Egypt Takes Proactive Approach to Limit the Pandemic’s Fallout

A worker disinfects the streets of Cairo. The health crisis has severely hit Egypt’s tourism industry, one of the country’s main sources of income. (photo: Xinhua News Agency/Newscom)

July 13, 2020//-As part of Egypt’s two-step request for IMF financing to respond to COVID-19, $5.2 billion was approved under the 12-month Stand-by Arrangement (SBA).  Financing under the SBA follows the $2.8 billion approved in May under the IMF’s Rapid Financing Instrument.

Reforms aim to preserve the economic achievements of the past four years and advance key structural measures while protecting the vulnerable populations.

Egypt was one of the fastest-growing emerging markets prior to the pandemic. But significant domestic and global disruptions from the crisis have affected the outlook and shuffled policy priorities.

In a conversation with IMF Country Focus, Uma Ramakrishnan, the IMF’s mission chief for Egypt, discusses the country’s economic challenges.

What is the impact of COVID-19 on Egypt’s economy?

As in other countries, Egypt’s economy is being impacted both through virus containment measures as well as through the sudden stop in tourism, fall in exports, drop in remittances, and lower revenue from the Suez Canal. Also, at the peak of the global risk aversion during March and April, Egypt experienced capital outflows of nearly $16 billion.

The combination of these factors—though partially offset by a fall in imports due to lower domestic demand—have put considerable pressure on the balance of payments. With the global economy in recession and domestic activity curtailed, growth is expected to significantly decline. Moreover, revenue is falling just as the government needs to urgently ramp up spending on health and social protection.

How will IMF support help limit the impact?

To manage the fallout from the pandemic, the authorities proactively sought IMF support in two steps. First, they requested $2.8 billion in financing under the Rapid Financing Instrument, approved in May, allowing them to respond with health and social spending for the most vulnerable groups.

Second, they requested a 12-month Stand-By Arrangement (SBA) with access to $5.2 billion in financing to help the government preserve the economic gains of the past four years—while continuing to ensure adequate health and social spending—and further advance structural reforms to position Egypt for sustained recovery.

How will Egypt protect the poor and vulnerable segments of the population? 

The government’s high priority on the people’s well-being and their livelihoods is evidenced by their three-pronged approach:

First, allocations for health spending have increased significantly since the onset of the pandemic, and coverage under the conditional cash transfer programs known as Takaful and Karama (Solidarity and Dignity) has expanded.

In addition, the government has instituted new programs to provide cash transfers to irregular workers who are substantially affected by the crisis and distribute medical and sanitation kits to poor villages. The government is also working with NGOs to provide additional support to the needy.

Second, to ensure continued provision of critical social protection, the government has committed to a minimum level of spending for health and social programs so that the resources for these basic services are available.

Third, the government will undertake a review of social spending—initially focusing on social protection, then on health and education—to assess the adequacy and efficiency of the spending and areas for improvement. The World Bank is supporting this review.

What policy measures will Egypt take under the Stand-By Arrangement to help ensure a sustainable recovery?

The government’s goal is to place Egypt on a strong footing for recovery. Fiscal policy is being eased to support the economy and address crisis needs, including increases in health spending (26 percent) and social protection (10 percent).

The government is also introducing measures to partially offset the revenue shortfall, including to promote green recovery through a fee on the consumption of fuel products.

Crisis spending, however, needs to be weighed against the need to avoid an excessive increase in public debt.  Once recovery begins, the government aims to resume debt reduction and maintain medium-term fiscal sustainability. To this end, the authorities are updating their debt strategy to reduce debt vulnerabilities and working to mobilize additional revenue to accommodate higher social spending.

The authorities are committed to maintaining low and stable inflation, preserving exchange rate flexibility, and allowing orderly exchange rate adjustments. Maintaining financial sector stability with the ongoing strong supervision and the close monitoring of any emerging financial risks remains a priority.

The authorities have also pledged to continue structural reforms that began under the Extended Fund Facility. Specifically, the budget process will be improved, more light will be shed on the financial operations of state-owned enterprises and economic authorities, competition will be strengthened by helping level the playing field, and the customs law will be amended to improve Egypt’s investment climate.

How did Egypt’s earlier reforms help the country weather the challenges of the current crisis?

The bold economic reform program that Egypt adopted from 2016 greatly enhanced the economy’s resilience. Before the pandemic, growth was above 5 percent, international reserves were comfortable, and debt was on a downward trajectory.

The government had also embarked on additional reforms to enhance the business environment and adopt a private sector-led growth model to enhance job creation.  These steps allowed the government to swiftly launch a comprehensive pandemic response. Despite significant progress to reduce poverty and inequality, however, challenges remain.

What measures will be introduced to ensure that crisis-related spending is used for its intended purpose?

The government is committed to publishing the details of all crisis-related spending in a consolidated manner on the Ministry of Finance website. It will likewise post government procurement plans and contracts awarded for the emergency responses to COVID-19, including the names of the companies concerned and information on beneficial ownership. The Accountability State Authority will audit crisis-mitigating inflows as well as spending and publish the results after the end of the fiscal year.

IMF blog

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