More funding in the pipeline as Egypt’s economic reforms yield results

Egypt is continuing its programme of fiscal consolidation, exchange rate liberalisation and pro-investment reform, with the country expected to receive another multibillion-dollar tranche of funds from creditors following a year-end review.

In September the IMF released a report stating that Egypt had made a “good start” to its $12bn loan deal, with the fund noting that reforms had helped boost growth, rein in the budget deficit and eliminate foreign currency shortages that were previously putting pressure on many businesses.

The three-year programme, signed in November last year, includes a series of tax increases and spending cuts, and is designed to help stimulate the economy, which has suffered from a shortage of foreign currency and investment since the 2011 revolution.

The IMF has already disbursed $4bn of the package, with another $2bn tranche to be released following a year-end assessment of the economy.

“The Egyptian authorities have embarked on an ambitious reform programme and have taken decisive measures aimed at restoring macroeconomic stability and sustainable public finances,” Subir Lall, IMF mission director in Egypt, said. “We have seen that economic activity has been gathering strength and efforts at reining in the budget deficit have begun to bear fruit.”

Reforms to improve foreign capital and investor confidence

The deal with the IMF has been tied to a series of fiscal reforms from the government, which has prioritised reducing the deficit and attracting more foreign capital into the country.

Chief among these reforms was the floating of the Egyptian pound by the Central Bank of Egypt (CBE) in November last year, ending years of CBE management of the exchange rate. The float is designed to strengthen the economy’s competitiveness in the long term.

While the decision resulted in the currency roughly halving in value and interest rates rising, the subsequent stabilisation of the new exchange rate led to a sharp increase in Egyptian Treasury Bill interest, representing the largest influx of money into the country since 2011.

In addition, the government has introduced a value-added tax and cut energy subsidies, part of efforts to reign in its deficit and promote investor activity.

This growing confidence is one reason why Egypt is gearing up for its first euro-denominated bond issue before the end of the year – although high local borrowing rates in excess of 15% and concerns over a “crowding out” effect in the domestic banking sector have limited the government’s options to seek financing at home.

In September Amr El Garhy, the minister of finance, told international and local media that Egypt would issue a €1.5bn eurobond by the end of November, to be followed by a €10bn-eurobond programme next year.

El Garhy said the government planned to sell euro-denominated bonds worth between $3bn and $4bn in the first quarter of next year, which comes after Egypt raised $7bn in five-, 10- and 15-year bonds in the 2016/17 fiscal year ending in June.

Inflation represents challenge to economic stability

Despite the positive signs, some challenges to the economy remain, with inflation a primary concern.

While exports have become more competitive following the float of the pound, inflation rates hit three-decade highs, with annual urban consumer price inflation jumping to 33% in July, the highest level since 1986.

While the CBE has tightened monetary policy to counter surging prices – the IMF forecasts inflation to drop to just over 10% by the end of the 2017/18 fiscal year – the developments have driven up import costs, placing a strain on many domestic consumers and businesses.

The IMF has cited this as a potential challenge to the country’s economic stability, along with a lack of growth in trade partners, and the political and social difficulty of implementing the planned reforms.

Nevertheless, institutional partners and the markets alike have been largely positive about the economic progress; the IMF accepted a waiver request after Egypt missed primary fiscal balance and fuel subsidy bill requirements for end-June, with the waiver granted in part due to the scope of planned fiscal adjustments over the next two years.

Credit agency Fitch expects Egypt’s fiscal deficit to drop to 9.3% of GDP in FY 2017/18, down from 10.9% a year earlier, while it also forecasts the government’s debt-to-GDP ratio, which is predicted to have risen over 100% throughout 2017, to drop to 87.9% in FY 2018/19.

The government projects GDP growth of between 5-5.25% by the end of the current fiscal year, with IMF predicting slightly lower growth at 4.5%.