Egypt took the reform path last year in order to secure financial assistance from the International Monetary Fund (IMF). The IMF designed a $12 billion loan program for the country for three years in November 2016 in order to provide support to its efforts to foster inclusive growth.
For its type, this financial assistance was the biggest on record for the Middle East. The country received $2.75 billion as the first tranche immediately.
To show that it was willing to make structural changes in order to qualify for the loan, Egypt effected a reduction in fuel subsidies even in face of a public outcry. At the same time, the country removed the peg of Egyptian pound from 8.8 to a US dollar and allowed it to float freely.
In order to assess that Egypt remains on track on reforms, the IMF intends to conduct five reviews over the three year period. Disbursement of further tranches of the loan is contingent on a favorable impression on reforms in these reviews.
Lack of satisfactory progress can lead to freeze on further assistance, as has been the case with Tunisia. The first such review will take place either towards the end of April or in early May.
IMF Managing Director Christine Lagarde met with Egypt’s President Abdel-Fattah El-Sisi, post which she released a statement which said “Egypt is implementing a strong economic reform program to help the economy return to its full potential, achieve more growth and create more jobs. We recognize the sacrifices made and the difficulties faced by many Egyptian citizens, especially due to high inflation.”
The country is expected to undertake further cuts in fuel and electricity subsidies in fiscal year 2017-18 in order to attain its targeted budget deficit of 9.1% of gross domestic product (GDP) for the year down from 10.5% in 2016-17. In Egypt, a fiscal year begins in July and ends in June of the succeeding year.
In order to be eligible for continued financial help, the country needs to tighten its belt further on spending.
Ratings firm Moody’s is quite certain that Egypt will attain gols set by the IMF in order to secure its second tranche. The Wall Street Journal reported Steffen Dyck from the firm as saying “The implementation of the IMF program’s targets, including reductions in fiscal deficits and government debt levels, as well as improvements in Egypt’s external liquidity position, will help address Egypt’s key credit challenges.”
However, given the extent to which the high inflation has had the public reeling, apart from the cap on public sector wages and worries on food rationing, it is quite possible that further reform measures will result in a massive backlash.
The situation has been worsened by the church bombings on April 9, which have raised questions on the security situation in the country.
In the next article, let’s see how the reform process has helped Egypt.