Abstract
IMF Country Report No. 22/237
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IMF Country Report No. 22/237
ARAB REPUBLIC OF EGYPT
EX–POST EVALUATION OF EXCEPTIONAL ACCESS UNDER THE 2020 STAND-BY ARRANGEMENT—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR ARAB REPUBLIC OF EGYPT
July 2022
The following documents have been released and are included in this package:
A Press Release summarizing the views of the Executive Board as expressed during its June 27, 2022 consideration of the staff report
The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on June 27, 2022. Based on information available at the time of these discussions, the staff report was completed on June 7, 2022.
A Statement by the Executive Director for Arab Republic of Egypt
The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.
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Press Release
PRESS RELEASE
PR22/274
IMF Executive Board Discusses the Ex-Post Evaluation of Egypt’s Exceptional Access Under the 2020 Stand-By Arrangement
FOR IMMEDIATE RELEASE
Washington, DC – June 27, 2022: The Executive Board of the International Monetary Fund (IMF) met today to discuss the Ex-Post Evaluation (EPE) of Egypt’s Exceptional Access Under the 2020 Stand-By Arrangement.
The IMF’s financial support to the Egyptian authorities’ policy response to the COVID-19 pandemic in 2020 included exceptional access to Fund resources, leading to an EPE of the 2020 Stand-By Arrangement (SBA) that was approved by the Executive Board on June 26, 2020 (Press release No. 20/248). The EPE assess whether program objectives under the 12-months arrangement were achieved, whether the macroeconomic strategy, program design, and financing were appropriate to address the challenges Egypt faced at the time, and whether the program was consistent with Fund policies.
In early 2020, the Egyptian authorities launched a broad policy response to address the immediate and severe economic disruption caused by the COVID-19 pandemic, which threatened to reverse Egypt’s hard-won achievements in regaining macroeconomic stability. A central element of the authorities’ response to the crisis was a request for financial assistance from the IMF in April 2020 under the Rapid Financing Instrument (RFI) (Press Release No. 20/215) followed by an SBA. The overarching goal of Fund support was to maintain macroeconomic stability amid the crisis, allowing for the easing of fiscal, monetary, and financial policies to support the crisis response and for thus achieving health and social policy objectives during the pandemic. The SBA aimed at safeguarding medium-term fiscal sustainability and at keeping the momentum in selected structural reform areas, mostly building on initiatives that began during the 2016-19 Extended Fund Facility (EFF).
The report finds that the SBA achieved its primary objective of maintaining macroeconomic stability and that policy implementation was broadly in line with program objectives, even as exchange rate variability remained limited. External and domestic confidence strengthened, and quantitative program targets were comfortably achieved. Both reviews of the SBA were concluded on time and all program conditionality was met. While some of the governance commitments regarding COVID-19 related expenditures have been implemented, others remain outstanding. The focused structural reform agenda supported by the SBA was fully executed. Going forward, decisive progress on deeper reforms is needed to foster private sector development, improve governance and reduce the role of the state. Fund policies and procedures for financing under exceptional access were followed. The SBA expired on June 25, 2021.
Executive Board Assessment1
Executive Directors welcomed the Ex-Post Evaluation (EPE) of Egypt’s exceptional access to Fund resources under the 2020 Stand-By Arrangement (SBA). They considered that the two-step approach—Egypt’s request for emergency financing under the Rapid Financing Instrument (RFI) followed by the SBA—was an example of agile Fund support to its members during the COVID-19 pandemic.
Directors agreed that the SBA achieved its primary objective of maintaining macroeconomic stability in Egypt amidst the severe disruptions caused by the pandemic. They noted that policies were eased to accommodate emergency spending on health and social protection, while preserving fiscal sustainability. Directors welcomed that all program conditionality was met and both reviews were completed on time.
Directors observed that a better-than-expected external environment combined with policy implementation under the arrangement strengthened domestic and external confidence. They concurred that conservative macroeconomic projections, the authorities’ commitment to fiscal discipline, and a well-focused structural reform agenda were important factors for the successful conclusion of the SBA.
Directors agreed that policy implementation under the SBA was broadly in line with program objectives. However, while noting the authorities’ objective to bolster confidence through a broadly stable exchange rate, they considered that greater exchange rate variability during the SBA could have been entrenched to avoid a buildup of external imbalances and facilitate adjustment to shocks. In this regard, Directors welcomed the authorities’ recent communications on the role of exchange rate flexibility in the policy toolkit.
In hindsight, Directors noted that the program design could have better captured upside risks as they materialized. Furthermore, they saw the benefits of a broader definition of FX reserve targets and a more comprehensive discussion of burden sharing. Directors found the structural conditionality of the SBA appropriate given its short duration and in view of its primary objective to maintain macroeconomic stability. While noting the trade-offs implied by a program of short duration, on balance, they agreed that a short duration SBA was the appropriate choice in view of prevailing uncertainties at the time. Directors called on the authorities to meet the governance commitments of COVID-19 related expenditures.
Directors concurred with the findings of the EPE that the authorities demonstrated a strong track record of implementation of Fund programs. They also agreed that the SBA was conducted in a manner consistent with Fund policies and procedures and welcomed the stringent application of the Exceptional Access Framework and risk management procedures.
Looking ahead, Directors noted Egypt’s remaining vulnerability from a high public debt burden and large gross financing requirements, and emphasized that decisive progress on deeper fiscal and structural reforms is needed to boost the economy’s competitiveness, improve governance, and strengthen its resilience against shocks. They noted that this EPE should inform the ongoing discussions on the Fund’s future engagement with Egypt.
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ARAB REPUBLIC OF EGYPT
EX-POST EVALUATION OF EXCEPTIONAL ACCESS UNDER THE 2020 STAND-BY ARRANGEMENT
June 7, 2022
EXECUTIVE SUMMARY
The Executive Board approved a 12-month Stand-By Arrangement (SBA) on June 26, 2020, to support the Egyptian authorities’ response to the COVID-19 pandemic. The SBA, at 184.8 percent of quota, was part of a two-step support strategy that was preceded by a purchase under the Rapid Financing Instrument on May 11, 2020, at 100 percent of quota. Both reviews of the SBA were concluded on time and all program conditionality was met. The arrangement expired on June 25, 2021.
The SBA achieved its primary objective of maintaining macroeconomic stability in the context of the disruption from the COVID-19 pandemic. This allowed for the easing of fiscal, monetary, and financial policies to support the crisis response, including by increasing spending on health and social protection while safeguarding debt sustainability and preserving investor confidence. Momentum was kept on structural reforms in selected areas.
Policy implementation under the SBA was broadly in line with program objectives, even as exchange rate variability remained limited. Fiscal policy was eased to accommodate emergency spending on health and social protection, including by increasing pension payments, introducing temporary cash subsidies to irregular workers, and expanding existing conditional cash transfer programs. While some of the commitments made with regard to the governance of COVID-19 related expenditures have been implemented, others remain outstanding. Monetary policy continued to be data driven; headline inflation remained below the Central Bank of Egypt’s (CBE) target range, triggering additional monetary easing and a revision of the inflation target and its bands. While exchange rate flexibility was an important element of the agreed policy mix, the exchange rate lacked substantive variation during the SBA, representing a missed opportunity to entrench greater flexibility.
Against the backdrop of a better-than-expected external environment, external and domestic confidence was strengthened, and program targets were comfortably achieved. The impact of the crisis on the domestic economy was cushioned further by domestic policies. This contributed to an overperformance of external and fiscal targets. In hindsight, the program may have benefited from a strategy to capture upside risks more systematically. A spending floor to safeguard social spending was met, but data challenges preclude an evaluation of outcomes.
While the Egyptian economy has successfully weathered the COVID-19 shock, the external and debt vulnerabilities that existed prior to the crisis remain high. High public debt and large external financing needs leave Egypt vulnerable to shifts in financing conditions. Notwithstanding some important progress in lengthening maturities of public debt under the SBA, Egypt continues to be reliant on nonresident portfolio flows, which expose the economy to persistent volatility from the ‘boom-bust’ cycles of capital flows, as well as global shocks.
The focused structural reform agenda supported by the SBA was fully executed, but decisive progress on deeper reforms is needed to foster private sector development, improve governance, and reduce the role of the state. The SBA succeeded in taking forward several reforms that had been set in motion at the end of the EFF, including the reform of the National Investment Bank (NIB). The publication of updated financial reports on SOEs and Economic Authorities was an important step to strengthen governance and should become a regular and timely exercise. Nonetheless, post-pandemic, the combination of vulnerabilities originating from the external sector and high public debt places a premium on reinvigorating a structural reform agenda that puts the Egyptian economy on a more competitive footing and builds resilience against shocks (see the 2021 Article IV consultation, IMF 2021b).
The program design contributed to the successful completion of the SBA, yet certain aspects could have been reconsidered. A distinctive feature of this SBA is its conservative approach to macroeconomic projections. Strong commitment to fiscal discipline while accommodating needed health and social spending and a well-focused structural reform agenda were other important factors that facilitated the completion. To give a more complete picture of reserves management, a broader definition of the FX reserves target could have been considered. A fuller picture of financing during the program could have been achieved by a more detailed discussion of the role of Gulf Cooperation Council (GCC) member deposits. Finally, a 15-month SBA may have allowed for the arrangement to cover the full fiscal year 2020/21 (even if, given the commitment to fiscal discipline, this likely would not have significantly changed fiscal outcomes).
Fund policies and procedures for financing under exceptional access were followed. The application of the Exceptional Access Framework (EAF) was consistent with Fund policies and involved carefully balanced assessments. Overall, it was stringently applied. Program-related risk management was consistent with Fund policies, reflecting improvements in the Fund’s approach. During the COVID-19 pandemic, the Fund’s General Resources (GRA) lending toolkit was applied in a flexible manner to face an unprecedented crisis, to the benefit of its members, including Egypt.
Authorized for distribution by
MCD and SPR
Prepared by an interdepartmental team comprising of Fabian Bornhorst (SPR, lead), Qianying Chen (FIN), Matthew Gaertner (MCD), Susan Mary George (MCM), Jung Yeon Kim (SPR), and Genet Zinabou (FAD), with research assistance from Shiying Wang (SPR).
Contents
INTRODUCTION
CONTEXT
A. Success and Remaining Challenges after the EFF
B. The COVID-19 Pandemic
STRATEGY AND PROGRAM DESIGN
PROGRAM IMPLEMENTATION AND PERFORMANCE
A. External Sector Policy
B. Monetary Policy
C. Fiscal Policy
D. COVID-19 Response
E. Structural Reforms
CONSISTENCY WITH FUND POLICIES AND PROCEDURES
A. Financing
B. Application of the Exceptional Access Framework
C. Risks to the Fund
CONCLUSIONS AND LESSONS
BOXES
1. Fund Lending During the Pandemic
2. Structural Conditionality Under the 2020 SBA in Perspective
3. Access to GRA Resources
4. Exceptional Access Criteria
FIGURES
1. The Immediate Impact of the COVID-19 Crisis
2. Timeline of Events Leading Up to the SBA Approval
3. Macroeconomic Indicators and Program Performance
4. External Sector Developments
5. Financial Sector Developments
6. Fiscal Developments
7. Debt Indicators
8. Risks to the Fund at the Time of the SBA Request
TABLES
1. External Financing Requirements and Sources, 2019/20 – 2020/21
2. Quantitative Performance Criteria and Indicative Targets
3. Structural Conditionality Under the Egypt SBA
References
APPENDIX
I. Authorities' Views
At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://0-www-IMF-org.library.svsu.edu/external/np/sec/misc/qualifiers.htm.
