IMF Releases $820 Million to Egypt, Calls for Continued Economic Reforms

The IMF has released $820 million to Egypt following its third loan program evaluation, urging the nation to pursue further economic reforms amid ongoing fiscal challenges.

IMF Disburses $820 Million to Egypt, Urges Further Reforms Amid Economic Crisis

After completing the third evaluation of its extended loan program, the International Monetary Fund released approximately $820 million in funding to Egypt. However, the Arab world's most populous country was urged to implement additional reforms.

The fund stated on July 29 that the Egyptian authorities' recent endeavors to "restore macroeconomic stability have begun to yield positive results."

“Inflationary pressures are gradually abating, foreign exchange shortages have been eliminated, and fiscal targets (including related to spending by large infrastructure projects) were met. These improvements are beginning to have a positive effect on investor confidence and private sector sentiment,” the IMF said.

Egypt has been implementing an IMF-backed economic reform program since 2022, which has resulted in a significant reduction in food and energy subsidies and the devaluation of its currency four times. However, some subsidies continue to exist. Egypt is currently grappling with a severe economic crisis.

By its agreement with the IMF, the nation has implemented an initiative to progressively eliminate subsidies by December 2025, which includes an increase in fuel prices this month.

The government has increased tariffs for the second time since the IMF expanded its loan program by $5 billion in March.

Citizens have opposed the government's efforts to eliminate subsidies, contending that their living expenses have increased significantly in recent years. The ongoing power cuts have further exacerbated the situation, disrupted daily life, and sparked Egyptian resentment.

The International Monetary Fund (IMF) stated on July 29 that the Central Bank must adopt a data-driven strategy to reduce inflation and inflation expectations.

According to analyst Moustafa Badra (via The National), inflation has decreased by approximately 10% since it reached a record high of 38% in September of last year. However, it is still nearly three times higher than before the IMF agreement was completed in 2022.

“High inflation remains a concern for citizens and economists alike. The prevailing expectation is that it will remain high until well into 2025 when the tight monetary policy that the Central Bank has been implementing at the IMF's behest will take effect,” he said.

“We expect the bank to keep interest rates high until it sees inflation abating.”

Transitioning from In-Kind Subsidies to Currency System Poses Major Challenge for Egypt

According to Mr. Badra, transitioning from in-kind subsidies to a currency system is challenging. It will likely require significant time and effort to achieve the desired outcome as part of the IMF-mandated reforms.

“The simple reality is that the in-kind subsidy system cannot work anymore. When you factor in the population increase and the sheer cost of keeping even just bread subsidies as they are, it is simply not possible. The in-kind system has also allowed for subsidies to be widely exploited by undeserving citizens and this needs to change,” he said.

One of the government's most challenging responsibilities will be evaluating the beneficiaries of its various subsidized sectors, such as food, water, electricity, and fuel, and guaranteeing that only the most deserving individuals receive assistance from the government.

“The government is exerting a lot of efforts to stabilise everything but it is a difficult time. The situation is infinitely complex and will require time, patience, and deft maneuvering,” he added.

The fund said continuing fiscal consolidation efforts will help place public debt on a “decisive downward path.”

“To ensure that resources are still available to meet vital spending needs to help Egyptian families, including on health and education, particular attention will be needed to strengthen domestic revenue mobilization and contain fiscal risks from the energy sector.”

“This will also assist in generating some fiscal space to expand social spending in support of vulnerable groups.”

The fund also stated that the regional environment remains challenging in the context of the Gaza conflict and the ongoing tensions in the Red Sea.

Earlier this month, Egypt's Suez Canal, a critical component of the country's economy, reported a 23% decrease in annual revenue for the fiscal year 2023-24. The primary cause of this decline was the impact of attacks by Yemen's Houthis on cargo vessels in the Red Sea.

The Suez Canal Authority reported total revenue of $7.2 billion for the 12 months ending June 30, a decrease from the $9.4 billion generated during the same period last year.

The number of ships transiting through the canal decreased: 20,148 vessels, carrying 1 billion tonnes, transited the canal in 2023-24, compared to 25,911 vessels, carrying 1.5 billion tonnes, in the previous fiscal year.

“Risks remain significant. Regional conflicts and uncertainty about the duration of disruption of trade in the Red Sea are important sources of external risk,” said Antoinette M Sayeh, deputy managing director and acting chair of the IMF.

“Maintaining appropriate macroeconomic policies, including a flexible exchange rate regime, would help ensure economic stability,” she said.

She added that managing the resumption of "capital inflows prudently" will also be crucial to mitigate the danger of future external pressures and prevent potential inflationary pressures.

The fund also advocated for increased efforts to implement the state ownership policy initiative, which included the enhancement of its divestment program, the streamlining of business regulations to establish new firms, the expediting of trade facilitation practices, and the establishment of a "level playing field" that prevents unfair competitive practices by state-owned companies.

Additionally, it advocated for enhanced management practices and competition within the financial industry.

“Reforms that boost tax revenue, deliver a more robust debt management strategy, and bring additional resources from divestment to debt reduction would create space for more productive spending, including additional targeted social spending,” said Ms Sayeh.