Egypt Special November 2016

Egypt

Egypt: IMF approves bailout program to Egypt in a bid to restore economic stability

November 23, 2016

The International Monetary Fund (IMF) approved a USD 12.0 billion Extended Fund Facility Arrangement for Egypt on 11 November, immediately disbursing a first tranche of USD 2.75 billion in aid to the cash-strapped country. The Fund’s loan will enable the government to partially meet the market demand for dollars as well as help to restore investor confidence and replenish the state’s coffers. The Fund’s program will also fuel reform momentum in the context of a shortfall of tourism- and FDI-related revenues, high unemployment and low economic growth. The loan, which is the largest ever provided by the IMF to a Middle East country, followed the Egyptian’s government implementation of a number of IMF-recommended measures aimed at correcting external imbalances and reining in the country’s soaring fiscal deficit. It should help Egypt restore macroeconomic stability and competitiveness while placing the budget deficit and public debt on a downward trend.

Both the IMF’s loan as well as additional bilateral financing are needed to shore up the country’s floundering economy after years of political unrest and national security concerns caused tourism and foreign direct investment—the two largest sources of U.S. dollars—to plummet. The recent free floating of the Egyptian pound by the Central Bank of Egypt (CBE), which was a crucial prerequisite for the Fund’s program, will go some way towards attracting foreign investors and eliminating the shortage of foreign currency in the economy, which has plagued Egypt’s importing sectors for years. However, uncertainties remain, as Standard Chartered Senior Economist Bilal Khan warns:

“Delays in FX inflows beyond the IMF, multilateral and bilateral disbursements could see interbank USD-EGP rates rise sharply on a backlog of pent-up FX demand. Absorbing USD in local circulation into the banking system will be important, in our view. While a weaker Egyptian pound (EGP) and higher rates (the CBE hiked 300bps) should rationalize import demand, an ‘indefinite’ halting of Saudi oil shipments could offset this. Short-term USD-EGP spikes could test the CBE’s free-float resolve.”

Structural reforms will be aimed at enhancing the role of the private sector in the economy as a source of job creation and growth. Under the program, however, several measures, many of which are already being implemented, could push up inflation. Subsidy cuts, coupled with higher interest rates, could also spark further social turmoil. These include the aforementioned adoption of a flexible exchange rate regime as well as reforms aimed at staunching the spiraling fiscal deficit, particularly the removal of multiple subsidies on products and the introduction of a Value-Added Tax. However, in a bid to partially offset the effects these could have on poor Egyptian households, the Egyptian government has vowed to strengthen the social safety net by means of increasing direct transfers to poor Egyptians as well as subsidies on basic food products.

Looking ahead, potential risks stemming from the IMF-backed program are high, considering Egypt’s past failures to uphold agreements with the Fund and a potential political backlash due to unpopular reforms. Ordinary citizens will bear the brunt of pass-through inflationary pressures following the weakening of the pound, which will be exacerbated by ongoing fiscal consolidation measures. Nonetheless, this is likely to be Egypt’s best shot at jump-starting the economy, implementing delayed structural reforms and luring foreign investors back into the country. A shift in monetary policy from exchange rate targeting to inflation targeting will likely bode well with Egyptians in the longer run, while the government’s decision to subsidize people rather than products—with the exception of basic food products—will adjust goods prices to market rates.

The government targeted growth of 4.4% in FY 2016 and expect GDP at 5.2% in FY 2017. FocusEconomics Consensus Forecast panelists expect the economy to have expanded 3.4% in fiscal year 2016, which is up 0.1 percentage points from last month’s forecast. For fiscal year 2017, the panel sees economic growth at 3.6%, which is unchanged from last month’s projection.


Author:, Economist

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