Egypt’s economy is showing signs of recovery following a difficult period marked by weak economic activity and foreign exchange shortages, according to a recent report by the International Monetary Fund (IMF). While growth slowed to an average of 2.5 percent in the first half of the fiscal year 2023/24, the IMF sees a path toward a stronger recovery in the future.
The IMF review on Egypt, released on Monday, highlights several positive developments. Since the unification of the official and parallel exchange rates in early March, the Egyptian pound has been market-determined, with the spread between the official rate and market-clearing rates narrowing, the foreign exchange backlog at banks eliminated, and daily interbank foreign exchange turnover increasing significantly.
While still high, inflation has generally trended downwards since September 2023, reaching its lowest level since January 2023 in May. The monetary policy hike in March and the reduction in monetary financing of the government are expected to help contain inflation further in the coming months.
Following the exchange rate unification and the policy rate hike, domestic financing conditions have improved significantly. The government is relying more heavily on weekly T-bill auctions and has increased issuance of longer-term T-bills. Nonresident holdings of local currency T-bills and T-bonds have also increased significantly.
The banking system remains stable, with banks on average profitable, liquid, and adequately capitalized. The announcement of the Ras El-Hekma deal and the completion of the first and second reviews under the Extended Fund Facility (EFF) arrangement have led to a sharp rebound in banks’ net foreign asset positions.
However, the IMF report acknowledges several challenges and risks facing the Egyptian economy. While the exchange rate unification has improved the situation, foreign exchange shortages remain a concern, particularly in the non-oil sector.
The conflict in Gaza and Israel and disruptions in the Red Sea are exacerbating these pressures. Despite projected improvements, Egypt’s public debt remains high, with an elevated interest burden and rollover risk. The development of the Ras El-Hekma region, a massive investment project estimated to reach $150bn over 20-30 years, could lead to overheating and exert upward pressure on the currency, potentially creating a situation akin to Dutch disease. The financial situation of the Egyptian General Petroleum Corporation (EGPC), a major state-owned enterprise, poses a significant fiscal risk due to liquidity issues and high debt levels.
The IMF report also outlines the government’s reform agenda, which includes achieving a revenue-based fiscal consolidation through tax policy changes, particularly related to the Value-Added Tax (VAT), and continued reduction of untargeted fuel subsidies.
The report indicates that the government is pursuing an active debt management strategy to reduce gross financing needs and debt, including phasing out non-market borrowing mechanisms and promoting market-based financing through auctions.
Moreover, the government is strengthening governance practices and competition in the banking sector, including commissioning an independent assessment of policies, procedures, and controls of state-owned banks. The government is implementing measures to reduce the state’s economic footprint and provide more room for private sector growth, including draft legislation to give key elements of the State-Ownership Policy the force of law.
The IMF report concludes that the strengthened reform package underlying the EFF-supported program is beginning to yield positive results. However, the report stresses that delivering on the program’s objectives will require significant political effort and a sustained commitment to implementing structural reforms.
