IMF’s Financial Support to Egypt: A Step Towards Economic Recovery
Updated 8/6/2024 8:00:00 AM
Egypt has secured another lifeline with the International Monetary Fund (IMF) approving the third tranche of its $8 billion loan program.
This $820 million injection of foreign currency comes as the North African nation struggles with soaring inflation, a widening budget deficit, and dwindling foreign exchange reserves.
Receiving IMF Boost
While the IMF's support offers temporary relief, it highlights the urgent need for significant economic reforms in Egypt. On July 29th, the IMF completed its third review under the Extended Fund Facility (EFF) program, approving the $820 million disbursement to Egypt.
The third tranche was received on August 1st, amid signs of recent economic policies stabilizing the economy.
Despite remaining high, inflation is showing signs of improvement. The government's commitment to a flexible exchange rate is crucial to its economic strategy, according to an IMF press release.
Ahmed Fawzy Hussein, a Ph.D. holder and assistant professor of economics, tells Arab Finance, “The disbursement of the third tranche is a key milestone in Egypt's economic stabilization. It demonstrates international confidence in Egypt's commitment to economic reform and its ability to adhere to the agreed-upon program.”
The IMF is set to complete its fourth review of Egypt's economic reform program between mid-September and the end of December, according to IMF mission chief Ivana Vladkova Hollar. A successful review will unlock a $1.3 billion disbursement, the largest installment of the loan program.
In a recent video conference, Hollar urged Egypt to speed up economic reforms, emphasizing the need for rapid implementation of the state ownership policy and enhanced structural reforms to bolster private sector participation.
Economic Reform Progress Amid the IMF Review
The IMF’s third review assesses Egypt’s progress in meeting the goals set out in their agreement. The review highlights continued strides in structural reforms, particularly in improving the business environment and strengthening social safety nets.
Macroeconomic performance has been broadly satisfactory, with progress made in reducing the budget deficit and accumulating foreign reserves.
Deputy Managing Director and Acting Chair Antoinette M. Sayeh stated, “Strengthened reforms under the EFF-supported program are yielding positive results. The unification of the exchange rate and the accompanying monetary policy tightening have curtailed speculation, brought in foreign inflows, and moderated price growth. With signs of recovery in sentiment, private sector growth should be poised for a rebound.”
The country has shown progress in its economic reforms in recent years. Hussein explains, “Egypt has made notable progress in fiscal consolidation and monetary policy stabilization. The subsidy reform, particularly in the energy sector, has been a significant achievement, reducing fiscal pressures and reallocating resources to more productive areas.”
Ahmed Shawky, a Ph.D. holder and advisory board member of the Egyptian Center for Economic and Strategic Studies, says, “The economic reforms being implemented will have an impact on growth rates. The Egyptian economy is currently expanding through many projects, especially infrastructure.”
Meanwhile, the IMF acknowledges challenges remain, particularly with inflation. They call for continued efforts to bring inflation down to a level consistent with the program's objectives.
Accordingly, it is critical to continue implementing program commitments in a difficult regional context characterized by tensions in the Red Sea and the Gaza-Israel conflict, according to the IMF.
Egypt's Path to Economic Sustainability
Progress has been made on certain key structural reforms, yet more decisive action is required to implement the State Ownership Policy. This includes accelerating the sale of state-owned assets, streamlining business setup procedures, improving trade processes, and ensuring a fair competitive environment by curbing unfair practices of state-owned enterprises, according to the IMF.
Strengthening the financial sector's resilience, while improving governance and competition within the banking industry, should also be among key priorities.
To further boost the Egyptian economy and ensure debt repayment, Egypt needs to attract foreign currency.
“Funded projects must yield returns in foreign currencies to repay financing in the future. Some foreign currency resources, such as Suez Canal revenues, are decreasing. Therefore, the country should work on other resources like exports and tourism to ensure a continuous foreign currency influx,” Shawky explains.
“The Egyptian economy is taking crucial steps, including financing infrastructure and green energy projects and focusing on sustainability to settle debts,” Shawky adds.
Moreover, structural reforms need to be implemented. Hussein says, "Areas such as structural reforms and addressing social inequalities need more attention to fully realize the reform program’s benefits."
Addressing social inequality is a vital step to ensure citizens’ social welfare. Shawky highlights, “The country is balancing economic stabilization with social welfare and equity through subsidies. Egypt is lifting subsidies from some fossil fuels and electricity to restructure the subsidy file.”
“However, the gap between exports and imports will delay achieving social welfare for Egyptian citizens,” Shawky points out.
Egypt's economic trajectory is intricately tied to its ability to balance immediate financial needs with long-term structural reforms. The IMF's financial support provides temporary relief, but Egypt’s sustainable growth hinges on its capacity to attract foreign investments, diversify its economy, and address pressing social challenges.
By Sarah Samir
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