Engagement with the Fund is highly appreciated by the authorities, and the work of the team is well regarded. We appreciate the responsiveness of the Fund to Egypt’s request for two-step financial support from the Fund that supported the very early policy response to the pandemic and helped restore market confidence. Midway into the one year SBA program, Egypt has been able to limit the spread of the virus, provide support to affected households and firms to maintain social cohesion, overperform on program targets with macroeconomic outcomes better than had been anticipated six months ago, and continue to deliver on the government’s structural reform agenda in spite of pandemic demands, and in some cases ahead of schedule. Reforms implemented in recent years, including progress achieved in strengthening social protection and institutional reforms, have all boosted Egypt’s resilience in the face of the pandemic.

COVID-19 Containment. After peaking at around 1550 infections per day in June, the number of infections steadied around 150 per day during August to October before picking up in a second wave to around 400 a day in the past week. Fatalities had peaked at 85, but since August hovers around 20 per day. The lower-case count from containment efforts has allowed the government to relax restrictions on air travel, schools, hotel operations, and public gatherings, allowing economic activity to pick up compared to Q2–2020. Egypt will rely on a number of sources for its vaccine, is in partnership with GaviAlliance, and remains in discussions for other purchases and manufacturing in Egypt. The President announced that the government will provide the vaccine to all citizens free of charge.

COVID-19 Response. These outcomes reflect bold and rapid policy response starting with the announcement on March 14 of support measures of EGP 100 billion. The Central Bank of Egypt lowered the policy rate by 300 bp in March and by another 50 bp in each of September and November in response to declining inflation. A 6-month loan repayment moratorium was introduced in March and ended in September and subsidized lending schemes to targeted sectors which boosted credit growth. Fiscal response measures spanned support for the health sector, expansion of social transfers including a monthly cash subsidy to irregular workers, tax and fee deferrals, support to industry, aviation and tourism and culture establishments, an increase in funding for public works, and public investments, and support to SMEs.

Macroeconomic outcomes are better than expected: Real GDP grew by 3.6 percent in 2019/2020, much lower than the 5.6 rate anticipated pre-COVID but much higher than 2 percent projected by staff in June, and despite a contraction of 1.7 percent in 2020Q2. The contraction in that quarter was the first witnessed in 9 years, but much milder than what other EMs experienced, reflecting the relative resilience of the economy despite the hit to tourism. Activity rebounded in the remainder of the year, so the 2020 calendar year is expected to register a positive growth rate of between 1.5 and 2 percent. Unemployment also saw a swift recovery, dropping to 7.3 percent in September after having jumped up to 9.6 in June. Headline inflation is lower than anticipated, and the fiscal balance and external conditions all outperformed expectations. Accordingly, the quantitative performance criteria and indicative targets were met, some with a large margin.

The authorities broadly share staff’s outlook, recognizing that it remains subject to considerable uncertainty. The government forecasts growth in 2020/21 between 2.8 and 4 percent and local analysts forecast 3.5 percent growth, compared to 2 percent projected by staff in the June report. They agree that there are downside risks, especially from vaccine delay or from a pick-up in cases in the second wave, but see only a remote chance of a sharp increase in unemployment, poverty, or inequality nor a likelihood that contingent liabilities would adversely affect the debt trajectory.

Fiscal policy aims to mitigate the impact of the pandemic through targeted reversible measures and support government priorities to upgrade education, health, and social protection while safeguarding the gains in fiscal sustainability and restoring the downward debt trajectory. The package of fiscal measures amounts to close to 2 percent of GDP, but some of the spending was offset by reduced fuel and energy subsidies due to lower global fuel prices, reallocations of some budget items, and robust revenue growth on the back of recently introduced tax measures. As a result, the primary fiscal balance for 2019/20 amounted to 1.8 percent of GDP, only 0.2 percent of GDP lower than the pre-COVID budget target. The budget for 2020/21 was presented to Parliament pre-COVID with a target of 2 percent, and with a provision establishing a primary surplus floor of 0.5 percent of GDP. To bolster support to health and targeted special programs, the government plans to roll back crisis-related spending and to mobilize additional revenue through the enactment of a medium-term revenue strategy.

The goal is to return to a primary fiscal surplus of 2 percent of GDP from 2021/22, which would allow the debt-to-GDP ratio to shrink. A high priority is to reduce public debt and reduce Gross Financing Needs (GFN), including through an updated Medium-term Debt Management Strategy (DMS). Further improvements to the Public Financial Management Law (PFM) are planned, and a Public Expenditure Review (PER) is planned with the World Bank to support our goals of ensuring sufficient and appropriate resources to health and education and achieve the highest efficiency.

Monetary policies will continue to be data-driven and conducted in line with the recently ratified new Banking Law which formalizes the CBE mandate of financial sector stability and price stability. Despite three rate cuts since March amounting to 400 basis points, September headline inflation persisted below 6 percent and fell below 4 percent, the lower band of the Monetary Policy Consultation Clause (MPCC) , although it increased again in October and November to 4.5 and 5.7 percent respectively, as was anticipated by CBE. As stated in the Consultation note this reflects some seasonal factors related to good weather, COVID-related decrease in exports, and pass-through from exchange rate appreciation. However, CBE assesses the recent rate decisions provide appropriate support, consistent with price stability over the medium-term. The Monetary Policy Committee closely monitors all activity and is ready to utilize all available tools to support recovery and price stability. There is also a structural element; reflecting logistical improvements, we expect food price volatility to continue to be subdued compared to previous years and this supports a lower midpoint and narrower band for the next review. The exchange rate has generally moved in line with market forces, appreciating modestly with the return of capital inflows. Exchange rate flexibility will be preserved while avoiding undue volatility, and rebuilding of FX reserves will continue, where feasible, to take advantage of favorable market conditions.

Financial Policies. The new Banking Law strengthens CBE’s governance and operational autonomy and also improves the legal framework for CBE’s oversight of banks’ governance and operations, and for early intervention and resolution. The central bank is closely monitoring financial sector risks while supporting borrowers most negatively affected by the economic slowdown. Financial sector risks are being closely monitored; banks’ nonperforming loans are close to 100 percent (97.2 percent) provisioned. Loan classification rules and provisioning requirements and credit quality guidelines will continue to be fully enforced.

Structural reforms. The Ministry of Finance will continue with institutional reforms and upgrading the fiscal framework and improving transparency. Completion of the COVID-19 updates to the medium-term revenue and debt strategy remains on track. Already, the share of new short-term domestic debt issuances has declined and is on track to meet the annual target, which will reduce Gross Financing Needs. Fiscal risk assessment capabilities are being enhanced. The new Public Finance Law aims to strengthen the budget process and will include a fiscal responsibility provision and accounting rules for all budget entities. Transparency and accountability are being advanced on many fronts, including by publishing budget details throughout the process, and publishing fiscal risks, and contingent liabilities and showing sensitivity analysis around the macroeconomic framework. MoF recently established a unit for fiscal transparency and citizen engagement. Egypt’s scores at the International Budget Partnership, and rank in the Open Budget Index, continue to improve and are expected to improve further in the next round to be announced in 2021with more notable progress identified in areas related to citizen engagement.

Reducing the role of the state and leveling the playing field is a priority that is being addressed from many angles. Data recently published on the MoF website provides financial information and analysis for SOEs and 50 economic authorities. Published reports include sections on board members, relevant policies and changes in regulations, reforms implemented, and the net relation with the Treasury. Steps to strengthen their governance and accountability. The new public enterprise law that passed a few months ago after years of discussions requires all SOEs to compile and publish regular performance reports with performance and governance guidelines similar to non-public enterprises. Also, the government recently announced that it is allowing the private sector to manage several SOEs on behalf of the public sector in the transportation, tourism, and housing sectors.

With respect to the National Investment Bank, which is part of the general government, the work of the international consulting firm is nearing completion according to the timeline set by the government. Based on this report, the government will formulate a reform plan to contain any macro-fiscal risks posed by the deterioration of its financial position. Before waiting for this plan, the reform committee has since early 2019 resolved some of its nonperforming loans through asset swaps.

Promoting private sector-led growth and encouraging investment and exports are a key pillar of the economic agenda. The establishment and strengthening of the competition agency and amendments to the competition law aim to support a level playing field and ensure competitive neutrality. Efforts are ongoing to further improve Egypt’s rank in the Doing Business Report and the Competitiveness report. The Egyptian presidency recently announced an ambitious goal of reaching $100 bn in exports annually as the government is intensifying efforts to solve problems that hinder productive activities and competitiveness. This would be a game changer for Egypt. Several fiscal initiatives support exporters, including (i) higher allocations to the Export Development Fund for subsidy payment, (ii) clearance of tax rebate arrears due to exporters, (iii) investment incentives of up to 20 percent of taxes due when this amount is reinvested in CAPEX, (iv) a 10 percent tax reduction to exporters (increased to 30 percent under COVID-19), and (v) the provision of land to exporters. To enhance logistics, the new Customs Law and Advance Cargo Information System are set to cut customs clearance time to one day from next July.

Toward a more equitable, inclusive, and sustainable development

Poverty: The latest household income and expenditure survey released in late November by the Central Agency for Public Mobilization and Statistics (CAPMAS), showed a decrease in

Egypt’s poverty rate in the FY2019–2020 data. This is particularly notable since a worsening of poverty indicators had been associated with austerity measures and the impact of inflation, depreciation, and structural reforms on vulnerable groups under the 2016–2018 EFF. In this biennial survey, the percent of those living below the poverty line fell to 29.7 percent, having shot up almost five percentage points to 32.5 percent in FY2017–2018. The percentage decline was higher for rural families. It is also worth noting that the rate of extreme poverty decreased to 4.5 percent from 6.2 percent during the two-year period. The survey found the poverty rate is lower by 10 percentage points among families who receive subsidies for food, butane gas, and electricity. Egypt is firmly committed to fight poverty which is the first of the SDG goals and is highlighted in its Sustainable Development Strategy.

Egypt began to overhaul the social assistance and protection system in 2013, before the EFF program, including by developing databases of the beneficiaries of different social protection programs and introducing the exemplary Takaful and Karama program that now reaches 3.6 million households providing conditional and unconditional transfers, and is supplemented by other programs that will be the subject of the forthcoming PER.

The pilots to roll out the Universal Health initiative speak to the government’s commitment to improve social indicators and access to opportunities. Since the Law was issued in 2018, Port Said governorate was the first pilot where contributions were collected and claims submitted. Luxor is the second governorate that has neared completion. In Q1 2021, three more (out of 29) governorates will be added. To ensure sustainability, MoF tries to identify sources of financing for the scheme, including through taxes on tobacco and toll fees. A $400 million World Bank loan supports efficient implementation. The capacity of the health system was attested by WHO in April in the context of COVID-19 preparedness. Some of the planned further upgrades to the health system were rescheduled over a longer timeframe as the ministry shifted resources towards the urgent pandemic response.

It is essential to upgrade education and health outcomes to improve productivity and access to opportunities. Government spending on education and health nearly doubled to 6 percent and 3 percent of the gross domestic product respectively in 2020 compared to 3.7 and 1.4 percent of GDP in 2009/10.

Gender. The government is developing policies to increase women’s participation in the labor force and to close the gender gap. This includes a package of educational programs, including a focus on information technology. The National Council on Women (NCW) introduced a policy tracker on the Responsiveness of Policies and Programs During the Pandemic to track policy responses through a gender lens. Special measures were introduced during COVID-19 lockdowns to help women with young children cope. The MoF is studying gender-based budgeting and financing gender-driven programs and is in an early stage of discussing with UN Women and the NCW the issuance of the first gender-based bond to finance education and labor programs.

Egypt has a long-term multisectoral plan for climate change related investment for mitigation and adaptation and to counter the main environmental risks and their impact on coastal areas and public health, ensure water security, shift to clean energy, and improve food security. The plan is constantly being revised and updated to improve the implementation of the National Strategy for Climate Change and Disaster Risk Reduction. EBRD and the EU launched two programs to support a green stimulus. The first will offer sub-loans for green investments in energy, water, and resource-efficient solutions. The second, the Green Value Chain program will help SMEs to invest in advanced technologies and climate mitigation. Following intensive preparation, Egypt issued a $750 million green bond, which was the first in the region. Green investment projects account for 14 percent of total public investments this year. New environment sustainability guidelines are to be applied to 30 percent of the projects this year to reach 100 percent in three years. Projects are focused on investment in solar energy and wind parks, shift of public transport to electricity. Egypt hosts one of the largest solar parks in the world, located in Benban, near Aswan which will help achieve Egypt’s goal of producing a significant share of its generated energy through renewables.

The authorities recognize that transformational change requires persistent efforts and reform continuity on many fronts to achieve the aspirations of the Egyptian people. They are committed to build on the success achieved and to continue implementing their structural reform priorities despite the additional challenges of addressing the current global crisis. In this regard, they value the partnership with the Fund and look forward to continued close engagement.