Egypt struggles to implement IMF’s conditions before board meeting

Hossam Mounir
6 Min Read

While the Egyptian government has imposed extreme secrecy on the conditions surrounding the International Monetary Fund’s (IMF) loan, a few have been made public, specifically subsidy reform, the flotation of the Egyptian pound, and the application of the value-added tax (VAT).

The government has a mission to achieve these three conditions of the IMF loan before the autumn meetings of the fund’s executive board.

Minister of International Cooperation Sahar Nasr, Minister of Planning Ashraf El-Araby, Minister of Finance Amr El-Garhy, and Central Bank of Egypt (CBE) governor Tarek Amer will participate in the IMF and World Bank meetings slated to be held in Washington DC from 7-9 October.

Days ahead of the scheduled meeting, the CBE announced on Monday that its foreign exchange reserves registered their largest increase since April 2015, reaching $19.59bn in September, an increase of 18.2% compared to August.

This is an increase of over $3bn; however, it is unclear what caused the increase, although a portion of this amount is understood to come from loans and deposits.

The increase in foreign exchange reserves is supported by the state’s direction towards reducing the value of the Egyptian pound against the US dollar, which is a move that the market has been waiting for from moment to moment and is a vital condition of the IMF loan.

Flotation of the Egyptian pound

For a week, the Egyptian media has talked incessantly about the devaluation of the Egyptian pound and its flotation.

“The decision to devalue the Egyptian pound is final; however, the timing of this step is up to the CBE alone, and it has not been decided yet,” a prominent banker told Daily News Egypt on Monday.

While Egypt has continued to hold its breath for the further devaluation of the Egyptian pound, the banker ruled out the possibility of taking this step, at least until Tarek Amer and his accompanying delegation return from the IMF and World Bank meetings.

Last week, Beltone Financial issued a report announcing that a fully fledged floating of the Egyptian pound would occur in the near future.

Arqaam Capital expected that the devaluation of the Egyptian pound would occur during the coming days.

As part of the package of loans Egypt is waiting to receive to fund its economic reform programme, it is known that the CBE has already received $1bn from the World Bank, the first of three $1bn increments to be received over a three-year period. The $1bn already received is believed to be part of the latest increase in foreign reserves.

The other $2bn that were added to foreign reserves were most likely covered by countries that pledged support to Egypt.

In recent weeks, the United Arab Emirates (UAE) had pledged $1bn, around $2bn is expected from Saudi Arabia, and between $1-2bn is expected from China, among other sources.

“We expect that support from European countries could also materialise soon,” Arqaam Capital told Daily News Egypt.

CI Capital forecasted that the Egyptian pound’s flotation will happen in two phases, each taking place a week apart.

Further, Pharos Holding said that a partial flotation of the Egyptian pound can occur after an increase in the CBE’s foreign exchange reserves.

In a previous statement by the CBE governor, Amer said that once the foreign exchange reserves reach $25bn, the flotation will be applied.

However, the sources for reaching the $25bn are not yet sufficient. The available sources at the moment total roughly $23bn, which include the first tranche of the IMF loan ($2.5bn), between $3-5bn from international bonds, a $2bn loan from China, and between $2-3bn from Gulf Cooperation Council (GCC) countries.

Subsidy reform

Further reform of subsidies is without a doubt forthcoming. Electricity Minister Mohamed Shaker dropped hints on Saturday that subsidy reforms that were applied in July 2014 contributed to putting the sector back on the right track to open doors for investments to improve the delivery of services to citizens, and boost economic activities in general. In addition, the money saved from reducing energy subsidies can also be redirected to other sectors, such as health, food, and education.

The minister added that the energy sector is one of the most influential sectors in contributing to the financial sustainability of Egypt, pointing out that the value of energy subsidies in Egypt is one of the highest subsidy rates in the world.

In August 2015, the government reduced the subsidies on water and electricity.

In addition, the Ministry of Finance has reduced water, electricity, and health insurance subsidies, as well as made a significant reduction in fuel material subsidies, in its budget for the next fiscal year (FY) 2016/2017.

Value-added tax

The third condition listed by the IMF is tax reform, which includes the application of value-added tax (VAT).  On 29 August, the Egyptian parliament approved the VAT Law at 13%, which will be increased to 14% in FY 2017/2018. The Ministry of Finance announced the application of the VAT in October, but it reconsidered its decision and applied the tax in September.

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