Washington, DC: The Executive Board of the International Monetary Fund (IMF) completed the third review of Egypt's EFF arrangement. This enables the authorities to immediately draw about US$820 million (SDR 618.1 million). Egypt's 46-month EFF arrangement was approved on December 16, 2022.
Macroeconomic conditions have started to improve since the approval of the combined first and second reviews of the program in March. Inflationary pressures are gradually abating, foreign exchange shortages have been eliminated, and fiscal targets (including related to spending by large infrastructure projects) were met. These improvements are beginning to have a positive effect on investor confidence and private sector sentiment. At the same time, the difficult regional environment generated by the conflict in Gaza and Israel and tensions in the Red Sea, as well as domestic policy and structural challenges, call for continued implementation of program commitments.
Maintaining a flexible exchange rate regime and a liberalized foreign exchange system will be imperative to avoid a buildup of external imbalances. At the same time, a data-driven approach by the Central Bank is needed to lower inflation and inflation expectations. Ongoing fiscal consolidation efforts will help place public debt on a decisive downward path. To ensure that resources are still available to meet vital spending needs to help Egyptian families, including on health and education, particular attention will be needed to strengthen domestic revenue mobilization and contain fiscal risks from the energy sector. This will also assist in generating some fiscal space to expand social spending in support of vulnerable groups.
While there has been progress on some critical structural reforms, greater efforts are needed to implement the State Ownership Policy (SOP). Such measures include accelerating the divestment program, pursuing reforms to streamline business regulations to set up new firms, expediting trade facilitation practices, and creating a "level playing field" that avoids unfair competitive practices by state-owned companies. Bolstering financial sector resilience and the governance practices and competition in the banking sector should also be key priorities. These measures are crucial for steering Egypt toward private-sector-led growth that can generate jobs and opportunities for everyone.
At the conclusion of the Executive Board's discussion, Ms. Antoinette M. Sayeh, Deputy Managing Director, and Acting Chair, made the following statement:
"Strengthened reforms under the EFF-supported program are yielding positive results. The unification of the exchange rate and the accompanying monetary policy tightening have curtailed speculation, brought in foreign inflows, and have moderated price growth. With signs of recovery in sentiment, private sector growth should be poised for a rebound.
"Policy settings are expected to help maintain macroeconomic stability. A sustained shift to a flexible exchange rate regime and a liberalized foreign exchange system, continued implementation of a tight monetary policy stance, and further fiscal consolidation coupled with proper implementation of the framework to monitor and control public investment should support internal and external balance. The allocation of a portion of the financing from the Ras El-Hekma deal to reserve accumulation and debt reduction provides an additional cushion against shocks.
"Looking ahead, implementation of the structural reform agenda is key to achieving more inclusive and sustainable growth. Reforms that boost tax revenue, deliver a more robust debt management strategy, and bring additional resources from divestment to debt reduction would create space for more productive spending, including additional targeted social spending. Restoring energy prices to their cost recovery levels, including retail fuel prices by December 2025, is essential to supporting the smooth provision of energy to the population and reducing imbalances in the sector. Enhancing the governance of state-owned banks, advancing the state-ownership policy, increasing fiscal transparency, and leveling the economic playing field are critical to securing greater private investment.
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"Risks remain significant. Regional conflicts and uncertainty about the duration of disruption of trade in the Red Sea are important sources of external risk. Maintaining appropriate macroeconomic policies, including a flexible exchange rate regime, would help ensure economic stability. Meaningfully advancing with the structural reform program would significantly improve growth prospects. Managing the resumption of capital inflows prudently will also be important to contain potential inflationary pressures and limit the risk of future external pressures."
