Front Matter Page
IMF Country Report No. 17/17
ARAB REPUBLIC OF EGYPT
REQUEST FOR EXTENDED ARRANGEMENT UNDER THE EXTENDED FUND FACILITY—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR THE ARAB REPUBLIC OF EGYPT
January 2017
In the context of the Request for Extended Arrangement Under the Extended Fund Facility, the following documents have been released and are included in this package:
A Press Release including a statement by the Chair of the Executive Board.
The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on November 11, 2016, following discussions that ended on August 12, 2016, with the officials of the Arab Republic of Egypt on economic developments and policies underpinning the IMF arrangement under the Extended Fund Facility. Based on information available at the time of these discussions, the staff report was completed on November 7, 2016.
A Statement by the Executive Director for the Arab Republic of Egypt.
The documents listed below have been or will be separately released.
Letter of Intent sent to the IMF by the authorities of the Arab Republic of Egypt*
Memorandum of Economic and Financial Policies by the authorities of the Arab Republic of Egypt*
Technical Memorandum of Understanding*
*Also included in Staff Report
The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.
Copies of this report are available to the public from
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© 2017 International Monetary Fund
Front Matter Page
ARAB REPUBLIC OF EGYPT
REQUEST FOR EXTENDED ARRANGEMENT UNDER THE EXTENDED FUND FACILITY
November 7, 2016
Key Issues
Egypt’s underlying structural weaknesses and the prolonged political transition have led to the build-up of macroeconomic imbalances. A significantly overvalued exchange rate has undermined competitiveness and depleted international reserves. Weak revenue combined with poorly targeted subsidies and a growing public sector wage bill have resulted in persistent large fiscal deficits and a high level of public debt. Real and potential growth have slowed since 2011 as foreign exchange shortages and the weak business climate deterred investment and impeded productivity improvement and job creation. Regional instability and security concerns have also taken a toll on the economy, especially on tourism. Risks of economic distress increased.
Given the largely structural nature of Egypt’s macroeconomic imbalances, the authorities are requesting Fund support under the three-year Extended Fund Facility (EFF) arrangement. They have developed a comprehensive program of adjustment and reforms to restore macroeconomic stability and pave the way for sustainable long-term growth. Their homegrown policy package envisages:
Adoption of a flexible exchange rate to remove overvaluation, rebuild reserves, and provide buffers for external shocks;
Monetary tightening to contain inflation;
Fiscal consolidation to ensure medium-term sustainability of public debt;
Strengthening social safety nets and increasing pro-poor spending to offset the impacts of reforms on the vulnerable; and
Structural reforms to promote inclusive growth, create jobs, increase and diversify exports, improve the business environment, and strengthen public finance management.
Program financing needs are significant. The financing gap for the program is about $35 billion, with about half of the gap resulting from the need to replenish reserves. The authorities request SDR8.59657 billion (about $12 billion, or 422 percent of quota), to be evenly distributed over the three-year period with some frontloading within the first year to boost credibility and instill market confidence in the program. The authorities have already secured the full financing for the first year.
The risks to the program mainly arise from the difficulties inherent in implementing a strong and wide-ranging reform program. Fiscal slippages could undermine the program’s debt sustainability objective. Failure to tighten monetary policy sufficiently could lead to exchange rate and inflationary pressures and loss of reserves. Structural reforms are vulnerable to opposition by vested interests. There is a risk that regional conflicts could intensify and domestic security conditions deteriorate, which could affect confidence, investment, and tourism. These risks are mitigated by the authorities’ commitment to the program as demonstrated by the implementation of the prior actions, the strength of the policies under the program, including the buffers provided by a move to a flexible exchange rate regime, by frontloading of major measures, and by the program’s backing at the highest political level.
Staff supports the authorities’ request for the EFF arrangement. Staff also supports the authorities request for temporary approval for a multiple currency practice maintained by Egypt.
Approved By
Juha Kähkönen and Sanjaya Panth
Discussions were held in Washington DC in May, in London in June, and in Cairo in August. The mission team comprised Chris Jarvis (head), Nikoloz Gigineishvili, Gohar Minasyan, Bénédicte Baduel (MCD), Matthew Simmonds (FAD), Frantisek Ricka (SPR), Carlos de Barros Serrao (MCM), and Randa Elnagar (COM). Masood Ahmed (Director, MCD) participated in discussions in London.
Contents
ECONOMIC AND POLITICAL CONTEXT
RECENT DEVELOPMENTS
PROGRAM OBJECTIVES AND POLICIES
A. Macroeconomic Outlook and Risks
B. Monetary and Exchange Rate Policies
C. Fiscal Policy and Public Finance Management
D. Energy Sector Reforms
E. Financial Stability
F. Structural Reforms for Growth and Employment
PROGRAM ISSUES
STAFF APPRAISAL
BOX
1. Prospects for Medium-Term Growth
FIGURES
1. Real Sector Developments
2. Fiscal Sector Developments
3. External Sector Developments
4. Monetary Sector Developments
TABLES
1. Selected Macroeconomic Indicators, 2011/12–2016/17
2. Balance of Payments, 2011/12–2020/21
3. Balance of Payments, 2011/12–2020/21
4. Budget Sector Operations, 2011/12–2020/21
5. Budget Sector Operations, 2011/12–2020/21
6. General Government Operations, 2011/12–2020/21
7a. Central Bank Accounts, 2011/12–2020/21
7b. Monetary Survey, 2011/12–2020/21
8a. Summary of National Accounts, 2011/12–2020/21
8b. Summary of National Accounts, 2011/12–2020/21 (In percent of GDP)
9. Medium-Term Macroeconomic Framework, 2011/12–2020/21
10. Financial Soundness Indicators of the Banking System
11. Capacity to Repay the Fund, 2013/14–2020/21
12. External Financing Requirement and Sources, 2014/15–2020/21
13. Proposed Schedule of Purchases Under the Extended Arrangement
ANNEXES
I. Public Debt Sustainability Analysis
II. External Debt Sustainability
APPENDIX
I. Letter of Intent
Attachment I. Memorandum of Economic and Financial Policies
Attachment II. Technical Memorandum of Understanding
Front Matter Page
Press Release No.16/501
FOR IMMEDIATE RELEASE
November 11, 2016
International Monetary Fund
Washington, D.C. 20431 USA
Telephone 202-623-7100
Fax 202-623-6772
