In its first review of the reform programme it is supporting with a loan of $5.2 billion, the International Monetary Fund (IMF) raised its growth forecast for the Egyptian economy during the current financial year to 2.8 per cent compared to the 2 per cent it expected last June. It also cited milder-than-expected contraction during the coronavirus pandemic. The IMF's Executive Board's completion and approval of this first review enables Egypt to draw a second tranche of the standby loan agreed on in June to contain the economic fallout of Covid-19. Strong consumption, according to the review, has helped offset weak tourism and investment, while the resumption of portfolio inflows has eased financing pressures, improving foreign currency supplies on the local market. With a high population growth rate, household consumption feeds growth. Historically, around 80 per cent of GDP is derived from household consumption. Portfolio inflows result from foreign investors being drawn to Egyptian pound-denominated treasuries since the 2016 devaluation of the pound due to their high yields, stable currency and signs from the government that it is committed to further economic reforms. The returns offered by Egypt's local-currency bonds remain some of the highest among emerging markets. Overall flows by the first week of December reached $23 billion after plunging to $10.4 billion in May amid emerging market selloffs by foreign investors. Assessing different indicators, the review pointed out that net foreign reserves and primary balance “outperformed” their targets. Foreign reserves reached $40 billion in December, the highest figure since April. Foreign reserves came under serious pressure amid the selloff in emerging markets due to Covid-19, with $10 billion lost between March and May. Accordig to the IMF, tax revenues soared by 14 per cent year on year in the third quarter of 2020, due to strong growth in corporate income tax receipts offsetting weaker VAT collection. According to the review, Egypt also managed to meet all the IMF targets set for “health and social spending, the government's overdraft at the CBE [Central Bank of Egypt], and the share of short-term net domestic issuances”. The LE100 billion emergency response package that the government allocated to dealing with the pandemic was channelled into providing financial relief for the most affected sectors and individuals, bringing 124,000 vulnerable households into social safety nets. It set up a LE3 billion fund to support irregular labour, including one-off disbursements of LE500 and higher payments to woman community leaders. The CBE's monetary policy has helped anchor inflation expectations and achieve low and stable inflation. With inflation rates being contained to hover around a 4 per cent average through 2020, IMF staff have supported the CBE's decision to lower interest rates in September and November to support economic recovery. IMF staff welcome the focus on green recovery and Egypt's leading regional role in this regard. In September Egypt was the region's first ever issuer of green bonds with an offering of $750 million in issuance of green bonds to be used in environment friendly projects. However the review underlined some challenges. “The still-high level of public debt and gross financing needs also leave Egypt vulnerable to a reversal of capital flows, which risk triggering again financing and exchange rate pressures,” the IMF said. Egypt's total debt, both domestic and foreign, is projected to stabilise at 114 per cent of GDP in the fiscal year 2020-21, hitting LE7.2 trillion compared to 115 per cent of GDP in 2019-20. Prior to the Covid-19 crisis, the authorities had made significant progress in reducing public debt from nearly 104 per cent of GDP in 2016-17 to 85 per cent in 2018-19. The plan focused on reducing the cost of borrowing by diversifying its sources and making the maturities of domestic debt longer. “Sustained progress in shifting towards longer-term debt issuance will also help reduce gross financing needs and improve the risk profile of public debt by lowering rollover risks,” the review noted. The Ministry of Finance has been working with the CBE to extend the tenors of Egypt's treasury bonds, rather than relying on instruments with three and nine-month tenors. By the end of June this year, average maturities were 3.2 years, up from 1.3 years in June 2013. In addition, the IMF recommended that fuel price adjustments should continue to be in accordance with the indexation mechanism introduced in 2019 to ensure that retail prices will adjust to changes in the exchange rate and oil prices in order to support the budget.
*A version of this article appears in print in the 14 January, 2021 edition of Al-Ahram Weekly.
