IMF Executive Board Completes Second Review under Stand-By Arrangement for Arab Republic of Egypt and Concludes 2021 Article IV

Washington, DC: The Executive Board of the International Monetary Fund (IMF) completed today the second and final review of Egypt’s economic reform program supported by a 12-month Stand-By Arrangement (SBA). The completion of the review allows the authorities to draw the equivalent of SDR 1,158.04 million (about US$1.7 billion), bringing total purchases under the SBA to SDR 3,763.64 million (about US$ 5.4 billion, 184.8 percent of quota). The arrangement was approved by the Executive Board on June 26, 2020 (Press Release No. 20/248) to support the authorities’ economic reform program during the COVID-19 crisis. The program aimed to address balance of payments needs arising from the pandemic, support the authorities’ efforts to maintain macroeconomic stability while preserving achievements made over the prior years, and advance key structural reforms.

The Executive Board also concluded today the 2021 Article IV consultation [1] with Egypt.

Egypt entered the COVID-19 crisis with sizable buffers, thanks to reforms implemented since 2016. Faced with unprecedented domestic and global uncertainty, the authorities’ policies struck a balance between ensuring targeted spending to protect necessary health and social expenditures and preserving fiscal sustainability while rebuilding international reserves. Growth is expected to reach 2.8 percent in FY2020/21 and rebound strongly to 5.2 percent in FY2021/22, but the outlook remains clouded by uncertainty while Egypt remains vulnerable to shocks due to its high public debt and gross financing needs.

In that context, the authorities’ near-term fiscal and monetary policies aim to support the recovery while continuing to preserve macroeconomic stability. With the immediate crisis subsidizing, deepening and broadening structural reforms will be essential to help unleash Egypt’s enormous growth potential. The authorities’ structural reform agenda aims at more inclusive and sustainable private sector-led growth to create durable jobs and improve external resilience. This will require sustained efforts to improve resource allocation by reducing the role of the state and enhancing governance, strengthening social protection, improving the business environment, deepening financial markets, and increasing integration into global trade. The IMF will remain closely engaged with the Egyptian authorities and continue supporting their reform agenda.

Following the Executive Board’s discussion on Egypt, Ms. Antoinette Sayeh, Deputy Managing Director and Acting Chair, issued the following statement:

“The Egyptian authorities have managed well the economic and social impact of the COVID-19 pandemic. Proactive economic policies shielded the economy from the full brunt of the crisis, alleviating the health and social impact of the shock while maintaining macroeconomic stability and investor confidence. The economic recovery is underway, but the outlook is still clouded by uncertainty related to the pandemic. High public debt and large gross financing needs leave Egypt vulnerable to shocks or changes in financial market conditions for emerging markets.

“The budget target for FY2021/22 strikes an appropriate balance between supporting the recovery and keeping public debt on the projected path. The envisaged pickup in growth should allow a return to the pre-crisis primary surplus from FY2022/23 to put public debt back on a firmly downward trajectory. Continued progress on fiscal structural reforms is critical to ensure additional space for high priority spending on health, education, and social protection.

“The Central Bank of Egypt’s (CBE) data driven approach to monetary policy has helped anchor inflation expectations. Inflation remains below the CBE’s target range, providing scope for monetary policy to further support the recovery as warranted by inflation and economic developments. Continued progress on strengthening the monetary framework will also support monetary transmission. Two-sided exchange rate flexibility is essential to absorb external shocks and maintain competitiveness.

“The banking system remains resilient, having entered the crisis well-capitalized and with ample liquidity. As crisis-related measures are unwound, continued supervisory vigilance will be needed to closely monitor lending standards.

“The authorities’ national structural reform plan aims to achieve strong private sector-led growth to create durable employment and improve external resilience. This will require sustained efforts to improve resource allocation by reducing the role of the state in the economy, enhancing governance and transparency, improving the business environment, deepening financial markets, and increasing integration into global trade.”

Executive Board Assessment [2]

Executive Directors agreed with the thrust of the staff appraisal. They commended Egypt’s strong performance under the Stand-by Arrangement, a result of timely policy response to the crisis and steadfast implementation of the program with overperformance in key program targets. At the same time, Directors cautioned that global uncertainty remains high and encouraged continued efforts to safeguard debt sustainability, strengthen transparency and governance, and undertake structural reforms to build a greener, digital, and more inclusive economy.

Directors lauded the satisfactory performance against the fiscal targets, including spending on health and social protection. Noting the still-high uncertainty, they agreed with the more gradual fiscal consolidation to support the economic recovery. However, given significant risks to debt sustainability, they emphasized the importance of returning to the pre-COVID-19 primary surplus from FY2022/23 onwards. Directors welcomed the medium‑term revenue strategy and the medium-term debt strategy. They stressed that strong implementation of these strategies, including enhanced revenue mobilization, will be key for lowering the high public debt and gross financing needs while creating space for priority spending. They also underscored the need for continued progress toward greater fiscal transparency, including for state-owned enterprises.

Directors commended the Central Bank of Egypt (CBE) for the monetary policy support to the economy thus far and supported a data-driven approach to monetary policy. Given available policy space and below-target inflation outturns , Directors broadly encouraged the CBE to consider easing if warranted by inflation and economic developments. They emphasized that the monetary policy framework could be further strengthened to support monetary policy transmission. They considered that if subsidized lending facilities were considered necessary for social objectives, they should be defined and supported in the budget rather than implemented through the CBE. Directors noted the strong capital inflows and underscored the importance of exchange rate flexibility as a defense against potential volatility in these flows, and more broadly against external shocks.

Directors noted the resilience of the banking system but observed that continued vigilance was warranted. Noting the system’s high exposure to the sovereign, they welcomed efforts to help diversify banks’ revenue streams and enhance financial inclusion through digital financial technologies and a focus on underserved groups. Directors also welcomed the completion of the restructuring plan for the National Investment Bank, which will reduce fiscal and financial stability risks.

Directors emphasized the importance of deepening and broadening structural reforms to maintain strong medium-term growth. They urged continued efforts to foster private‑sector-led growth—including reducing the role of the state in the economy and leveling the playing field—improving the governance of public institutions, fostering labor market participation of women and youth, and encouraging exports. They also supported ongoing plans to transition to a greener, more digital economy. Directors commended Egypt’s commitment to reach the Sustainable Development Goals by 2030.

It is expected that the next Article IV consultation with the Arab Republic of Egypt will be held on the standard 12-month cycle.