a withholding tax on sales from free zones to the domestic market.
The IMF is scheduled to initiate the fourth review between September and October, with expectations of completing it by December. Upon approval by the Fund’s Executive Board, the fourth review will pave the way for Egypt to receive a $1.3 billion tranche.
