The Egyptian authorities are undertaking momentous reforms. Egypt’s economy faced multiple headwinds that led to a significant growth slowdown from previously high levels, rising unemployment, acute balance of payments challenges, and inflated fiscal deficits – all of which coincided with rising public aspirations. The economy was subjected to successive shocks, including the effects of the political transition, a heightened regional security situation that severely impacted investment and tourism, and unfavorable global economic conditions which have taken a toll on confidence and investment and triggered capital outflows. As the situation became untenable, the authorities initiated wide-ranging and bold reforms to restore macroeconomic stability, ensure robust inclusive growth, build confidence, and rebuild reserves.
The government is implementing a comprehensive and well-balanced program for which they have requested a three-year extended arrangement. Specifically, the program aims to restore a healthy foreign exchange market, reduce the fiscal deficit and high debt, remove internal supply bottlenecks to achieve the growth potential, and create jobs as laid out in the MEFP. A paramount objective is to carry out these reforms, which entail short-term pain, while safeguarding social cohesion; which will be difficult to balance and all the more challenging when there are high expectations of immediate results. Some reforms were already initiated in 2014, and the adjustment as agreed with the Fund is significantly front-loaded, which underscores the tremendous resolve for reform at all levels of government.
The program targets change in the primary fiscal deficit given the uncertainty surrounding interest rates.
This figure is higher than the 3.9 percent of GDP shown in the staff report, as it (i) annualizes the fiscal yield from the VAT and fuel price increase that became effective in September and November, respectively; and (ii) includes 0.9 percent of GDP as the decline in the wage bill this year as described in paragraph 15 of the MEFP.