IMF passes Egypt’s first loan review on condition of stronger fiscal adjustments
Courtesy: International Monetary Fund

On Friday, the International Monetary Fund approved the second loan disbursement worth $1.25 billion in a 3-year extended fund facility agreement worth a total of $12 billion, the international creditor said in a press release.

Egypt passed the first review of its adherence to the economic program tied to the disbursement of the loan, after measures taken to cut subsidies, raise taxes and liberalize the exchange rate. The success of the first review follows a decision by the IMF to waive the unmet June targets on the condition that Egypt pursues stronger fiscal adjustments in the coming two years.

“The waiver was approved in view of the important measures taken in June to contain fuel subsidies, and the planned stronger fiscal adjustment in the next two years, which will keep the program objectives on track,” read the release.

To pass the review, Egypt has cut fuel subsidies for the second time in less than a year, raising prices at the pump by up to 55 percent and household and commercial gas cylinders by 100 percent. In July, the government also raised electricity prices by more than originally planned for in its ‘price reform’ plan. The value-added tax, initially implemented in September, a couple of months prior to finalizing the loan agreement, was further raised to 14 percent in the current fiscal year, from the previous 13 percent.

Around the time of signing the loan agreement in November 2016, Egypt liberalized the exchange rate, leading to the drastic devaluation of the pound to the dollar, followed by the implementation of fuel subsidy cuts, raising prices by up to 47 percent at the pump. The measures resulted in a surge in prices in the import-dependent economy, whereby the annual inflation rate peaked in April at 32.9 percent.

The significant acceleration in inflation rates came as a surprise to the IMF, which signalled in March that Egypt must raise interest rates further to contain the rise in the general price level. Indeed, the government has raised interest rates by a total of 400 basis points on two occasions, bringing the rise in interest rates to 700 basis points since November 2016 — a measure seen worrying by economists, who are concerned about the subsequent rise in the government’s cost of borrowing and the contractionary implications on the economy.

The intense economic program had set a target of LE35 billion for the fuel subsidy bill in fiscal year 2016/17, which inflated to LE101 billion after international oil prices took an uptrend and the cost of import doubled. The inflated subsidy bill then lead to missing the primary fiscal balance target.

“In completing the review, the Executive Board approved the authorities’ request for waivers of the June performance criteria for the primary fiscal balance and the fuel subsidy bill. These were missed due to higher costs of imported food and fuel products caused by large depreciation of the pound,” read the Friday IMF statement.

To Noaman Khaled, economist at the Cairo-based investment bank CI Capital Asset Management, keeping these targets indicated that the government would need to raise fuel prices more than once during fiscal year 2017/18, in order to meet the targets for the fuel cost recovery ratio. “If we assume the same strict attitude from the IMF regarding the agreement, then Egypt should achieve an 85 percent cost recovery ratio for the year 2017/2018, and, assuming the current dollar rate of LE18, Egypt should raise petroleum prices by an average of 250 percent in FY 2017/2018,” Khaled told Mada Masr in a previous interview.

“The main deficit-reducing measures are the increase of the VAT rate, continued reforms of energy subsidies and wage restraint. At the same time, the budget includes a strong social component to ease the burden of adjustment on the poor and the vulnerable,” said David Lipton, First Deputy Managing Director and Acting Chair at the IMF in the press release.

President Abdel Fattah al-Sisi announced a LE75-billion social spending increase as part of a wider social protection scheme intended to absorb the expected impact of ongoing austerity measures. “Is what we are providing to each family enough?” Sisi asked in the June 21 speech. “It is what is obtainable. This is what the state can offer to citizens to ease the impact of economic reforms. The LE75 billion social package was made obtainable because of the economic reform path that we began.”

But following the recent energy price hikes, analysts told Mada Masr that inflation would accelerate further and are expected to hover around 35 percent in the summer.

Since November, the parliament passed two laws pertinent to the agreement, namely the industrial licensing law and the investment law. “Significant progress has been made on structural reforms. An industrial licensing law and a new investment law have been passed, and a new insolvency law is in the Parliament. These are critical pieces of legislation necessary to strengthen the business climate, attract investments, and promote growth.”


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