IMF awaits more reforms in Egypt before its first program review

The International Monetary Fund is waiting to see Egypt enact more of the wide-ranging reforms it pledged before carrying out the first review of a $3 billion rescue program, according to people familiar with the matter.

The Washington-based lender wants to see privatization deals for state assets and genuine flexibility in Egypt’s currency to ensure the review is successful, said the people, who asked not to be identified as the matter is confidential.

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The IMF approved a 46-month program for the North African country in December, later signaling the review would likely be com-pleted in March. Officials at Egypt’s finance ministry and central bank couldn’t be reached for comment.

In a press conference on Thursday, Jihad Azour, the IMF’s director for the Middle East, North Africa and Central Asia, said that “the flexibility of the exchange rate is the best way for Egypt to protect its economy from external shocks.”

There’s also a need to “redesign the role of the state to focus on priority sectors and allow through leveling the playing field, the capacity for the Egyptian private sector to create growth and create more foreign currencies,” Azour said.

The IMF’s managing director, Kristalina Georgieva, said on the same day that the fund was preparing to carry out the review, without giving a timeline. “The teams are working and I am confident that we will have a good outcome,” she told reporters.

The IMF deal is a vital component of Egypt’s efforts to turn around an economy that was tipped into crisis by the shock waves of Russia’s invasion of Ukraine and is experiencing its worst foreign-currency crunch and highest inflation in years.

The lender’s support is supposed to catalyze billions of dollars of investment from Gulf allies including Saudi Arabia and the UAE that the IMF has called “critical.”

The IMF is keen for Egypt to curb the state’s role in the economy with moves including the sell-off of stakes in local companies.
Private businesses have long complained that unfair competition from state enterprises, including those owned by the military, is deterring large-scale foreign investment.

A new state-ownership policy introduced in late 2022 clarifies the role of the public sector and is supposed to boost private-sector participation in development projects. Under the IMF pact, state-owned entities must also submit financial reports to the finance ministry. The lender, however, has warned of potential “resistance from vested interests.”

The government in February unveiled a list of 32 companies in which it would sell stakes within a year. Finance Minister Mohamed Maait has said that number may rise and some assets would go to the market in April. According to the IMF program, Egypt is expected to raise $2 billion from the sale of state-owned stakes during the current fiscal year that ends in June.

Currency reform is also a crucial issue. Egyptian authorities say they’re shifting to a flexible exchange rate and have devalued the pound three times since March 2022. But long stretches of stabil-ity for the pound even as its value falls on the local black market have raised questions over their commitment.

Concerns about inflation —- already at its highest since the after-math of a currency crisis in 2016 — and the impact on social stabil-ity in the country of more than 104 million people, may be putting constraints on the policy. The IMF warned in January that the central bank “may face political and social pressure to reverse course.

Gulf countries have previously been quick and reliable sources of aid for Egypt. But while Saudi Arabia and Qatar promised more than $10 billion in investments about a year ago, only a fraction has materialized as they press for more clarity on currency policies and evidence of deeper reforms.

Approval on the review, which should be discussed by the IMF’s board by June, would result in Egypt receiving a second tranche of the loan, worth 261.13 of the IMF’s Special Drawing Rights, or about ($354 million).

The IMF can combine reviews in some cases, meaning that if the first isn’t completed by June it can be combined with the next one, which is due in the second half of 2023.

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