Arab Republic of Egypt:Fifth Review Under the Extended Arrangement Under the Extended Fund Facility—Press Release; Staff Report; and Statement by the Executive Director for the Arab Republic of Egypt
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International Monetary Fund. Middle East and Central Asia Dept.
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Publication Date:
10 Oct 2019
eISBN:
9781513516622
Language:
English
Keywords:
ISCR; CR; authorities' economic reform program; core inflation; private sector; authority; Egypt-IMF Executive Board; interest rate; indexation mechanism; nominal exchange rate; export-led growth; resource allocation
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Fifth Review Under the Extended Arrangement Under the Extended Fund Facility-Press Release; Staff Report; and Statement by the Executive Director for the Arab Republic of Egypt

Abstract

Fifth Review Under the Extended Arrangement Under the Extended Fund Facility-Press Release; Staff Report; and Statement by the Executive Director for the Arab Republic of Egypt

Recent Developments and Program Performance

1. Macroeconomic performance has remained strong in 2018/19, supported by continued sound policy implementation. Real GDP increased by 5.4 percent in the first half of 2018/19, supported by strong growth in natural gas, tourism, and construction, while unemployment declined to 8.1 percent in the first quarter of 2019, the lowest in over a decade. The current account deficit is expected to remain little changed at 2.6 percent of GDP in 2018/19, with Egypt becoming a net exporter of oil and gas in late 2018 for the first time since 2012/13. Headline inflation picked up slightly from 12 percent in December 2018 to 14 percent in May due to increases in food prices, but core inflation remains stable at around 8 percent. The budget is on track to achieve a primary surplus of 2 percent of GDP in 2018/19, in line with the program target, with gross general government debt projected to decline from 93 percent of GDP in 2017/18 to 85 percent of GDP by end-June.

uA01fig01

Contributions to real GDP growth, y/y

(percentage points)

Citation: IMF Staff Country Reports 2019, 311; 10.5089/9781513516622.002.A001

uA01fig02

Auction Yields (percent)

Citation: IMF Staff Country Reports 2019, 311; 10.5089/9781513516622.002.A001

2. Financial market conditions have recovered in 2019 despite continued risks to the global outlook from escalating trade tensions. Portfolio inflows have resumed in 2019 as investor sentiment toward Egypt improved, supporting an appreciation of the Egyptian pound against the U.S. dollar of about 8 percent since the beginning of the year. Treasury bill yields have also declined by about 200 basis points, bringing domestic yields back down toward their levels from early 2018 for maturities of less than one year where demand from nonresidents is focused; the yield curve remains inverted, reflecting expectations of lower inflation over the medium term.

3. Program performance has remained broadly favorable, but progress on structural reforms has been uneven. All end-March performance criteria and indicative targets were met, but a number of structural benchmarks were missed due to delays or only partial implementation reflecting in part capacity constraints. Nevertheless, continued progress in key areas has kept the program broadly on track to meet its objectives. The benchmarks on reaching cost recovery on fuel prices and introducing fuel price indexation were missed but were implemented with delay as prior actions on July 5 and July 6, respectively. The benchmark on development of a plan to restructure the National Investment Bank (NIB) was also missed, to allow a detailed asset review by an international auditor. In the interim, the authorities have introduced measures to strengthen NIB oversight and governance as a prior action. Several other benchmarks were missed: new guidelines for industrial land allocation were approved at end-March but they do not include a market-based allocation mechanism as specified under the benchmark; minority shares were divested through IPOs in one state-owned enterprise by mid-June instead of four; the approval of executive regulations for the new Government Procurement Law was delayed to incorporate comments from the World Bank; and the separation of the regulatory authority for transportation from the Ministry of Transportation (MoT) was delayed due to organizational changes at the MoT. Benchmarks were met on refraining from exemptions for commercial banks to breach net foreign exchange (FX) open position limits; eliminating the FX deposits of the Central Bank of Egypt (CBE) in foreign branches of the Egyptian banks; and launching an e-Procurement portal. The benchmark to approve a plan to align SOE procurement rules with the new law was missed but completed with a slight delay to allow further consultation with the OECD.

Outlook and Risks

4. Continued strong growth will be essential to navigate medium-term demographic challenges. Egypt will need to accommodate an estimated 3.5 million new entrants to the labor market over the next five years, in the context of already high youth unemployment and low labor force participation. The authorities and staff agreed that the growing labor force presents a tremendous opportunity for faster growth, but only if it encounters a strong and vibrant private sector that can productively employ those workers.

5. The medium-term outlook hinges on sustained reform implementation to create an enabling environment for private sector-led growth. In the near term, the increased production of natural gas and ongoing recovery in tourism, as security conditions have stabilized, are expected to support real GDP growth close to 6 percent. As these sectors approach full capacity, increased private investment will be essential to drive productivity improvements and support broad-based growth beyond these areas (Box 1). Staff’s baseline scenario assumes that macroeconomic policies remain prudent to preserve macroeconomic stability and that continued progress on structural reforms facilitates a pickup in other sectors, keeping real GDP growth at 6 percent over the medium term. Inflation is expected to decline to mid-single digits from about 14 percent in 2018/19, while a sustained primary surplus at 2 percent of GDP would help reduce general government gross debt to 70 percent of GDP by 2024.

6. The main risks to the outlook are a shift in global financial conditions or a weakening of reform momentum. The authorities’ prudent policies have been instrumental in strengthening Egypt’s resilience to the elevated uncertainty in the external environment. The high level of public debt and large external gross financing needs leave Egypt vulnerable to a shift in global financial conditions, and a sustained increase in real interest rates could aggravate public debt dynamics. In addition, a loss of momentum on reform implementation due to complacency or opposition from vested interests would weaken the growth outlook. Strong growth in recent years has resulted in a steady decline in unemployment from the peak of 12.9 percent in 2014/15, but should real GDP growth slow toward the 2006–2015 average of 4 percent unemployment would likely return to double digits. Additional risks include materialization of contingent liabilities or a deterioration of the security situation that would disrupt the recovery in tourism. These risks underscore the importance of maintaining sound macroeconomic policies and sustaining reform efforts, particularly as geopolitical competition and rising protectionism increase downside risks to the global outlook.

Egypt: Looking Back: Progress Under the EFF Arrangement

Macroeconomic stabilization. By mid-2016, an unsustainable policy mix had left Egypt facing low growth, elevated and rising public debt, and a mounting balance of payments problem with severe shortages of foreign exchange and an overvalued exchange rate. Egypt’s reform program, supported by the EFF arrangement, implemented a significant policy adjustment anchored by the liberalization of the foreign exchange market and fiscal consolidation to ensure public debt sustainability while protecting the most vulnerable. The authorities’ strong ownership of the program and decisive upfront policy actions were essential in establishing credibility and restoring confidence. These measures were critical in stabilizing the economy: growth has accelerated; current account and fiscal deficits have narrowed; international reserves have risen; and public debt, inflation, and unemployment have declined.

uA01fig03

Gross Official Reserves and Current Account Balance

Citation: IMF Staff Country Reports 2019, 311; 10.5089/9781513516622.002.A001

uA01fig04

Budget Sector Balances and Gross Public Debt

(Percent of GDP)

Citation: IMF Staff Country Reports 2019, 311; 10.5089/9781513516622.002.A001

Structural reforms and growth. The acceleration in growth has been driven in part by tourism and natural gas, but the contribution from these sectors is expected to taper as they get closer to capacity. Against this background, as macroeconomic stabilization took hold the authorities appropriately focused increasingly on long-standing structural impediments to growth and resource allocation in other sectors. The structural agenda was expanded to include reforms to industrial land allocation, strengthen competition and public procurement, and improve governance—including of NIB and SOEs. The initiation of these reforms is an important first step, but the transition to a transparent market-based economy will require further broadening and deepening of reforms and their sustained implementation beyond the current program. The medium-term growth outlook depends significantly on creating an enabling environment for private sector development to accommodate Egypt’s rising labor force. Continued efforts will be needed to improve the business climate, tackle corruption, reduce the role of the state, and enhance non-oil exports.

Policy Discussions

Policy discussions focused on maintaining a sound policy framework while following through on structural reforms to create space for private sector development and sustain strong growth. Staff and the authorities were closely aligned on monetary and fiscal policy objectives and the importance of sustained structural reform implementation to support medium-term growth prospects. Fiscal consolidation to anchor public debt reduction remains on track, supported by the completion of fuel subsidy reform. Monetary policy continues to focus on bringing inflation down to single digits, underpinned by a flexible exchange rate to improve resilience to external shocks. The favorable near-term outlook provides an opportune juncture to advance structural reforms, and staff emphasized the importance of steadfast execution of the reform agenda beyond the current program.

Monetary, Exchange Rate, and Financial Sector Policies

7. Monetary policy remains anchored to the CBE’s medium-term objective of guiding inflation down to single digits. The CBE lowered its overnight deposit rate by 100 basis points in February to 15.75 percent to reflect softer demand-side pressures, but real interest rates remain positive. The monetary policy stance is expected to remain appropriately restrictive to contain possible second-round effects from increases in fuel prices, but sustained disinflation would provide scope for further reductions in the CBE policy rate. Inflation continues to be driven to a large extent by supply side factors that impact domestic food prices, with core inflation relatively well contained. Structural inefficiencies in the domestic agricultural sector contribute to persistent upward pressure on domestic food prices, reflecting low yields, limited storage capacity, poor transport links from rural to urban areas, and encroachment on agricultural land, in the context of rising demand from a fast-growing population. If inflation pressures reemerge, the CBE should stand ready to tighten monetary policy as needed.

uA01fig05

Inflation and Interest Rates

(percent)

Citation: IMF Staff Country Reports 2019, 311; 10.5089/9781513516622.002.A001

8. Exchange rate flexibility has increased, and the level of international reserves remains adequate. The Egyptian pound has appreciated by about 8 percent against the dollar since the beginning of 2019, reflecting in part increased portfolio inflows through the interbank market due to the cancellation of the repatriation mechanism in late 2018 (Box 2). The increased supply of foreign exchange allowed commercial banks to reduce their open positions below the regulatory limits by end-May, while the CBE has also refrained from granting exemptions for commercial banks to breach net FX open position limits. Gross international reserves remain broadly adequate at about 125 percent of the Fund’s Assessing Reserve Adequacy (ARA) metric at end-2018.

uA01fig06

Exchange rate and Non-resident Tbill holdings

(EGP/$ and EGP bn)

Citation: IMF Staff Country Reports 2019, 311; 10.5089/9781513516622.002.A001

9. The CBE intends to gradually move to an interest rate-based monetary policy framework anchored to inflation in the medium term. The draft Banking Law (to be discussed in Parliament in October) defines price stability as the primary objective of monetary policy and strengthens the CBE’s governance, financial structure, operational and institutional autonomy, and the early intervention and resolution framework. To ensure a smooth transition, the CBE will continue to strengthen its analytical and operational capacity, further develop money markets to improve monetary transmission, and continue strengthening its communication strategy (LOI115). This includes regular updates on monetary policy objectives and decisions, and the central bank’s assessment of economic and financial developments. The balance in the government’s overdraft facility with the CBE has been brought below the statutory limit. The mission welcomed the authorities’ decision to issue overdrafts at market interest rates starting from July 1, 2019, but urged them to further reduce its use as it undermines the effectiveness of monetary policy. Staff encouraged the CBE to refrain from any new mortgage lending programs, which extend beyond the central bank’s mandate and undermine monetary policy efficiency and credibility.

10. The authorities have initiated a review of the financial position and future operations of the NIB. NIB maintains significant retail deposits in the form of investment certificates and has a large portfolio of SOE loans but is not subject to banking regulations and supervision. A committee comprising representatives of the CBE, the Ministry of Planning, Monitoring, and Administrative Reform, and the Ministry of Finance was created to strengthen NIB oversight and governance and tasked to develop a plan for reforming and improving its financial performance (LOI ¶11). As a first step, the committee hired an international auditor to perform a thorough evaluation of NIB’s assets and liabilities, which will inform a subsequent decision on NIB’s new financial structure, and its revised mandate and business model. Egypt’s banking system overall remains liquid, profitable, and generally well capitalized, and nonperforming loans are contained and well provisioned.

Egypt: Assessing External Competitiveness

Real appreciation. An unchanged nominal exchange rate in the context of high domestic inflation has resulted in sustained real appreciation over the past two years. Results under the External Balance Assessment indicated that the external position was broadly in line with fundamentals and desirable policy settings in 2018. However, the REER has continued to appreciate since then.

Improved external position. Egypt has experienced a significant reduction in external imbalances over the past three years, with the current account deficit declining from 6 percent of GDP in 2015/16 to 2.6 percent projected in 2018/19. This has been driven primarily by a strong recovery in tourism as security conditions have improved; a rise in remittances due to the liberalization of the foreign exchange market and high domestic interest rates; and a shift to net exports of oil and gas as domestic gas production increased. At the same time, there has been a large increase in capital inflows as improved macroeconomic conditions and attractive interest differentials have attracted portfolio investors

uA01fig07

Effective Exchange Rates

(Jan 2016= 100)

Citation: IMF Staff Country Reports 2019, 311; 10.5089/9781513516622.002.A001

Non-price factors. Non-oil and gas exports remain relatively small at 6 percent of GDP, with only a modest improvement following the large depreciation of the exchange rate in 2016. This reflects in large part the legacy of inward-oriented economic policies and a prominent role of the state that has constrained efficient resource allocation and weakened the ability of Egyptian firms to compete in external markets. Improved external competitiveness will require a focus on deepening structural reforms to improve non-price competitiveness and re-orient Egypt toward private sector and export-led growth.

Fiscal Policy

11. Egypt is on track to achieve a primary surplus of 2 percent of GDP in 2018/19, in line with the target under the program. This will complete the planned three-year cumulative fiscal consolidation of 5.5 percent of GDP during the program. This year’s fiscal consolidation has been underpinned by a further reduction in expenditure on fuel subsidies and continued progress on consolidation of the public sector wage bill. The overall deficit is projected to narrow from 9.7 percent of GDP in 2017/18 to 8.2 percent in 2018/19, with general government gross debt projected to decline from 93 percent to 85 percent of GDP at end-June.

12. The 2019/20 budget passed in June targets a primary surplus of 2 percent of GDP (prior action). This will help anchor a further reduction in public debt, which remains the key medium-term fiscal objective. The authorities also plan to increase issuance of longer-term debt instruments to extend duration and improve the maturity profile of public debt. The budget incorporates an increase in the public sector wage grid and a onetime wage bonus in addition to the annual statutory public wage increase to help mitigate the impact of cost of living increases on public employees. The budget also increases the allocation to expand social protection under the Takaful and Karama programs. The authorities are also preparing a pension reform based on a recent actuarial assessment of the current system to ensure its financial viability, including an overhaul of the organizational structure of public pension funds to provide more effective administration and investment of their assets.

13. The reform of fuel subsidies has been completed with the increase of prices to full cost recovery for most products1 and the introduction of indexation. Retail prices for a range of products were increased by an average of 22 percent on July 5, with the fuel subsidy bill projected to fall to 0.8 percent of GDP in 2019/20 from 1.6 percent in 2018/19 (LOI ¶12). This compares to 3.3 percent in 2016/17. The indexation mechanism is intended to maintain prices at cost-recovery levels and safeguard the budget from unexpected changes in the exchange rate and global oil prices. Price adjustments will take place quarterly, with a cap of 10 percent as a smoothing mechanism. The authorities are also implementing a plan to strengthen corporate governance and optimize operating costs of the Egyptian General Petroleum Corporation (EGPC). As part of the plan, EGPC has cleared an additional $150 million of its outstanding arrears, which at end-December 2018 amounted to $1 billion. The authorities have also continued to implement electricity subsidy reform, with an increase in electricity tariffs of 15 percent at the beginning of July.2

14. The authorities are progressing on development of a Medium-Term Revenue Strategy (MTRS) to strengthen revenue mobilization and create space to increase social spending. Strengthening social protection has been a priority since the start of the reform program, and improving revenue mobilization is essential to further increase space for critical spending in health, education, and infrastructure and to continue building a modern and efficient social safety net. This government-led initiative is supported by IMF technical assistance and covers both tax policy and tax administration. The authorities intend to publish the MTRS by end-2019 (LOI ¶8).

15. The authorities plan to broaden the coverage of the report on state-owned enterprises to incorporate entities that were omitted in the initial version and to publish it annually. Based on these reports, they intend to develop a comprehensive reform strategy to streamline and modernize the legal, governance, and operational frameworks for SOEs, and strengthen their financial performance and oversight (LOI ¶10). The PFM law will be also modernized to revamp the entire budget process, including the introduction of a medium-term budget framework.

Structural Reforms

16. The authorities remain committed to advancing structural reforms to attract investment, raise productivity and competitiveness, and create jobs. Achieving strong medium-term growth will require sustained reform implementation beyond the program period to create the enabling conditions for private-sector and export-led inclusive growth. Exports outside the oil and gas sector have strengthened modestly following the depreciation in 2016 but remain low compared to other emerging market peers at around 6 percent of GDP. To utilize Egypt’s full potential, it is critical to improve the efficiency of resource allocation by strengthening competition, improving governance, limiting the scope for corruption, and reducing the role of the state.

17. Improving the efficiency of industrial land allocation through a market-based mechanism is critical for private sector development. New guidelines for industrial land allocation were approved in March to replace the first-come, first-served process used previously with a scoring system based on multiple criteria, including an assessment of business plans, experience, technological expertise, and employment and export potential (LOI ¶14). These guidelines are more complex than before and leave significant discretion in picking successful applicants, with most land prices still set administratively. They do not include an open, transparent and competitive bidding process as specified under the structural benchmark, which was one of the key objectives of the reform. While the authorities believe that the new mechanism is in line with international best practices, the mission noted that technical capacity limitations of domestic institutions would risk large backlogs and create new opportunities for rent seeking. The mission advised the authorities to revisit the guidelines and introduce a market-based land allocation mechanism based on open, transparent, and competitive bidding.

18. The reform of public procurement has been delayed. The new Government Procurement Act was signed into law in October, aligning procurement procedures with international best practices based on the core principles of transparency, fairness, open competition, and sound procedural management (LOI ¶14). The online portal for public procurement also became operational in mid-2019. The authorities have prepared a draft executive regulation for implementation of the new act, which will standardize government procurement procedures across all government entities covered by the law to ensure a transparent and competitive bidding process, and ensure that they apply consistently and uniformly to all government entities’ tenders (including budget entities, local authorities, and economic authorities). However, final approval of the regulation was delayed beyond the end-May date specified in the benchmark in order to include input from the World Bank. The approval of a plan to ensure that SOE’s procurement rules are consistent with the new law missed the deadline in the structural benchmark, but was completed with a slight delay to allow additional consultation on best practices in this area with the OECD.

19. The new draft law on the Egyptian Competition Authority (ECA) is in Parliament. The new law aims to strengthen the institutional, financial, and operational independence of the ECA, while enhancing its accountability and transparency (LOI ¶14). The draft law was submitted to Parliament in January 2019 and is expected to be approved during the next Parliamentary session. Staff emphasized the importance of passing the amendments to strengthen independence and defining powers of the agency.

20. Reforms continue to progress in a number of other areas, albeit with some delays. The program to divest minority shares in select SOEs has moved more slowly than planned, with the sale of stakes in only one company completed in 2018/19, but the authorities remain committed to their plan to divest stakes in at least 23 SOEs, with an additional four to six planned for 2019/20 (LOI ¶14). A new SME law was sent to Parliament in April, which would introduce a reduced flat tax rate on annual turnover to spur small business development and encourage the formalization of the private sector. The authorities have also launched the Egypt Tourism Reform Program (ETRP), which seeks to build on the recent upturn in tourism by increasing value-added in the sector to help accelerate progress toward the Sustainable Development Goals.

Financing and Program Issues

21. Egypt’s capacity to repay is adequate, but risks remain. Fund credit outstanding as a share of gross reserves is projected to peak at 27.5 percent by the end of this year, and debt service to the Fund as a ratio of exports of goods and services would reach 0.9 percent in 2020/21. External risks remain in the context of volatile global financial conditions, but Egypt remains well positioned to manage any increase in capital outflows.3 The current account deficit is projected to be slightly larger over the medium-term than at the time of the fourth review, reflecting more moderate growth in remittances, but would remain around 2 percent of GDP. In addition, the CBE’s reserve position is strong, the fiscal balance is expected to continue to improve, and the memorandum of understanding between the CBE and MoF on respective responsibilities for servicing Fund credit should ensure uninterrupted repayments.

22. The CBE continues to implement the 2017 safeguards recommendations, albeit with some delay. The CBE is initiating an upgrade of its Core Banking System, which will further facilitate revamping its financial reporting practices and alignment with Egyptian Accounting Standards and the IFRS, in particular with request to improved disclosures. The CBE has eliminated its FX deposits in foreign branches of domestic banks. The draft banking law, which strengthens independence and governance of the CBE, will be discussed by Parliament in October.

Staff Appraisal

23. Egypt’s macroeconomic situation has improved markedly since the start of the program. Critical macroeconomic reforms implemented by the authorities to correct significant external and domestic imbalances have been successful in achieving macroeconomic stabilization. Growth has accelerated; external and fiscal deficits have narrowed; international reserves have increased; and public debt has been put on a firmly downward trajectory. Unemployment has declined to its lowest level in over a decade, while social protection was strengthened to ease the burden of adjustment on the poor.

24. The near-term outlook remains favorable, but sustained reform implementation will be essential to sustain strong growth and manage external risks. A more inclusive private sector and export-led growth model is needed to absorb the significant new entrants to the labor force expected over the next five years. Strong medium-term growth projected in the baseline assumes sustained implementation of structural reforms to support private investment and foster broad-based growth beyond tourism and energy. A loss of reform momentum would reduce growth and potential output and put pressure on unemployment, given the fast-increasing labor force. In addition, while the authorities’ sound policies have strengthened Egypt’s resilience to external shocks, the still-high level of public debt leaves Egypt vulnerable to a shift in global financial conditions or a weakening of investor confidence in the context of rising uncertainty over the global outlook. This highlights the importance of sustaining sound policies and accelerating structural reforms to raise productivity and further strengthen policy buffers, including by enhancing exchange rate flexibility and reducing public debt.

25. Exchange rate flexibility and a prudent monetary stance are critical to preserve macroeconomic stability. While core inflation appears to be relatively well anchored, staff supports the CBE’s intention to maintain a restrictive monetary policy stance to ensure that possible second-round effects from fuel price increases are contained. Volatility in food prices continues to present a challenge to bringing inflation down to single digits. Exchange rate flexibility remains essential to preserve the gains in real competitiveness since 2016. The elimination of the repatriation mechanism and better enforcement of regulatory rules on open FX positions of banks has helped strengthen the responsiveness of the exchange rate to capital flows, as reflected in the currency appreciation since the beginning of the year. It will be important to ensure that the exchange rate also has flexibility to move downward should portfolio flows reverse.

26. This year’s budget is on track to achieve a primary surplus of 2 percent of GDP, which would complete the programmed fiscal adjustment of 5.5 percent of GDP in three years. The fiscal consolidation has helped anchor a decline in general government debt from a peak of 103 percent of GDP at end-2016/17 to 85 percent of GDP estimated at the end of 2018/19. General government debt remains high, however, and interest expenditures remain a heavy burden on public finances. The 2019/20 budget targets a primary surplus of 2 percent of GDP; it will be important to maintain primary surpluses at this level over the medium term to keep public debt on a downward trajectory. At the same time, improving revenue mobilization is essential to create space for spending in health and education, and to further expand social protection. To this end, the authorities’ plan to complete the design of a Medium-Term Revenue Strategy by end-2019 to review tax policy and modernize tax administration is welcome.

27. The completion of fuel subsidy reform is a significant achievement and will help safeguard fiscal space for high priority social spending. This will encourage energy efficiency, attract investment in more labor-intensive industries, and free up fiscal space for high-priority expenditures, including targeted cash transfers to poor households. The automatic fuel price indexation mechanism is critical to safeguard the budget against the re-emergence of subsidies from future changes in fuel prices, and to signal the continued commitment to fiscal discipline needed to reduce public debt.

28. The authorities have launched an operational and financial review of NIB. The move to improve oversight and engage an international auditor to perform a thorough financial assessment of the bank is a welcome first step. This will need to be followed by the preparation of a comprehensive restructuring plan, including a decision on a new financial structure, revised mandate, and business model.

29. The favorable near-term outlook provides an opportune juncture to advance structural reforms before cyclical conditions become more challenging. The initiation of reforms of competition policy, the public procurement system, industrial land allocation, and SOE governance is an important first step, but greater efforts will be needed to ensure that statutory changes achieve the desired results in practice. Progress on reform implementation has been uneven with delays in several areas, while the new guidelines for industrial land allocation remain excessively complex and not market based. The transition to a transparent market-based economy will require further broadening and deepening of reforms and their sustained implementation beyond the current program, particularly regarding long-standing problems of weak governance, rent seeking, vulnerabilities to corruption, and the heavy presence of the state in the economy.

30. Staff supports the authorities’ request for the completion of the fifth review under the Extended Arrangement. It is proposed that Article IV consultations with Egypt revert to the 12-month cycle. The next Article IV consultation is expected to be held in early 2020.

Figure 1.
Figure 1.

Egypt: Real and External Sector Developments

Citation: IMF Staff Country Reports 2019, 311; 10.5089/9781513516622.002.A001

Sources: Egyptian authorities; IMF, International Financial Statistics; Bloomberg; Markit Economics; and IMF staff calculations and projections.
Figure 2.
Figure 2.

Egypt: Fiscal Sector Developments

Citation: IMF Staff Country Reports 2019, 311; 10.5089/9781513516622.002.A001

Sources: Egyptian authorities; IMF, International Financial Statistics; Bloomberg; and IMF staff calculations and projections.
Figure 3.
Figure 3.

Egypt: Monetary Sector Developments

Citation: IMF Staff Country Reports 2019, 311; 10.5089/9781513516622.002.A001

Sources: Egyptian authorities; International Financial Statistics; Bloomberg; and IMF staff calculations and projections.
Table 1.

Egypt: Selected Macroeconomic Indicators, 2016/17–2020/21 1/

article image
Sources: Egyptian authorities; and IMF staff estimates and projections.

Fiscal year ends June 30.

General government includes the budget sector, the National Investment Bank (NIB), and social insurance funds.

Budget sector comprises central government, local governments, and some public corporations.

The primary balance for 2017/18 excludes the recapitalization of the CBE for EGP 6 billion.

Includes multilateral and bilateral public sector borrowing, private borrowing and prospective financing.

Debt at remaining maturity and stock of foreign holding of T-bills.

Table 2a.

Egypt: Balance of Payments, 2016/17–2023/24

(In billions of U.S. dollars, unless otherwise indicated)

article image
Sources: Central Bank of Egypt; and IMF staff estimates and projections.

EGPC arrears.

Table 2b.

Egypt: Balance of Payments, 2016/17–2023/24

(In percent of GDP, unless otherwise indicated)

article image
Sources: Central Bank of Egypt; and IMF staff estimates and projections.

EGPC arrears.

Table 3a.

Egypt: Budget Sector Operations, 2016/17–2023/24 1/

(In billions of Egyptian pounds, unless otherwise indicated)

article image
Sources: Ministry of Finance; and IMF staff estimates.

Budget sector comprises central and local governments, and some public corporations. Fiscal year ends June 30. Cash basis.

Food subsidies include subsidies paid to farmers.

The primary balance for 2017/18 excludes the recapitalization of the CBE for EGP 6 billion.

Oil revenue minus fuel subsidies. Oil revenue includes corporate income tax receipts from EGPC and foreign partners, royalties, extraordinary payments, excise taxes on petrol products, and dividends collected from EGPC.

Includes debt issued to the SIF for settlement of past arrears and implied future liabilities.

Table 3b.

Egypt: Budget Sector Operations, 2016/17–2023/24 1/

(In percent of GDP)

article image
Sources: Ministry of Finance; and IMF staff estimates.

Budget sector comprises central and local governments, and some public corporations. Fiscal year ends June 30. Cash basis.

Food subsidies include subsidies paid to farmers.

The primary balance for 2017/18 excludes the recapitalization of the CBE for 6 billion Egyptian pounds.

Oil revenue minus fuel subsidies. Oil revenue includes corporate income tax receipts from EGPC and foreign partners, royalties, extraordinary payments, excise taxes on petrol products, and dividends collected from EGPC.

Includes debt issued to the SIF for settlement of past arrears and implied future liabilities.

Table 4.

Egypt: General Government Operations, 2016/17–2023/24 1/

article image
Sources: Ministry of Finance; and IMF staff estimates.

General government includes budget sector, National Investment Bank (NIB) and Social Insurance Funds (SIF). Fiscal year ends June 30. Cash basis.

Table 5.

Egypt: Central Bank Accounts, 2016/17–2023/24

article image
Sources: Central Bank of Egypt; and IMF staff estimates and projections.
Table 6.

Egypt: Monetary Survey, 2016/17–2023/24

article image
Sources: Central Bank of Egypt; and IMF staff estimates and projections.
Table 7a.

Egypt: Summary of National Accounts, 2016/17–2023/24

(In percent, unless otherwise indicated)

article image
Sources: Egyptian authorities; and IMF staff estimates and projections.

Contribution to growth.

Components do not sum up to total due to statistical discrepancies associated with changes of base years.

Table 7b.

Egypt: Summary of National Accounts, 2016/17–2023/24

(In percent of GDP)

article image
Sources: Egyptian authorities; and IMF staff estimates and projections.
Table 8.

Egypt: Medium-Term Macroeconomic Framework, 2016/17–2023/24

(In percent of GDP, unless otherwise indicated)

article image
Sources: Egyptian authorities; and IMF staff estimates and projections.
Table 9.

Egypt: Financial Soundness Indicators of the Banking System, 2010–2018

(end-June, percent)

article image
Source: Central Bank of Egypt.
Table 10.

Egypt: Capacity to Repay the Fund, 2016/17–2023/24 1/ 2/

article image
Source: IMF staff calculations.

Fiscal year starts on July 1 and ends on June 30.

Assumes repurchases are made on obligations schedule.

Debt service includes interest on the entire debt stock and amortization of medium- and long-term debt.

Quota changed from 943.7 to 2037.1 millions SDRs effective as of February 2016.

Table 11.

Egypt: External Financing Requirements and Sources, 2016/17–2023/24

(In billions of dollars, unless otherwise indicated)

article image
Sources: Central Bank of Egypt; and IMF staff estimates and projections.
Table 12.

Egypt: Schedule of Purchases Under the Extended Arrangement

article image
Source: IMF staff calculations.

The Executive Board meeting for the First review took place on July 13, 2017.

The Executive Board meeting for the Second review took place on December 20, 2017.

The Executive Board meeting for the Third review took place on June 29, 2018.

The Executive Board meeting for the Fourth review took place on February 4, 2019.

Annex I. Public/External Debt Sustainability Analysis

Figure 1.
Figure 1.

Egypt: Public Sector Debt Sustainability Analysis (DSA) – Baseline Scenario

(in percent of GDP unless otherwise indicated)

Citation: IMF Staff Country Reports 2019, 311; 10.5089/9781513516622.002.A001

Source: IMF staff.1/ Public sector is defined as general government.2/ Based on available data.3/ EMBIG.4/ Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.5/ Derived as [(r -π(1 +g) – g + ae(1 +r)]/(1 +g+π+gπ)) times previous period debt ratio, with r = interest rate;π = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).6/ The real interest rate contribution is derived from the numerator in footnote 5 as r – π (1 +g) and the real growth contribution as -g.7/ The exchange rate contribution is derived from the numerator in footnote 5 as ae(1 +r).8/ Includes asset changes and interest revenues (if any). For projections, includes exchange rate changes during the projection period.9/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.
Figure 2.
Figure 2.

Egypt: Public DSA – Composition of Public Debt and Alternative Scenarios

Citation: IMF Staff Country Reports 2019, 311; 10.5089/9781513516622.002.A001

Source: IMF staff.
Figure 3.
Figure 3.

Egypt: Public DSA – Realism of Baseline Assumptions

Citation: IMF Staff Country Reports 2019, 311; 10.5089/9781513516622.002.A001

Source: IMF Staff.1/ Plotted distribution includes program countries, percentile rank refers to all countries.2/ Projections made in the spring WEO vintage of the preceding year.3/ Not applicable for Egypt as it meets neither the positive output gap criterion nor the private credit growth criterion.4/ Data cover annual obervations from 1990 to 2011 for advanced and emerging economies with debt greater than 60 percent of GDP. Percent of sample on vertical axis.□
Figure 4.
Figure 4.

Egypt: Public DSA Risk Assessment

Citation: IMF Staff Country Reports 2019, 311; 10.5089/9781513516622.002.A001

Source: IMF staff.1/ The cell is highlighted in green if debt burden benchmark of 70% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant2/ The cell is highlighted in green if gross financing needs benchmark of 1 5% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant3/ The cell is highlighted in green if country value is less than the lower risk-assessment benchmark, red if country value exceeds the upper risk-assessment benchmark, yellow if country value is between the lower and upper risk-assessment benchmarks. If data are unavailable or indicator is not relevant, cell is white. Lower and upper risk-assessment benchmarks are: 200 and 600 basis points for bond spreads; 5 and 15 percent of GDP for external financing requirement 0.5 and 1 percent for change in the share of short-term debt 15 and 45 percent for the public debt held by non-residents; and 20 and 60 percent for the share of foreign-currency denominated debt4/ EMBIG, an average over the last 3 months, 05-Jan-19 through 05-Apr-19.5/ External financing requirement is defined as the sum of current account deficit, amortization of medium and long-term total external debt, and short-term total external debt at the end of previous period.
Figure 5.
Figure 5.

Egypt: Public DSA – Stress Tests

Citation: IMF Staff Country Reports 2019, 311; 10.5089/9781513516622.002.A001

Source: IMF staff.
Table 1.

Egypt: External Debt Sustainability Framework, 2014–2024

(In percent of GDP, unless otherwise indicated)

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Derived as [r – g – r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Figure 6.
Figure 6.

Egypt: Ex ternal Debt Sustainability: Bound Tests 1/ 2/

(External debt in percent of GDP)

Citation: IMF Staff Country Reports 2019, 311; 10.5089/9781513516622.002.A001

Sources: International Monetary Fund, Country desk data, and staff estimates.1/ Shaded areas represent actual data. Individual shocks a re permanent one standard deviation shocks. Figures in the boxes represent average projectionsfor the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.2/ For historical scenarios, the historical averages a re calculated overtheten-year period, and the information is used to project debt dynamics five years a head.3/ Permanent one standard deviation shocks applied to nominal interest rate, growth rate, and current account balance.4/ One-time real exchange rate depreciation of 30 percent occurs in 2018/19.

Appendix I. Letter of Intent

July 10, 2019

Ms. Christine Lagarde Managing Director International Monetary Fund Washington, D.C.

Dear Ms. Lagarde:

Our comprehensive economic reform program, initiated in November 2016 and supported by the IMF’s Extended Fund Facility arrangement (EFF), has been successful in achieving its objectives. We have managed to resolve severe external and domestic imbalances faced by Egypt before the start of the program and restored macroeconomic stability while protecting the most vulnerable. We have also embarked on an ambitious structural reform agenda aimed at modernizing fiscal and monetary policy frameworks, strengthening the energy sector, improving the business climate, strengthening governance and reducing the role of the state in the economy. These measures are essential building blocks to improve the welfare of all Egyptians by creating a supportive environment for private sector-driven inclusive growth and job creation. As the EFF arrangement draws to its end, our reforms will continue and the achievements realized so far will form a solid foundation for our policies and reforms over the medium term.

The program has remained on track. We request the completion of the fifth review of the EFF arrangement and the disbursement of the sixth and the final tranche in the amount equivalent to SDR 1,432.76 million (70.3 percent of quota and about $2 billion). As before, IMF resources will be used for budget support and will be maintained in government accounts at the CBE. We consent to the publication of this letter, Tables 1 and 2, the TMU and the related staff report.

Table 1.

Egypt: Quantitative Performance Criteria (PC) and Indicative Targets (IT) Under the EFF Arrangement June 2018–June 2019

(In billions of Egyptian pounds unless otherwise indicated)

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Note: For precise definitions of the aggregates shown and details of the adjustment clauses, see the Technical Memorandum of Understanding (TMU).

Cumulative flow from the beginning of the fiscal year (July 1).

For FY2017/18, cumulative flows are from November 1, 2017. For FY2018/19, cumulative flows are from July 1, 2018.

Table 2.

Egypt: Prior Actions and Structural Benchmarks 1/

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The references to the MEFP reflect the MEFP from the fourth review.

A. Recent Economic Development and Program Performance

1. The Egyptian economy has continued to perform well. Real GDP grew by 5.4 percent in the first half of 2018/19 led by natural gas, tourism, and construction, while unemployment declined to a record low of 8.9 percent in December 2018. CPI inflation picked up slightly from 12 percent in December 2018 to 14 percent in May, while core inflation (excluding volatile food items and regulated prices) continued to decline to record 7.8 percent in May. The current account deficit is expected to remain unchanged at 2.4 percent of GDP in 2018/19, with a decline in imported natural gas offsetting a larger non-oil trade deficit. The budget execution is in line with our projections, and gross general government debt is projected to decline from 93 percent of GDP in 2017/18 to 85 percent of GDP by end-June. Portfolio outflows in the second half of 2018 have reversed early this year and the pound has appreciated by about 7 percent.

2. Performance under the program was favorable. All end-March 2018 performance criteria were met (Table 1). With regards to structural benchmarks: fuel prices were increased to full cost-recovery and fuel price indexation was implemented as planned; the FX deposits of the CBE in foreign branches of the Egyptian banks were eliminated by June 15, 2019; development of the NIB plan to review its financial position and future operations is pending a detailed asset review by an international auditor, but meanwhile we have strengthened NIB oversight and governance; the new guidelines for industrial land allocation were finalized and approved by a Prime Ministerial decree as of end March 2019, but allowed only industrial land in high demand and commercial land at industrial zones to be allocated via auctions (end-March SB); the executive regulations for the new Government Procurement Law have been delayed to accommodate further comments received from the World Bank, while the reform plan to make the SOE procurement system consistent with the new Government procurement rules was implemented early in July . The e-Procurement portal was launched in May as planned; minority shares were divested through IPOs in one state-owned enterprise instead of four due to market conditions; and the CBE has not granted exemptions to banks from the NoP limits (continuous SB). The separation of the regulatory authority for public transportation from the Ministry of Transportation has been delayed due to organizational changes at the Ministry of Transport, and the end-March target date was not met.

B. Economic Policies

Monetary, Exchange Rate and Financial Sector Policies

3. Monetary policy will remain anchored to the CBE’s medium-term objective of guiding inflation down to single digits. The CBE lowered its policy rate by 100 basis points in February to reflect softer demand-side pressures, but real interest rates still remain significantly positive. The monetary policy stance is expected to remain restrictive to contain possible second-round effects. If demand pressures remain contained, the CBE may consider further rate cuts. However, should inflation pressures reemerge, it will stand ready to tighten monetary policy as needed. Simultaneously, the government is developing a series of measures to resolve structural impediments that cause supply shocks to inflation, notably to food prices. These measures include new storage facilities, especially in remote areas, improvements in transportation infrastructure, and the creation of agricultural hubs. Liquidity management has relied primarily on indirect policy instruments such as deposit auctions. The balances in the overdraft account amounted to EGP 2.9 billion at end-March, which is below the statutory limit of EGP 66 billion (PC). We have modified the Memorandum of Understanding between the CBE and MoF to indicate that overdrafts will be issued at market rates starting from July 1, 2019. The CBE social housing program has been discontinued as it has reached the approved limit of EGP20 billion, while CBE’s subsidized loans for SMEs will be gradually phased out once the system-wide cumulative flow limits are exhausted. and its lending to banks will be done only for monetary policy (short-term liquidity management) and, if needed, emergency liquidity assistance purposes.

4. The pound strengthened by 7 percent against the US dollar as portfolio inflows resumed. The exchange rate will continue to be market-determined in open and free trading, which is critical as a cushion against external shocks. The CBE will continue not to intervene in the interbank FX market, but will stand ready to make FX sales or purchases in exceptional cases, when unusually large short-term flows pose stability risks to the FX market. Our gross international reserves have reached $44 billion or 140 percent of the Fund’s ARA metric for floating regimes in March 2019, which is adequate for macroeconomic stability and market confidence, and we intend to maintain reserves within the Fund’s adequacy range.

5. In the medium term, we intend to adopt a forward-looking and interest rate-based monetary policy framework with inflation as the nominal anchor. The new banking law, which was expected to be discussed in Parliament in June, but will now be discussed in the forthcoming October session, was an important step in this direction as it defines price stability as the primary objective of monetary policy and strengthens the CBE’s governance, financial structure, operational and institutional autonomy, and the early intervention and resolution framework. To ensure a smooth transition, the CBE will continue to strengthen its analytical and liquidity management capacity, further develop money markets to improve monetary transmission, and continue strengthening its communications strategy. Meanwhile, it will continue to regularly publish reports, which inform markets about the objectives of monetary policy, the central banks’ assessment of economic developments, the rationale underlying policy decisions and financial stability. We are revamping our financial reporting practices to comply with the Egyptian Accounting Standards/IFRS for the 2019 audit of CBE accounts.

6. Egypt’s banking system remains liquid, profitable and well capitalized. Our regulatory and policy framework strives to entrench public confidence in the banking system so that it plays a key role in financial intermediation and efficiently channels savings into productive investments. We will monitor the developments in the sector to ensure that financial surveillance, lending policies, and governance practices are adequate, will continue to strengthen banking supervision and the regulatory framework, and will implement new emergency liquidity assistance and bank resolution frameworks, in line with international best practices. Commercial banks reduced their open positions within the regulatory limits by end-May, and we will continue to ensure that all banks are in strict compliance with the NOP limits with no exemptions granted and the violators sanctioned as prescribed by the regulations. We will also start publishing quarterly system-wide NOP figures along with other FSIs, starting with the end-June 2019 data.

Fiscal Policy and Public Finance Management

7. Our budget is on track to reach a primary surplus of 2 percent of GDP in 2018/19. This will reduce gross general government debt to 85 percent of GDP by end-June and complete the programmed 3-year consolidation of the primary balance by 5.5 percent of GDP. The overall deficit of the budget sector is expected to reach 8.2 percent of GDP this fiscal year, beating the budget target of 8.4 percent of GDP. The 2019/20 budget, which was sent to the Parliament and passed in June, also targets a primary surplus of 2 percent of GDP (prior action). We intend to maintain primary surpluses at that level in the medium term to reduce gross general government debt to 72 percent of GDP by 2022/23.

8. We will continue to develop and implement the Medium-Term Revenue Strategy (MTRS) to strengthen and modernize revenue mobilization. This is essential to create fiscal space for critical spending in health, education, and infrastructure as well as to continue building modern and efficient social safety nets to support inclusive growth while also keeping public debt on a firmly declining path. This government-led initiative is supported by IMF technical assistance and covers both tax policy and tax administration. We will revise tax policy and related legislation, modernize the Egyptian Tax Administration (ETA), strengthen capacity of the staff and upgrade the IT infrastructure. We intend to publish our MTRS before end of 2019.

9. We will continue to strengthen management of our public finances. Our fiscal strategy paper and the fiscal risks statement will be updated every year, and our comprehensive system to evaluate and decide on new state guarantees will continue to develop and improve. Our medium-term debt management strategy (MTDS) was approved by the Prime Minister and published in May 2019. It aims to ensure an optimal debt profile to allow financing of the budget on the most favorable terms.

10. We will continue to broaden the coverage of SOE report and publish it annually. Based on these reports, we will work on developing a comprehensive reform strategy to streamline and modernize the legal, governance and operational frameworks for SOEs, and strengthen their financial performance and oversight. We will also work on improving financial and operational performance of a number of economic authorities. We are also developing a comprehensive reform plan for the Social Insurance Funds and the pension system to ensure that they are financially sustainable and can provide adequate and equitable pensions. The PFM law will be modernized to revamp the entire budget process and introduce a medium-term budget framework. We have also strengthened fiscal transparency to enhance access to information and increase public trust and confidence in government policies.

11. We are planning to review the financial position and future operations of the National Investment Bank (NIB), and restructure it as needed. NIB is performing some banking functions but is not subject to banking supervision which may lead to a build-up of vulnerabilities. A committee comprising representatives of the CBE, the Ministry of Planning, Monitoring and Administrative Reform and the Ministry of Finance was created and tasked to develop a plan for reforming and improving the financial performance of NIB. As a first step, the committee hired an international auditor to perform a thorough evaluation of NIB’s assets and liabilities, which will inform our subsequent decision on NIB’s new financial structure, its revised mandate and business model. Meanwhile, we will continue to monitor NIB’s banking activities.

Energy Sector Policies

12. We have completed our fuel subsidy reform plan. On July 5, we raised retail prices of all fuel types (excluding LPG and fuel oil used for electricity generation and bakeries) by 22 percent on average to reach full cost-recovery (prior action) and implemented on July 6th fuel price indexation for the same products (prior action). The first price adjustment in accordance with the indexation formula will take place within the following three months. The mechanism is intended to maintain prices at cost-recovery levels and safeguard the budget from unexpected changes in the exchange rate and global oil prices. Price adjustments will initially take place quarterly and will be capped at 10 percent as a smoothing mechanism. We are also implementing a plan to strengthen corporate governance and optimize operating costs of the EGPC. As part of the plan, EGPC further cleared USD 150 million of its outstanding arrears by end June 2019, which at end-December 2018 amounted to $1.043 billion. EGPC is committed to clear remaining outstanding arrears by end December 2019. In parallel, we continue with the electricity subsidy reform. We raised electricity tariffs by an average of 30 percent in July 2016, 40 percent in July 2017, and 36 percent in July 2018. These tariffs were further increased by 20 percent in July 2019.

13. Egypt has an enormous potential to become a major producer and a supplier of natural gas. The development of new fields in the Nile delta and Egypt’s territorial waters in the Mediterranean is projected to increase natural gas production to 7.7 bcf by end-2019, eliminating the need for imported natural gas and offering an opportunity to significantly increase export of gas to other countries. Moreover, ongoing offshore exploration suggests the presence of additional gas deposits, which could further boost Egypt’s gas potential. The increased domestic production of oil and gas along with more efficient electricity plants and higher reliance on renewables would bring down costs of various fuels.

Business Environment and Other Structural Reforms

14. Our objective is to unlock Egypt’s growth potential through market friendly reforms that will attract investments, raise productivity and competitiveness, support exports and create jobs. Towards this end, it is our ambition to significantly improve our rankings in the Doing Business and Global Competitiveness ratings. Egypt has already advanced by 8 and 15 positions, respectively, in the most recent publication of these reports. This reflects successfully implemented reforms such as the new investment law, the industrial licensing law, the companies’ law and the insolvency law, which were significant steps toward supporting private sector development. In addition, we established one stop shops that reduced time to start business from 16 to 11 days, strengthened borrowers’ and lenders’ rights with regard to collateral to facilitate and ease process of getting credit and extended VAT cash refunds to manufactures, when engaged in new capital investments. We have also made significant progress in the following key reform areas:

  • Industrial land allocation. Land is a critical input of production of goods and services and belongs to all Egyptians. Therefore, our reform of industrial land allocation is aimed to increase the availability of land to the private sector while ensuring that its benefits accrue to all citizens. To this end, we are developing a transparent, competitive, and market-based mechanism for industrial land allocation, which will be based on good governance practices. The new guidelines for industrial land allocation were approved by a Ministerial decree and published by end-March 2019, covering the following specific components: (a) permissible use of land by investors for broad industrial purposes with only limited restrictions; (b) clear eligibility criteria for bidders; (c) simplified and standardized document requirements; and (d) establishing an online platform and moving the entire process online, including all industrial land tender announcements, document and bidding submissions, and reporting auction results. According to the guidelines, for most allocation and uses, land will be allocated by a special committee based on a scoring system at predetermined fixed prices. Scores will be determined using multiple criteria such as feasibility of business plans, experience, expertise, technological capacity, and export and employment potentials. Land prices will be set a markup to the cost of land development and will be updated every 6 months. Industrial land at prime locations and at industrial zones with occupancy above 90 percent would be allocated through submitting both technical and price offers. All commercial land offered at industrial zones will be allocated via auctions.

  • Public procurement. To further enhance competition, optimize public spending and reduce rent seeking behavior, we are modifying our public procurement system. The objective is to ensure optimal allocation of public funds to procure best quality of goods, works and services at best prices (achieve value for money objectives). The new Government Procurement Act was approved by Parliament in July 2018 and signed into a law by the President on October 3, 2018. The new executive regulation was drafted to align procurement procedures with best international practices based on the core principles of transparency, fairness, open competition, and sound procedural management. These regulations will standardize government procurement rules, procedures and document requirements to encourage broad participation by the private sector, with a clear and robust framework for complaint resolution. The regulations will apply consistently and uniformly to all government entities’ tenders, including to procurement conducted by budget entities, local authorities and economic authorities. The executive regulation will be issued by the Minister of Finance in the coming weeks, once State Council legal review is finalized. We have also launched a single e-Procurement portal, which will gradually replace the paper-based procurement system to manage the entire procurement process (tender announcements, bidding, contract awarding, results reporting) online and where all relevant materials can be publicly accessible (SB). A reform plan to ensure that SOE’s procurement rules are consistent with best practices as highlighted in the new Government Procurement law (SB) was approved by the Prime Minister early in July 2019.

  • SMEs. To support SMEs and entrepreneurship and encourage the formalization of the private sector, we are working on modernizing the tax regime for SMEs, where small taxpayers would pay a reduced flat tax rate on annual recorded turnover levels. The new law was approved by the Cabinet and sent to the parliament for approval.

  • Competition. To support competition and a vibrant private sector, the Parliament is expected to pass the new ECA law prepared and sent by the Government during the coming Parliamentary session which would strengthen the institutional, financial, and operational independence of the Egyptian Competition Authority (ECA) and the enforcement of its decisions, while also enhancing its accountability through greater transparency. Specifically, the new law will (a) ensure that the ECA reports directly to the Prime Minister and is independent from any Minister to avoid conflict of interest; (b) provide the ECA with administrative fining powers, eliminate the representation of the government and increase the representation of the judiciary and the technical experts in the ECA’s board of directors; (c) issue implementing regulations to Article 15 (3) giving the ECA independence in hiring; (d) establish clear criteria for assessing the performance of the ECA and its chairperson; (e) strengthen the transparency of ECA’s operations by requiring it to (i) publish motivated decisions together with a non-confidential versions of the case files (including the investigation report and the parties submissions) and market studies, (ii) introduce a referencing system for all board decisions, and (iii) update its web site to include non-confidential versions of all previous and future cases and decisions with supporting analyses; the regulation clarifying procedures and conditions to receive exemptions from the prohibitions of the competition law; the guidelines to calculate fines and settlements; the guidelines to grant leniency on cartel cases; and the methodology to identify and remove barriers to competition in legislation, policies, or decrees which negatively affect competition.

  • Public sector transparency. To enhance transparency and accountability in the operations of government, improve the performance of public agencies, and reduce perceptions of corruption, we have initiated an open and transparent consultative process with key stakeholders on developing a Right to Information Law and its associated implementing regulations. Building on these consultations we will aim to pass such a law that conforms to international good practices.

  • Female employment. Reducing unemployment is a high priority, especially among women and youth for which both labor participation and employment statistics are particularly weak. In 2016/17 we budgeted and spent EGP250 million to improve the availability of public nurseries and other facilities to enhance the ability of women to actively seek jobs. In 2017/18 we spent EGP500 million on nurseries for 0 to 4-year old children and EGP600 million in 2018/19. We will also work to simplify rules and facilitate registration of home-based nurseries, to expand job opportunities for women and child care for working mothers. This aims to increase coverage of registered nurseries from current low level.

  • Public enterprises. The announced five-year program to attract private investment in public enterprises is part of the government’s agenda to reduce the role of the state in the economy and unleash potential of the private sector. The program is aimed at redeploying Egypt’s public assets to their most productive use by widening the ownership base, enhancing transparency and corporate governance, improving financial management, diversifying investment sources, and attracting new investments that can enhance market capitalization. This includes our plan to divest stakes in at least 23 SOEs over the next three years. In 2018/19 we have divested stakes in one SOE due to market conditions, which generated slightly more than EGP 1 billion. Stakes in another four to six companies are intended to be divested in 2019/2020.

C. Conclusion

15. After the successful completion of the EFF arrangement, we remain committed to preserving the reform momentum. We will continue to implement sound policies to further entrench macroeconomic stabilization and create additional fiscal space for investment in human and physical capital, while reducing debt and debt servicing as well as enhancing our social safety nets. We will also continue to deepen and broaden reforms to raise productivity and growth, and better integrate Egypt in global trade. Our ambition is to become a dynamic, well-diversified, and modern economy that acts as a regional trade and energy hub, and a regional leader in creating a market-friendly environment for attracting investment and job creation. We appreciate the fruitful partnership with the Fund over the past three years and look forward to continued close engagement and policy dialogue.

Sincerely yours,

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Attachment I. Technical Memorandum of Understanding

July 10, 2019

1. This memorandum sets out the understandings regarding the definitions of quantitative performance criteria, indicative targets, and the consultation clause, as well as the data reporting requirements for the extended arrangement under the Fund’s Extended Fund Facility (EFF) arrangement. The quantitative performance criteria and indicative targets are reported in Table 1 of the MEFP.

2. Program exchange rates are those prevailing on June 30, 2016.

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For all other foreign currencies, the current exchange rates to the U.S. dollar will be used. Monetary gold is valued at $1,258.65 per troy ounce.

The program exchange rate of the pound against the US dollar is 18.0251 (the actual exchange rate on May 31, 2017) for FY 2017/18 and 17.8572 (the actual exchange rate on May 31, 2018) for FY 2018/19.

A. Floor on Net International Reserves (PC)

3. Net international reserves (NIR) of the Central Bank of Egypt under the program are defined as the difference between foreign reserve assets and reserve-related liabilities. The program targets the change in NIR which is calculated as the cumulative change since the beginning of the fiscal year. NIR is monitored in US$ and for the program monitoring purposes assets and liabilities in currencies other than US$ are converted into dollar equivalents using the program exchange rates.

4. Foreign reserve assets are defined consistent with SDDS as readily available claims on nonresidents denominated in convertible foreign currencies, including the Chinese Yuan. They include the CBE holdings of monetary gold, SDRs, foreign currency cash, foreign currency securities, deposits abroad, the country’s reserve position at the Fund and other official reserve assets. Excluded from foreign reserve assets are any assets that are frozen, pledged, used as collateral, or otherwise encumbered, including but not limited to assets acquired through short-term currency swaps (with original maturity of less than 360 days), claims on residents, precious metals other than gold, assets in nonconvertible currencies, and illiquid assets. As of September 30, 2017, foreign reserve assets thus defined amounted to $35,879 million.

5. Foreign reserve-related liabilities are defined as comprising all short-term foreign exchange liabilities of the CBE to residents and nonresidents with original maturity of less than 360 days, including government’s foreign currency deposits with original maturity of less than 360 days, banks’ required reserves in foreign currency, and all credit outstanding from the Fund, which is on the balance sheet of the CBE. As of September 30, 2017, foreign reserve-related liabilities thus defined amounted to $8,431 million.

6. Adjustors. The NIR floor will be adjusted up (down) by the full amount of the cumulative excess (shortfalls) in program disbursements (as defined in paragraph 7) relative to the projections shown under the memo items in Table 1. The NIR floor will also be adjusted up by the full amount of the cumulative gross foreign reserve assets acquired through the repatriation mechanism relative to the projections shown under the memo items in Table 1.

7. Program disbursements are defined as external disbursements of loans (including IMF disbursements), grants and deposits for the budget support purposes, foreign reserve asset creating loans and deposits to the CBE with the original maturity of more than 360 days, and rollovers by more than 360 days of existing foreign loans and foreign reserve-related liabilities, in foreign currency, from official multilateral creditors, official bilateral creditors, and private creditors, including external bond placements. Program disbursements also include net issuance of government T-bills in foreign currency. Program disbursements exclude project loans and grants.

B. Ceiling on Average Reserve Money (IT)

8. Reserve money (RM) is defined as the sum of currency in circulation outside the CBE (includes cash in vaults), balances on commercial banks’ overnight deposits, and banks’ correspondent accounts (includes required reserves in local currency at the CBE). Reserve money excludes balances in deposit auctions and 7-day deposits at the CBE. For each semester, average reserve money is calculated from daily balance sheets of the CBE as the average for the last month of the semester. For December 2016, average reserve money thus defined amounted to EGP541.47 billion.

9. Adjustor. In the event of a change in reserve requirement ratio (rr) in local currency, the reserve money ceiling will be adjusted according to the formula:

Revised RM ceiling  =  Program RM ceiling  + banks ' correspondent accounts in localcurrency  ×   ( new rr / old rr  −  1 )

The reserve money targets for June 2018 and December 2018 are based on the following assumptions for the banks’ corresponding accounts:

June 2018: EGP182 billion

December 2018: EGP 317 billion

C. Ceiling on Net Domestic Assets of the CBE (PC)

10. Net domestic assets (NDA) of the CBE under the program are defined as the sum of net credit of the government, net credit to public economic authorities, credit to banks, and open market operations, excluding overnight deposits of commercial banks at the CBE and foreign currency components such as loans and deposits of the government, public economic authorities and banks. As of December 29, 2016, NDA of the CBE thus defined amounted to EGP573.76 billion. The program targets the cumulative change in NDA since the beginning of the fiscal year.

Adjustors.

  • 1) NDA targets will be adjusted down (up) by the full amount of the cumulative excess (shortfall) relative to the baseline projections shown under the memo items in Table 1 in external budget support loans and grants, in U.S. dollars, from official multilateral creditors, official bilateral creditors, private creditors, and external bond placements. Project loans and grants are excluded. The U.S. dollar amounts will be converted in Egyptian pounds using the program EGP/$ exchange rates.

  • 2) In the event of a change in reserve requirement ratio (rr) in local currency, the NDA ceiling will be adjusted according to the formula:
    Revised NDA ceiling = Program NDA ceiling + banks' correspondent accounts inlocal currency × (new rr/old rr −1)

The assumptions about banks’ correspondent accounts are the same as in ¶9.

D. Floor on Primary Fiscal Balance of the Budget Sector (PC)

11. The general government comprises the budget sector, the Social Insurance Funds and the National Investment Bank (NIB). The budget sector comprises the central government (administration), the governorates (local administration) and public service authorities, including the General Authority for Government Services, other regulatory authorities and supervisory agencies, funds, universities and hospitals.

12. The primary balance of the budget sector under the program is defined as the overall balance plus total interest payments of the budget sector and any capital injection in the CBE. The overall balance is measured as total revenue minus total expenditure and net acquisition of financial assets. These variables are measured on a cumulative basis from the beginning of the fiscal year. For the fiscal year 2016/17 the primary balance of the budget sector was EGP-63 billion.

13. Off-budget funds. The authorities will inform IMF staff of the creation of any new off-budgetary funds or programs immediately. This includes any new funds, or other special budgetary and extra-budgetary programs that may be created during the program period to carry out operations of a fiscal nature as defined in the IMF’s Manual on Government Finance Statistics 2001.

14. Adjustor. The target for the primary balance of the budget sector will be adjusted up (down) by the full amount of the shortfall (excess) in the disbursement of external project loans, i.e., the disbursement shortfalls will reduce primary deficits and excesses will increase them. The U.S. dollar amounts will be converted into Egyptian pounds using the program EGP/$ exchange.

E. Tax Revenue (IT)

15. Tax revenue includes personal income tax, corporate income tax, GST/VAT, excises, international trade taxes, and other taxes.

F. Fuel Subsidies (PC)

16. Fuel subsidies are defined as total amount of subsidies paid by the budget sector for gasoline, diesel, kerosene, LPG and fuel oil. These subsidies are measured in domestic currency on a cumulative basis from the beginning of the fiscal year.

G. Government overdraft at the CBE (PC)

17. Government overdraft at the CBE is defined as the balance on the government’s overdraft account at the CBE minus government’s foreign currency deposits at the CBE. As of December 31, 2018, the government overdraft at the CBE amounted to EGP 21.2 billion.

H. EGPC Arrears (IT)

18. EGPC arrears. This ceiling will apply to accumulation of EGPC arrears to foreign creditors (international oil companies) on a net basis, reflecting the common industry practice of attributing payments to the most overdue receivables. EGPC arrears will be measured in $. As of December 31, 2018, the stock of EGPC arrears amounted to $1.0 billion.

I. Debt of the Budget Sector (IT)

19. Debt of the budget sector is defined as the outstanding stock of debt issued by the budget sector. The U.S. dollar amounts will be converted in Egyptian pounds using the program EGP/$ exchange rates. The program target is defined as a cumulative change in debt of the budget sector from the beginning of the fiscal year.

J. Continuous Performance Criteria

20. Non-accumulation of external debt payments (principal and interest) arrears by the general government (as defined in paragraph 12). No new external debt payments (including on long-term leases) arrears will be accumulated during the program period. For the purposes of this performance criterion, an external debt payment arrear is defined as an amount of payment obligation (principle and interest) due to nonresidents by the general government and the CBE, which has not been made when due under the contract, including any applicable grace period. The performance criterion will apply on a continuous basis throughout the arrangement.

21. Standard continuous performance criteria include: (1) prohibition on the imposition or intensification of restrictions on making of payments and transfers for current international transactions; (2) prohibition on the introduction or modification of multiple currency practices; (3) prohibition on the conclusion of bilateral payments agreements that is inconsistent with Article VIII; and (4) prohibition on the imposition or intensification of import restrictions for balance of payments reasons.

K. Consultation Clause

22. Direct sales of foreign exchange to SOEs and the government include sales of foreign exchange by the CBE to the government other than for debt service and to SOEs such as EGPC, GASC, and other.

23. If foreign exchange sales to SOEs and the government, and commercial banks are excessive, a consultation will be held with the IMF Executive Board on policies comprising the following: (i) the stance of monetary policy; (ii) the reasons for deviations from the program targets, taking into account compensating factors; and (iii) necessary remedial actions.

L. Monitoring and Reporting Requirements

24. Performance under the program will be monitored using data supplied to the IMF by the Ministry of Finance and the CBE as outlined in Tables 3A and 3B, consistent with the program definitions above. The authorities will transmit promptly to the IMF staff any data revisions.

M. Data Reporting

Table 3A.

Ministry of Finance

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Note: Q= quarterly; M = Monthly; W = Weekly
Table 3B.

Central Bank of Egypt

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Note: Q = Quarterly; M = Monthly; W = Weekly
1

Excluding LPG and fuel oil used for electricity generation and bakeries. Fuel oil use for electricity generation has declined sharply over the past years as power plants have switched over to natural gas.

2

This follows an increase in electricity tariffs by an average of 30 percent in July 2016, 40 percent in July 2017, and 36 percent in July 2018.

3

An agreement to extend the maturities of several large deposits from nonresidents at the CBE has reduced external financing needs in 2018/19 and 2019/20, with a commensurate increase in 2021/22 and 2022/23.

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Cover IMF Staff Country Reports
Arab Republic of Egypt: Fifth Review Under the Extended Arrangement Under the Extended Fund Facility-Press Release; Staff Report; and Statement by the Executive Director for the Arab Republic of Egypt
Author:
International Monetary Fund. Middle East and Central Asia Dept.
Volume/Issue:
Volume 2019: Issue 311
Publisher:
International Monetary Fund
ISBN:
9781513516622
ISSN:
1934-7685
Pages:
69
DOI:
https://doi.org/10.5089/9781513516622.002

Contributions to real GDP growth, y/y

(percentage points)

Auction Yields (percent)

Gross Official Reserves and Current Account Balance

Budget Sector Balances and Gross Public Debt

(Percent of GDP)

Inflation and Interest Rates

(percent)

Exchange rate and Non-resident Tbill holdings

(EGP/$ and EGP bn)

Effective Exchange Rates

(Jan 2016= 100)
Figure 1.

Egypt: Real and External Sector Developments
Figure 2.

Egypt: Fiscal Sector Developments
Figure 3.

Egypt: Monetary Sector Developments
Figure 1.

Egypt: Public Sector Debt Sustainability Analysis (DSA) – Baseline Scenario

(in percent of GDP unless otherwise indicated)
Figure 2.

Egypt: Public DSA – Composition of Public Debt and Alternative Scenarios
Figure 3.

Egypt: Public DSA – Realism of Baseline Assumptions
Figure 4.

Egypt: Public DSA Risk Assessment
Figure 5.

Egypt: Public DSA – Stress Tests
Figure 6.

Egypt: Ex ternal Debt Sustainability: Bound Tests 1/ 2/

(External debt in percent of GDP)