An International Monetary Fund delegation arrived in Cairo on April 30 to conduct the first review of the economic adjustment program required by the three-year, US$12 billion loan agreement signed last November. The loan conditions require Egypt to implement fiscal and monetary measures and make structural changes to some sectors in an attempt to address ongoing economic challenges. These are, as outlined in the IMF’s staff report on the loan agreement, “a balance of payments problem manifested in an overvalued exchange rate, and foreign exchange shortages; large budget deficits that led to rising public debt; and low growth with high unemployment.”
Prior to the November loan agreement, the Egyptian government had already implemented some of the requisite steps, including the liberalizing the foreign currency exchange rate, introducing a value added tax at a rate higher than the previous sales tax and decreasing the energy subsidy.
Egypt received $2.75 billion of the first $4 billion tranche in November, and the remainder is expected to be disbursed in June, after the conclusion of the current review.
According to the IMF Mission Chief for Egypt Chris Jarvis, the review was originally scheduled for March, but was subsequently postponed as the government was busy preparing the budget the privately owned Al-Shorouk newspaper reported on February.
A timetable included in the staff report, published in January, showed which steps Egypt is expected to have undertaken. Mada Masr tracks which of these have been implemented so far.
Monetary policy and financial sector
|Limiting government overdrafts||December 31, 2016||Implemented|
|Improving the management of foreign exchange reserves||December 31, 2016||Unknown|
|Publishing reports on monetary policy||March 31, 2017||Not implemented|
Fiscal policy and public financial management
|Preparing state guarantees report||January 31, 2017||Implemented|
|Preparing statement on fiscal risks||March 31, 2017||Implemented|
|Adopting a medium-term strategy to restructure the energy sector||March 31, 2017|
|A plan to improve the efficiency and finances of the Egyptian General Petroleum Corporation||March 31, 2017||Implemented|
|Streamlining industrial licensing||March 31, 2017||Implemented|
Limiting government overdrafts: One of the aims outlined in the staff report is placing a limit on the amount of money the government can withdraw directly from the Central Bank of Egypt, in an effort to control inflation by limiting easy access to funds that exacerbate the budget deficit. The plan was to transform LE250 billion from overdrafts into bonds and treasury bills, capping overdrafts at LE70 billion, with the aim to make the government more accountable, as securities are guaranteed.
Ahmed Kouchouk, the deputy finance minister, says that LE250 billion was securitized by the allocated date, December 31, adding that overdrafts are below the agreed upon amount. However, according to Finance Ministry figures, the government exceeded this target, having issued securities worth approximately LE325 billion between October and December 2016.
Improving the management of foreign exchange reserves: The IMF and Egyptian government agreed the latter would draw up new investment guidelines to improve management of foreign exchange reserves. This includes clearly defining the objectives of the investments to enhance accountability and the added condition that banks and financial institutions where the reserves are allocated must be reputable and meet the minimum required credit ratings. The Central Bank of Egypt (CBE) did not respond to Mada Masr’s inquiry about this measure.
Publishing reports on monetary policy: The agreement stipulates that the CBE should publish quarterly reports on monetary policy, inflation and financial stability, with the goal of increasing the transparency of the state’s monetary policy. The CBE did not publish a quarterly monetary policy report in March as per the agreement, and it postponed the issuance of the 2016 financial stability report until the third quarter of 2017. The last published financial stability report is for the year 2014.
While the CBE publishes monthly reports on inflation, no quarterly report could be found on its website.
Preparing state guarantees report: The government pledged it would prepare a report on its debt guarantees to better manage Egypt’s public debt. According to this pledge, the government is required to write up a full report on the guarantees it provided for debtors, in addition to creating a committee comprised of senior Finance Ministry officials, which would evaluate all suggested guarantees and advise the minister on their risks and benefits. The government also pledged to set a ceiling for issued guarantees. This step should, according to the agreement, decrease the government’s financial risks.
Kouchouk told Mada Masr that the state guarantees report had been drafted and an advisory had been formed, but a report published on Sunday by the Egyptian Initiative for Personal Rights (EIPR) claimed that the report was still outstanding. Salma Hussein, one of the two researchers who wrote the report, told Mada Masr this was confirmed by a Finance Ministry official.
Preparing statement on fiscal risks: One of the steps the government agreed to take was to prepare a fiscal risks statement addressing macroeconomic risks, public enterprises, debt management, contingent liabilities, pensions and other areas. According to Kouchouk, this statement has been prepared. He claimed that the statement supports the ministry’s fiscal policy, accounting for possible instabilities caused by changes in the exchange rate or fuel prices, for example. He said the statement is internal to the ministry and not for wider publication.
Adopting a strategy to restructure the energy sector: In the loan agreement, the government committed to preparing a medium-term strategy to “modernize” Egypt’s energy sector based on a report done by an international and reputable consultant. The restructuring will supposedly involve further cuts to energy subsidies and the creation of an energy regulation body that would supervise the sector’s efficiency.
Egypt’s Petroleum Minister Tarek al-Molla said in April that the ministry is implementing a modernization strategy to increase the petroleum sector’s efficiency. However, Petroleum Ministry officials did not respond to Mada Masr’s questions to confirm the existence and details of the medium-term plan mentioned in the agreement.
A plan to improve the efficiency and finances of the Egyptian General Petroleum Corporation: No plan has been outlined to place the EGPC on financially sustainable footing, increase its efficiency and limit its financial risks, as mentioned in the IMF staff report. The Petroleum Ministry issued a tender for a consultant to restructure the company, which McKinsey & Company won last April. However, the ministry was not available for further comment.
Streamlining industrial licensing: The government said it would issue an industrial licensing law to streamline industrial licensing for all businesses except those that serve vital public interests. The law will also simplify and limit the civil defense and fire department codes for factories engaged in low-risk production. Parliament approved a new licensing law in March, and a law easing the procedures for issuing licenses for industrial facilities was issued on Monday.
The measures outlined in the economic program aim to achieve the general objectives outlined in the staff report, such as decreasing the budget deficit and stimulating economic growth. Here, Mada Masr looks at some of the indicators reflecting Egypt’s performance in these regards.
Growth: The IMF adjusted its forecasts for Egypt’s economic growth in 2017, lowering it from 4 to 3 percent, as EIPR reported by in its report “An Eye on Debt: The first report following the IMF program up to April 2017.”
EIPR attributes this to the government’s failure to fulfill some of the program’s objectives, such as monetary contraction (Egypt has seen its money supply rise to record levels since November), controlling headline inflation (which surpassed 30 percent in February) and slowdown in industrial activity and investment due to rising production costs following the pound float and lower consumption due to inflation.
According to official statistics, GDP growth remained below 4 percent in the first three quarters of the current fiscal year, which will end on June 30. Growth was calculated at 3.4 percent in the first quarter of 2016/2017, compared with 5.1 percent the previous year, and it increased to 3.8 percent in the second quarter, compared to 4 percent the previous year. It then climbed to 3.9 percent in the third quarter, compared with 3.6 percent in the last fiscal year.
Inflation: Controlling inflation has become a primary objective for the government and IMF after it skyrocketed, surpassing their expectations. In an April news conference, IMF spokesman Gerry Rice said that the fund is in discussions with Egypt to use “budgetary restraint and tighter monetary policy to contain demand and so bring down inflation.”
The IMF forecast that inflation would reach 18 percent following the inflationary measures taken, such as the devaluation and value added tax. However, the annual headline inflation rate soared to record highs of 29.6 percent in January and 31.7 percent in February, then increased again in March, albeit at a slower rate, reaching 32.5 percent.
In February, Finance Minister Amr al-Garhy attributed the high inflation rate to the pound’s devaluation and rise in wages and pensions, which he said stoked demand without a parallel increase in supply of goods and services, adding that he expects it to fall by the end of 2017. Conversely, EIPR points to the flotation of the pound as the primary reason for inflation, writing that interest rate hikes used by the CBE to curb demand aren’t effective, as only 10 percent of Egyptians are integrated in the banking system.
However, the EIPR report said that flotation succeeded in limiting the foreign currency black market and stabilizing fluctuations in the price of the pound but at a higher than expected average price of LE18 to the US dollar.
Budget Deficit: Narrowing the budget deficit (how much government expenditures exceed revenues) is an overarching goal of the IMF loan program, after expenditures exceeded 13 percent of GDP in 2013/2014 and 11.5 percent in 2014/2015. The Egyptian government has taken several measures to reduce the deficit, including halving its fuel subsidy in its 2016/17 budget (from LE62 billion to LE35 billion) and introducing a value added tax greater than the previous sales tax.
However, some of the program’s other measures have substantially increased government expenditures. One example is the increase of fuel subsidies to more than their 2015/2016 value due to the flotation of the pound. According to Molla, they reached LE78 billion in the first nine months of the 2016/2017 fiscal year, compared to the LE35 billion outlined in the pre-flotation draft budget. The EIPR report also referred to a Finance Ministry statement that said public debt increased by 15 percent due to the pound’s devaluation.
EIPR also points to the impact of increasing interest rates on the government’s interest payments, saying this amounts to 34 percent of the budget, making it the single largest expenditure. However, Hussein says that this does not come up in the deficit, as the government decided to calculate the primary deficit this year excluding interest payments, unlike past years, when it announced overall deficit numbers.