Reform before review, IMF tells Egypt: The IMF wants Egypt to make more progress on privatizing state-owned companies and moving to a flexible exchange rate before it goes ahead with the first review of the country’s USD 3 bnassistancepackage, Bloomberg reports, citing people it says have knowledge of the matter. The review had been expected by 15 March 2023 under the terms of the package.

Signs of progress: The Washington-based lender had “fruitful discussions” with the Egyptian authorities in preparation for the first review on the sidelines of the IMF and World Bank Spring Meetings last week, IMF mission chief for Egypt Ivanna Hollar said in a statement on Sunday. “Discussions addressed a number of issues related to program implementation and the outlook for the Egyptian economy, and will continue virtually towards starting the first review mission,” Hollar added, without disclosing a potential timeline.

Seconded by Georgieva: “The teams are working and I am confident that we will have a good outcome,” IMF boss Kristalina Georgieva told reporters on Thursday, adding, “I want to say that we have seen in Egypt a deeper understanding of how complex not only the domestic environment is but also the regional and global environment is.”

The government may have to curb the pace of large-scale infrastructure projects to get through the bottleneck, Georgieva added. “In the current tight environment, they could undermine macroeconomic stability with the speed that was originally designed under different circumstances,” she added. Prime Minister Moustafa Madbouly in January announced curbs on FX spending on infrastructure projects and instructed all but “essential” ministries to make budget cutbacks until the end of the current fiscal year.

“The flexibility of the exchange rate is the best way for Egypt to protect its economy from external shocks,” said the IMF’s director for the Middle East, North Africa and Central Asia, Jihad Azour, at a press conference on Thursday (transcript). The government needs 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,” he added.

The World Bank agrees: The lender's vice president for the Middle East and North Africa, Ferid Belhaj, shared the same view as the IMF about the government’s need to reduce its involvement in the economy in an interview on Wednesday, according to Bloomberg. Authorities in Egypt are “moving in the right direction but they never move fast enough when it comes to reforms,” the news service quotes him as saying. “What we see today in Egypt is a situation that is not as stable as we would like it to be,” he added, in reference to the EGP exchange rate. Structural reforms to level the playing field and increase transparency of state-owned companies are “very, very important to give more confidence to investors and people who would like to engage in the Egyptian economy,” he added.

What happens if the first review doesn’t wrap up before June? The IMF’s executive board should discuss the first review by June, but in the case of a longer delay the lender may combine it with the next one, which is scheduled for September, according to Bloomberg.

BACKGROUND- Egypt committed to reduce the state’s involvement in the economy and maintain a permanent currency float as part of the terms of the loan. The government is yet to sell down any assets since it in February announced plans to offload stakes in 32 companies, while the official USD-EGP rate has remained unchanged at 30.94 for almost six weeks. Egypt needs to pass the first review to unlock the second USD 354 mn tranche of the loan.

MAAIT RESPONDS-

The government is “steadily proceeding” with implementation of economic reforms in partnership with the IMF, Finance Minister Mohamed Maait told Fund representatives in Washington, according to a ministry statement released on Sunday. He pointed to the state ownership policy document and measures to drum up more FDI as evidence of progress, adding that the changes will see the private sector become the driver of economic growth.

ABDALLA SPEAKS-

It’s going to take more than rate hikes to bring down inflation:“A lot of our inflation is imported and a lot of it is due to supply problems,” Central Bank of Egypt Governor Hassan Abdalla said on Thursday in Washington (watch, runtime: 06:19). “Not only supply prices but supply issues including a backlog that has resulted from some previous regulations. And this in itself is not and will not be addressed by interest rates.”

Background: Inflation rose to a near-record high in March of 32.7%, up from 31.9% in the previous month on the back of factors including a series of currency devaluations, an FX crunch, higher fuel prices, and increased demand during Ramadan.

Moving with caution: The CBE has raised interest rates by 1k bps over the past year to curb soaring inflation, and Abdalla voiced caution about further hikes. “We’ll not hesitate to do more, but we need to be very careful,” he said, hinting at the use of other policy measures to address the rapid growth in prices. Improving the effectiveness of monetary policy — such as by winding down its subsidized loan program last year — is something the central bank is “working very hard on,” he said.

Fixing supply issues is key, Abdalla says: “Relaxing the supply issues and increased competition will result also in a healthier and faster inflation reduction,” he said.

Regaining the narrative: “The market needs to see a true story and needs to see a way forward for some time, a plan for two or three years,” he said. “You cannot get back the confidence and the trust and managing expectations unless you have the whole full plan. And this is something I’m glad to tell you that we are working very closely with the government on.”

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