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Wednesday, 26 May 2021

IMF gives initial approval for final tranche of USD 5.2 bn standby loan

Egypt expects to unlock the third and final USD 1.6 bn tranche of its USD 5.2 bn IMF standby loan after reaching a staff-level agreement with the fund, the IMF said in a statement. An IMF delegation was (virtually) in town over the past two weeks for the second review of the 12-month program and its annual Article IV consultations, which the IMF usually holds with its member states once a year as a way to keep track of local economies. The disbursal of the third tranche is contingent on the approval of the IMF’s executive board, which is expected within the next few weeks, according to the statement. Reuters also has the story.

Refresher on the facility: The IMF had signed off last June on the one-year package to support Egypt’s economic recovery through covid-19, as key economic sectors — including the vital tourism industry — were negatively impacted by the pandemic. The funding was also made available to support healthcare, shore up the country’s social safety net, advance structural reforms, boost private sector growth and job creation, and help the government narrow its budget deficit.

Overall, the review appears to be quite positive, with the fund noting that “all structural benchmarks were met” under the agreement. “Over the past 12 months, the authorities’ strong performance and commitment helped achieve the program’s objectives of maintaining macroeconomic stability during the pandemic while protecting necessary social and health spending and implementing key structural reforms,” the statement read.

The economy showed “resilience” over the past several months thanks to the government’s “strong implementation” of its policy program. Egypt’s GDP is expected to close the current fiscal year with 2.8% growth before accelerating to 5.2% in FY2021-2022, the fund says. The fund had bumped up its outlook for Egypt’s growth from 2% following the completion of its first review of the program in January. Fiscal policy for the upcoming fiscal year “appropriately targets a gradual consolidation to balance needed support for the economic recovery while safeguarding fiscal sustainability,” the fund says, giving a nod to the government’s plan to ramp up its investments in priority sectors such as healthcare, education, and infrastructure. The government’s sustainable development plan for FY2021-2022 outlines healthcare, transport and railway infrastructure, and education as its top priority areas.

Reserves + the banking sector are still a bright spot: The IMF team found that the primary balance and international reserves have exceeded the program’s targets, which was also the case when it reached a staff level agreement for its first review in November. Foreign reserves have been steadily rising since June, coming in at USD 40.3 bn at the end of April, bringing us closer to our February 2020 peak of USD 45.5 bn. The fund also gave a nod to the Central Bank of Egypt’s “readiness to act as necessary to support economic recovery amid muted inflation.” The country’s banking system is “liquid, profitable, and well-capitalized,” the fund says.

There are still covid-19 risks, but we have the right policies in place: Economic performance could be undermined by lingering risks related to the pandemic, resulting in a bit of uncertainty to the outlook. But the fund is optimistic that short-term recovery has appropriate policy support, while the government’s structural reform program — the second phase of which Prime Minister Moustafa Madbouly and Planning Minister Hala El Said announced last month — will “unleash Egypt’s enormous growth potential in the medium term.”

Next steps: The fund wants to see “specific policy measures” to support the targets of our Economic Reform Program 2.0, suggesting that the government outline clear steps to boost private sector involvement in the economy and help encourage exports by removing trade barriers.

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