International Monetary Fund (IMF) Executive Board Completes the First and Second Reviews of Extended Fund Facility Arrangement for Egypt, Approves Augmentation of the Arrangement

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The IMF Board today completed the First and Second Reviews of the extended arrangement under the Extended Fund Facility (EFF) for Egypt and approved an augmentation of the original program by about US$5 billion (SDR 3.76 billion), allowing the authorities to draw the equivalent of about US$820 million (SDR 618.1 million); A strong economic stabilization plan is being implemented to correct policy slippages. The plan is centered on a liberalized foreign exchange system in the context of a flexible exchange rate regime, a significant tightening of the policy mix, reducing public investment, and leveling the playing field to allow the private sector to become the engine of growth; While the recent sizable investment deal in Ras El-Hekma alleviates the near-term financing pressures, implementation of the economic policies under the program remains critical to address Egypt’s macroeconomic challenges. Robust delivery on structural reforms will be critical to lock in the benefits of the improved financing environment.

The Executive Board of the International Monetary Fund (IMF) completed the first and second reviews of Egypt’s Extended Fund Facility arrangement with Egypt and approved an augmentation of the original program by about US$5 billion (SDR 3.76 billion). This enables the authorities to immediately draw about US$820 million (SDR 618.1 million). Egypt’s 46-month EFF arrangement was approved on December 16, 2022.

In completing the review, the Executive Board assessed that all but one of the quantitative performance targets for end-June 2023 were met. The Board approved the authorities’ request for a waiver for non-observance of the June performance criterion on Net International Reserves on the basis of corrective actions.

Macroeconomic conditions since the approval of the program have been challenging, with rising inflation, foreign exchange shortages and elevated debt levels and financing needs. The difficult external environment generated by Russia’s war in Ukraine was subsequently aggravated by the conflict in Gaza and Israel, as well as tensions in the Red Sea. These developments increased the complexity of macroeconomic challenges and called for decisive domestic policy action supported by a more robust external financing package, including from the IMF.

Within this context, external shocks and delayed policy adjustment weighed on economic activity. Growth slowed to 3.8 percent in FY2022/23 due to weak confidence and foreign exchange shortages and is projected to slow further to 3 percent in FY2023/24 before recovering to about 4½ percent in FY24/25. Inflation remains high but is expected to ease over the medium term as the policy tightening takes hold. 

The recently announced US$35 billion investment deal from an Abu Dhabi-based investment and holding company in Ras El-Hekma has alleviated near-term balance of payment pressures and, if used judiciously, will help Egypt rebuild buffers to deal with future shocks.  Nonetheless, steadfast implementation of the economic policies under the program remains critical to sustainably address Egypt’s macroeconomic challenges, as does robust delivery on structural reforms to allow the private sector to become the engine of growth.

At the conclusion of the Executive Board’s discussion, Ms. Kristalina Georgieva, Managing Director and Chair made the following statement:

“Egypt is facing significant macroeconomic challenges that have become more complex to manage given the spillovers from the recent conflict in Gaza and Israel. The disruptions in the Red Sea are also reducing Suez Canal receipts, which are an important source of foreign exchange inflows and fiscal revenue.

“The authorities have significantly strengthened the reform package underlying the Extended Fund Facility arrangement, supported by an augmentation of access. Recent measures toward correcting macroeconomic imbalances, including unification of the exchange rate, clearance of the foreign exchange demand backlog, and significant tightening of monetary and fiscal policies, were difficult, but critical steps forward, and efforts should be sustained going forward. The authorities’ commitment to use a large part of the new financing from the Ras El-Hekma deal to improve the level of reserves, fast-track the clearance of foreign currency backlogs and arrears, and reduce government debt upfront is prudent.

“The authorities’ policies are well calibrated to entrench macroeconomic stability while protecting the vulnerable. The Central Bank of Egypt’s resolve to focus squarely on reducing inflation and to tighten further, if necessary, is key to preventing further erosion of the purchasing power of households. Implementation of the newly established framework to monitor and control public investment will help manage excess demand. The pursuit of a revenue-based fiscal consolidation will put debt firmly on a downward path and provide resources for expanding the social safety net. In this regard, it remains essential to replace untargeted fuel subsidies with targeted social spending as part of a sustained fuel price adjustment package.

“With policies to restore macroeconomic stability in place, the stage is set for accelerating implementation of the structural reform agenda intended to deliver inclusive and sustainable growth. Withdrawing the state and military from economic activity and leveling the playing field between the public and private sectors is key to attracting foreign and domestic private investment in Egypt.

“Achieving these goals is subject to risks. Externally, uncertainty remains high. Domestically, sustaining the shift to a liberalized foreign exchange system, maintaining tight monetary and fiscal policies, and integrating transparently off-budget investment into macroeconomic policy decision making will be critical. Managing the resumption of capital inflows prudently will be important to contain inflationary pressures and limit the risk of future external pressures.”

Egypt: Selected Macroeconomic Indicators[1]

2022/23

2023/24

2024/25

Output

Real GDP growth (%)

3.8

3.0

4.4

Employment

Unemployment  (%)

7.2

—

—

Prices

Inflation (%, end of period)

35.7

32.1

15.3

Inflation (%, period average)

24.4

32.5

25.7

Budget sector [2[

Revenue and grants (% GDP)

15.4

15.3

16.2

Expenditure (% GDP)

21.4

21.7

24.7

Overall balance (% GDP)

-6.0

-6.3

-8.5

Primary balance including divestment proceeds (% GDP)

1.6

7.1

4.5

Gross debt, general government (% GDP)

95.9

96.4

82.6

Money and credit

Broad money (M2, % change)

24.7

38.6

18.5

Credit to the private sector (% change)

25.4

30.0

25.0

Balance of payments

Current account (% GDP)

-1.2

-6.3

-2.4

FDI, net (% GDP)

2.5

9.3

2.5

Reserves (months imports)

5.3

7.3

6.9

External debt (% GDP)

41.8

43.0

45.4

Exchange rate

Real Effective Exchange Rate (% change; appreciation +)

-22.1

—

—

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

Distributed by APO Group on behalf of International Monetary Fund (IMF).

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