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January 10, 2023
Ivanna Vladkova Hollar, Assistant Director and Mission Chief for Egypt, Middle East and Central Asia Department, IMF
Moderator: Randa Elnagar, Senior Media Officer, Communications Department, IMF
MS. ELNAGAR: Good morning to our participants in the U.S. and good afternoon to those joining us from Egypt, the Middle East, and other parts of the world. Welcome to the press briefing on the release of the Staff Report for Egypt’s Extended Fund Facility. I am Randa Elnagar of the IMF’s Communications Department and with me Ivanna Vladkova Hollar, IMF Mission Chief for Egypt.
I hope that at this time you already accessed the Staff Report, which was released today. It is available at IMF.org. I want to note that we have Arabic interpretation available.
So, let’s begin our briefing. Ivanna will start with short opening remarks and then we’re going to take your questions on the Media Briefing Center and on Webex.
Ivanna, over to you.
MS. VLADKOVA HOLLAR: Thank you very much, Randa, and good morning, everyone. Thank you for making the time to participate in our press briefing today.
The IMF program approved in December supports the authority’s own reform program, which aims to address vulnerabilities and promote sustainable and inclusive growth and job creation. It is anchored on three main pillars. First, exchange rate and monetary policies will be focused on a permanent shift to a flexible exchange rate regime that would help absorb external shocks and help rebuild reserves while gradually reducing inflation. Second, continued fiscal discipline and fiscal structural policies aim to maintain market confidence and ensure the downward trajectory of the debt to GDP ratio while strengthening the budgetary process, increasing transparency, and improving the budget composition so as to allow for an expansion in social spending. Third, a structural reform agenda will help promote private sector investment and secure strong and inclusive medium-term growth, including through reducing the role of state in generating economic activity, leveling the playing field between state-owned enterprises and private companies, and removing barriers to trade.
The objective of exchange rate policy under Egypt’s reform program supported by the IMF is for the value of the Egyptian pound to be determined freely against other currencies, which would avoid the build-up of a chronic imbalance in the demand for and supply of foreign currency in Egypt, eliminate import shortages, and preserve the foreign exchange reserves of the Central Bank. Under such a framework one would expect to observe two-way movements in the exchange rate as it appreciates or depreciates in line with economic conditions. Once there is confidence in the application of this framework, we expect to see stronger investment inflows into Egypt. The ongoing depreciation comes at a time of high global commodity prices. Both of these factors have put pressure on domestic prices, leading to higher inflation.
In line with our advice across countries facing similar challenges, two policy responses are critical. One is restoring price stability by tightening monetary policy or raising the policy interest rate, and, two, protecting the vulnerable population with budget support carefully targeted to those in need.
Finally, long-term success depends on reforms that improve the capacity of the Egyptian economy to generate foreign exchange through experts and to generate jobs and strong and inclusive economic growth. To deliver on that goal, Egypt’s reform program, supported by the new IMF arrangement, includes an extensive package of structural reforms to support greater private sector activity and to facilitate trade. For example, the state ownership policy sets out ambitious plans to reduce the footprint of the state and catalyze private sector investment. It establishes a clear framework to inform which sectors the state will reduce its presence in and how such divestments will be implemented.
To level the playing field between the public and private sector, annual reports on tax breaks, exemptions, and incentives will be published to provide greater insight into how to go about leveling the playing field so that private firms don’t find themselves at a disadvantage.
To improve trade facilitation, a risk based approach to customs procedures will be adopted that would help move traded goods through Egypt’s ports faster.
These reforms will not be easy. The proposed structural reforms will take time to implement and deliver the intended results of reducing vulnerabilities to shocks and bringing about a stronger growth outlook. We look forward to supporting the authority’s efforts in delivering their reform priorities in the near-term and over the 46 month program duration.
With that, let’s turn to your questions.
Over to you, Randa.
MS. ELNAGAR: Okay, thank you very much, Ivanna.
I would like to ask those who have questions to submit on the Media Briefing Center or via Webex. Please raise your hand and put your camera on.
We’re going to start now with the Webex.
QUESTIONER: Good morning.
MS. ELNAGAR: Good morning.
QUESTIONER: Are you hearing me clearly?
MS. ELNAGAR: Yes.
QUESTIONER: Thank you so much for taking my questions.
First of all, happy New Year and Merry Christmas.
I have three questions. The first is what are the targets of the program on Egypt’s macro economy performance in light of the commitment the Egyptian government has extended, for instance, on the BoP, financial payments, budget deficit, inflation?
My second question is when is the IMF’s schedule the program reviews over the 46 months, meaning the period of implementing the EFF program?
And my last question is, what about the IMF estimats regarding the country’s inflation and interest rates under the EFF program?
Thank you so much.
MS. ELNAGAR: Thank you.
MS. VLADKOVA HOLLAR: Thank you very much.
Let me start by explaining a bit how the program is designed in order to answer your first two questions.
The IMF supported program will be monitored through semiannual reviews with disbursements distributed evenly over those reviews. And the schedule of those disbursements is published in the Staff Report. As a standard, whether or no, the objectives of the IMF supported program are met is monitored through targets. Such targets, which are called performance criteria, are set on net international reserves, the primary fiscal balance, the non accumulation of external debt payment arrears, and there are additional targets on tax revenues, on social spending, on the maturity of debt, on the total debt of the budget sector, and on overnight inter bank rate, which is related to monetary policy performance.
So these targets are set with test dates for December 2022 and June 2023. On the basis of those targets, the first review is then expected to be completed in or around March 2023 and the second review is expected to be completed in or around September 2023.
So as to your question on inflation and monetary policy, monetary policy is the primary tool that should be used to contain inflation. As we stress in the report, monetary policy should remain data dependent and the policy rate should be used as the main instrument for reducing inflation and ensuring price stability.
The Central Bank of Egypt has been making progress in improving the transmission of this policy rate to other interest rates in the economy. And one such action was already taken, which was moving the subsidized lending schemes from the Central Bank to the government. As a result of this action, the Central Bank will be able to use monetary policy better to steer inflation to the target and to reduce inflation over the course of the program.
Let me note that inflation has been a global challenge this year and Egypt is not an exception. And while we expect inflation to remain elevated during this fiscal year, we do expect it to fall back to around 7 percent by fiscal 2024-2025.
MS. ELNAGAR: Thank you, Ivanna.
Let me turn to one of the questions we received. We received a lot of question by email on OMBC, the Media Briefing Center, including some of them that you have answered, for example, on the second tranche, when to expect it from. We have some from Egypt. We will answer the questions because we have a lot of duplicates. Let me take one question from OMBC. He said that the IMF study in October, that the facility would be enabling Egypt to access $5 billion in addition as financing, but increase that figure to $14 billion. Can you please explain how this number was reached and how is it spent? Thank you.
MS. VLADKOVA HOLLAR: Sure, thank you. Thank you, Randa. So let me start then by just briefly explaining how the financing gap that has presented in the Staff Report is calculated. So, the financing gap that is presented in the Staff Report is estimated based on projections of various factors related to the inflow and outflow of foreign exchange in the Egyptian economy, including the demand for foreign currency to rebuild the reserves of the Central Bank. So, we project these from our current account performance, including exports and imports of goods and services and remittances. We project foreign direct investment. We project expected internal financing, and we target an adequate level of foreign exchange reserves.
These projections take into account domestic policies, and they also take into account second global market conditions that are considered important for the Egyptian economy, like global growth, and therefore demand for exports, and financial conditions and commodity prices developments.
So, using this approach, the Staff Report presents the financing gap of about $17 billion for Egypt over the next four years. IMF financing of the program is expected to close part of this gap, but in addition, the IMF supported program is expected to catalyze additional financing of the multilateral institution, bilateral partners, private sector investors to close the remaining gap.
The additional financing will also include these plans for fees of sales of state-owned assets. And finally, to get down to answering the specific question, the $5 billion that we had announced as our financing that would be catalyzed under the IMF program was just for the first 12 months of the program, and so that’s not a change in the forecast, but more clarification on the timeframe over which those $5 billion are expected to come in.
MS. ELNAGAR: Thank you, Ivanna, and let me go again to one from our media who ask when will the Fund discuss the $1 billion Resilience and Sustainability Trust to be discussed and in the program? Thank you.
MS. VLADKOVA HOLLAR: Sure. As I think we’ve noted in several press releases, the discussions on the climate policies that could be supported under an RSF for Egypt would be initiated in the context of the forthcoming review of the extended facility.
MS. ELNAGAR: Thank you. We shall go to Web-Ex now and take a question, please. We can’t hear you.
QUESTIONER: Forgive me. Can you hear me well? Could we thank everybody. My question has different points. The first point is regarding the price, the exchange rate, as that has moved last week. The exchange rate has moved for about 12 percent, that was an increase as of the end of last week until now, and we need to know the Fund’s view because the Fund always would call for a flexible exchange rate. Have we reached the rate that you believe that the price of the pound vis-à-vis the dollar is flexible now, and the second point in my question is the discussion between the Egyptian authorizes and the Fund, we need to know what are the main procedures that the Fund, in his view, in the Fund’s view that the Egyptian authorities should take as measures, and the last point, we need to know with regard to slowing the situation of the economy of Egypt, how to the Fund’s view, that the Fund’s view of the situation in Egypt.
MS. VLADKOVA HOLLAR: Okay, thank you. That’s quite a lot of content. Let’s see if we can cover that. So on the exchange rate, I think it’s important for us to start with understanding why a flexible exchange rate policy is the right policy for Egypt. In the past, a heavily managed exchange rate has not served Egypt well. It has led to periods of building imbalances which in turn have then led to loss of central and commercial bank foreign currency assets, rationing of the foreign currency, and forcing the Central Bank to abruptly devalue the Egyptian pound relative to other currencies. These past devaluations have led to spikes in inflation and have undermined economy activity as consumers and investors lose confidence in the health of the Egyptian economy.
So the objective under the authorities’ IMF-supported program is therefore to avoid this past management of the exchange rate and allow the value of the Egyptian pound to be determined freely against other currencies. This would help avoid the buildup of imbalances and the demand for and supply of foreign exchange in Egypt and preserve the foreign exchange reserves of the Central Bank. Under this framework, one would observe two-way movement in the exchange rate as it appreciates or depreciates in line with economic conditions.
Flexibility in the exchange rate will bring several benefits. It would help Egypt’s domestic economy adjust more smoothly to external shocks. It would support the ability of Egyptian businesses to sell their goods and services abroad, and it would encourage greater investment.
Now, once import financing backlogs have cleared, and economic agents can verify that the allocation of foreign exchange in Egypt is driven by market pricing and not through rationing mechanisms, we do expect that investment flows will resume on the back of that increased confidence in the application of a flexible exchange rate achieved.
On the commitment to the authorities under the program, as I had mentioned, commitments are measured in the context of targets where their performance targets on international reserves, on the evolution of fiscal policies of the primary fiscal balance, on tax revenues, on social spending, and on debt to ensure that the objectives of the program are met. So those commitments, those are the commitments under the macroeconomic policies under the program.
On structural commitments, we haven’t discussed yet. What I want to emphasize here is that the authorities are determined to deepen the structural requirements and to improve external resilience, secure inclusive private sector strong groups for the Egyptian economy and Egyptian people. The longstanding objectives are indeed to increase exports and industrial production and secure well-paid jobs for Egypt’s labor force, and a flexible exchange rate regime is only one part of this story. The other would be competitiveness.
Structural reforms intend to target improvements in non-price repetitiveness, meaning, for example, policies that improve the overall business climate-facing firms. So, two examples for that, to level the playing field between the public and the private sector, as I mentioned in my opening remarks, the authorities are looking to produce annual reports on tax breaks, exemptions, incentives that would provide them greater insight into what reforms would be most effective in reaching this objective of a level playing field for private businesses.
Also, to improve trade facilitation, a risk-based approach to customs procedures will be adopted, and that’ll help move traded goods through Egypt’s ports faster.
These are just two examples of the components of a structural reform agenda, which, again, is intended to deepen the resilience of the economy and to strengthen growth and job creation. Thank you.
MS. ELNAGAR: Let me say also that these questions came from many other media outlets. So, we have received all the same questions, so I’m just bundling them now.
We’ll take one question from online media briefing center. The question is “What is the size of the risk related to Egypt’s debt payments and annual installments? And what is the size of the targeted revenues from selling the government companies?”
The same question from a media outlet asking about how committed is the Egyptian government and how responsive it is to including some of specific companies in — specifically the military companies — in the economic activities of Egypt. Thank you.
MS. VLADKOVA HOLLAR: Thank you, Randa. So, on public debt, it’s important to note that as part of the outlook — the economic outlook — under the IMF-supported program, there is an expectation that the authorities’ policies — fiscal policies, in particular — will result in a decline in public debt over the course of the program, in particular a sustained primary fiscal surplus of around 2.1 percent of GDP by fiscal year 2023-2024. And about 2.5 percent thereafter will allow for a reduction in the general government debt to around 78 percent of GDP by fiscal year 2026-2027.
I should emphasize again that the intention of the authorities under the program is to bring about this consolidation, bring about this reduction in debt, without jeopardizing social support programs. In fact, the objective is to expand social support programs under the IMF-supported program.
How will this be achieved? More revenue mobilization will be indeed key to support the effort in reducing debt. This will help create the space for priority spending and, as I said, for this targeted support for vulnerable population groups. And it is also indeed the case that the authorities are open to using proceeds from the ongoing state asset divestment program to help reduce public debt further.
Was there a follow-up question on that?
MS. ELNAGAR: On the state-owned enterprises.
MS. VLADKOVA HOLLAR: Okay. So, on the state-owned enterprises, again, I’d point there to the authorities’ state ownership policy. The authorities’ reform program is based on giving a bigger well to the private sector, which is very much needed. And it is very important that the state ownership policy is endorsed at the highest level, including by the President. It is important that it is being made public. And it is important that the authorities are committing to provide information through an annual report on the progress and the implementation of that policy. This is a very important step towards reducing the role of the state in the economy. And we stand ready to support the authorities in the implementation of this very important reform.
MS. ELNAGAR: Thank you, Ivanna. One more question again, this is something that’s on the minds of all Egyptians: inflation. He said, “The IMF has asked the Government for economic reform program the exhausted Egyptians’ inflation rates, raised the prices of food products by nearly 40 percent. Can you please explain to us what happened? And is all this a result of the devaluation?”
MS. VLADKOVA HOLLAR: Thank you. So, I want to start perhaps with reminding again that the objective of exchange rate policy under the authorities’ economic program is to avoid the buildup of external imbalances, the avoiding the buildup of imbalances between demand and supply of foreign exchange.
Prior to the recent shift in regime by the Central Bank, moving to a flexible exchange rate regime, the exchange rate misalignment that had persisted increased uncertainty and dried up the availability of foreign exchange, compressing imports, reducing the availability of imported goods, and constraining economic activity. Thus, it was important for the Central Bank to move away from the previous regime and recommit to exchange rate flexibility, to avoid again these detrimental effects of misalignments on economic activity and on the basic availability of goods.
So, it is the role of monetary policy that should be the primary tool to contain inflation. And we’ve already discussed some of the actions that the Central Bank has taken to strengthen its ability to transmit changes of the policy rate to other interest rates in the economy. So, as a result of these actions, the Central Bank of Egypt will be better able to use monetary policy to steer inflation to the target range. And it is indeed the objectives of the economic program supported by the IMF to reduce inflation through monetary policy actions.
Finally, in recognition of the significant impact that high inflation has on the purchasing power of low and middle income households, the authorities’ approach to targeted budget support, which they have actually rolled out since the global commodity price shock hit, is the right approach. Budget support is the right instrument for compensation. This support needs to remain well-targeted, meaning that it reaches those and only those that it is intended to compensate for the economic shocks, including inflation. Thank you.
MS. ELNAGAR: Thank you, Ivanna. One last question because we only have a few minutes left.
MS. VLADKOVA HOLLAR: Okay.
MS. ELNAGAR: Questioner is asking “The IMF program is a testament of confidence to the Egyptian economy worldwide. However, it is opening doors for more barring (phonetic). How can this help while we are battling high debt levels?”
MS. VLADKOVA HOLLAR: Thank you. I think this is partially answered in my previous responses on public debt. Clearly, it is important to adjust economic policies to ensure that debt is on a sustainable path and debt does come down over the course of the program. And the policies that are embedded in the program that have been committed to by the authorities do indeed bring debt on a downward trajectory and reduce the indebtedness of Egypt over the course of the program.
MS. ELNAGAR: Thank you, Ivanna. I think we’ve answered all the questions that we received. And we’re coming to the end of our press briefing. So, thank you for taking the time to answer the questions. And thanks for those who participated in the press conference. Have a good rest of your day.
PRESS OFFICER: Randa Elnagar
Phone: +1 202 623-7100Email: [email protected]
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