The International Monetary Fund (IMF) has recently eased several conditions of its $8 billion financial support package to Egypt, including allowing the country more time to implement reforms. This update came in the IMF’s third review of the financial support package.
The fund said that Egypt met half of the structural benchmarks for the third review, but other requirements were not. Therefore, the IMF staff proposes to rephase two structural benchmarks, modify one, and not reset two.
Leading up to the IMF’s third review for Egypt, the authorities maintained a flexible exchange rate regime and a liberalized foreign exchange system, enacted the executive regulations of the Unified Public Finance Law, published comprehensive tax expenditure and government procurement contract reports, and introduced a fixed rate, full allotment of the CBE’s seven-day deposit operations.
Structural benchmark deadline extensions
However, Egypt did not ensure the timely publication of the Central Auditing Organization’s (CAO) annual audit reports on the fiscal accounts by the end of March 2024, which is a binding requirement. Therefore, the IMF extended the deadline until the end of November 2024 because the authorities are currently amending the law governing the CAO and plan to introduce this requirement into the law rather than through a decree.
In addition, the IMF extended the deadline to prepare a recapitalization plan for the Central Bank of Egypt until the end of August 2024 because authorities prepared an initial estimate of the recapitalization needs of the central bank. However, they needed more time to refine the estimate and plan for an effective recapitalization strategy.
Moreover, the IMF modified the quarterly implementation of the retail fuel price indexation mechanism for Egypt and replaced it with a firm commitment to restore fuel prices to their cost recovery levels by December 2025.
“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,” added the IMF.
IMF’s completed requirements
The IMF did not reset the deadline to create a plan to reduce CBE claims on public sector agencies (excluding the MOF) since Egypt has already committed to reducing the claims by EGP150 billion by the end of July 2024 and further reducing CBE claims by EGP100 billion every fiscal year until the claims reach zero.
In addition, the fund did not reset the deadline to prepare a plan to reduce the Egyptian General Petroleum Corporation’s (EGPC) arrears because the authorities have articulated a strategy to repay them. In addition, Egypt is taking measures to raise the company’s revenues by gradually increasing energy prices. However, the IMF said it will consider stronger conditionality on improving EGPC’s financial situation in the future if Egypt’s current plan falls short.
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Egypt’s economic outlook
Egypt’s economic growth slowed to an average of 2.5 percent in the first half of FY2023-24 due to weak confidence and foreign exchange shortages, which constrained overall investment. Suez Canal revenue deposits at the Central Bank fell by 57 percent annually in the first quarter of 2024. Meanwhile, the health of the non-oil private sector remains frail despite an uptick in the headline Purchasing Managers’ Index in May 2024.
The IMF expects Egypt’s real growth for FY2023-24 to slow to 2.7 percent. However, it expects a strong recovery in FY2024-25 as the development of the Ras El-Hekma region begins and pressures from regional conflicts and Red Sea disruptions will likely ease in the second half of the fiscal year.
Over the medium term, the fund expects growth to increase to around 5.5 percent as structural reforms to strengthen the business climate pay off. “Inflation is expected to trend downwards over the next 12 months as base effects unwind and policy tightening takes hold,” added the IMF.
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