What you need to know about the new IMF-backed economic reform programme for Egypt

On Thursday, the Egyptian government and the International Monetary Fund (IMF) announced reaching a staff-level agreement for a new loan to Egypt to address the repercussions of the Russian war on Ukraine.

Q: Under which IMF programme has Egypt reached a deal for an economic reform programme loan?

A: Egypt will secure the $3 billion loan under the IMF’s Extended Fund Facility (EFF) for a 46-month deal, which is the same programme Egypt obtained a $12 billion loan from November 2016 through July 2019.

Egypt requested this loan in March 2022 in order to address the severe impacts of the Russian-Ukrainian conflict on its economy.

By securing this loan, Egypt will have obtained a total of over $23 billion in loans from the IMF over the past seven years.

Q: Is the agreement a final deal?

A: No! The IMF and the Egyptian authorities have reached a staff-level agreement on the deal, which is scheduled to be discussed for approval by the fund’s executive board in December.

Q: What are the key issues the EFF is meant to tackle?

A: The EFF was designed to provide assistance to countries experiencing serious payment imbalances because of structural impediments or slow growth and an inherently weak balance-of-payments position. An EFF provides support for comprehensive programs including the policies needed to correct structural imbalances over an extended period.

When a country borrows from the IMF, it commits to undertake policies to overcome economic and structural problems. Under an EFF, these commitments, including specific conditions, are anticipated to have a strong focus on structural reforms to address institutional or economic weaknesses, in addition to policies to maintain macroeconomic stability.

Q: What are the cornerstones of the new reform programme for the Egyptian economy in terms of financial policy?

A: The programme aims to provide Egypt with balance of payments and budget support while catalysing additional financing from Egypt’s international and regional partners to maintain economic stability, address macroeconomic imbalances and spillover from the war in Ukraine, protect livelihoods, and push forward deep structural and governance reforms to promote private sector-led growth and job creation.

It also aims to keep the downward path of Egypt’s overall debt to GDP ratio to below 80 percent over the medium term.

Q: What about the measures regarding Egypt’s fiscal policy under the programme?

A: The fiscal policy under the EFF will be anchored to the reduction of general government debt and gross financing needs.

Continued fiscal consolidation will be supported by the implementation of the government’s Medium-Term Revenue Strategy (MTRS) that aims to improve the efficiency and progressivity of the tax system.

Social protection will continue to be strengthened including through the temporary extension of the emergency support to ration card holders and measures to protect the purchasing power of vulnerable wage earners and pensioners.

Broad fiscal structural reforms will also aim to further improve the budget composition, strengthen governance, accountability, and transparency and support climate mitigation goals.

Q: What is the relation between the new programme and the recently announced steps by the Central Bank of Egypt (CBE)?

A: The IMF welcomed such measures, considering the CBE’s move to a flexible exchange rate regime is a significant step to unwind external imbalances, boost Egypt’s competitiveness and attract foreign direct investment.

The commitment to durable exchange rate flexibility going forward will be a cornerstone policy for rebuilding and safeguarding Egypt’s external resilience over the long term, according to the IMF.

The EFF will support the CBE’s efforts to improve the functioning of the foreign exchange market, increase foreign reserves, and further improve monetary policy transmission. Monetary policy, which will be firmly rooted in the CBE’s price stability mandate, will aim to gradually reduce inflation to within the CBE’s inflation target.

Q: What about the programme’s measures for other aspects of the Egyptian economy?

A: The EFF aims to unlock Egypt’s enormous growth potential through broadening and deepening structural and governance reforms. The program will include policies to unleash private sector growth including by reducing the state’s footprint, adopting a more robust competition framework, enhancing transparency and ensuring improved trade facilitation.

Under the programme, Egypt plans to expand targeted social transfers and enhance spending on social assistance, health and education.

The IMF said that these reform measures will be critical to address long-standing constraints to Egypt’s higher, more sustainable and more inclusive growth.

Q: Is the IMF-backed loan deal a part of a larger loan that will be extended through other lenders?

A: The loan is a part of a total of $9 billion financing Egypt is expected to secure from its international and regional development partners. Egypt’s international and regional partners will play a critical role in facilitating the implementation of the authorities’ policies and reforms. Additional financing of about $6 billion is expected from multilateral and regional partners for the current FY2022/2023, which is predicted to strengthen Egypt’s external position.

Moreover, Egypt has also requested financing under the IMF’s newly created Resilience and Sustainability Facility (RSF) aimed at providing affordable, long-term financing to help build resilience, including against climate change.

Discussions on access under this facility, which could unlock up to an additional $1 billion for Egypt, will take place in the coming months, according to the IMF.