IMF Releases Egypt Loan Details: An Investors’ Guide

The International Monetary Fund released the details of the $12 billion loan it approved for Egypt in November, the Washington-based lender’s largest in the region.

Egyptian officials have said the loan adds credibility to its program to overhaul the economy, which has already included subsidy reductions, a currency float and higher interest rates. The government is currently marketing Eurobonds worth as much as $2.5 billion on a global roadshow that will help fund its spending plans.

Even so, the IMF loan was controversial among some Egyptians, who feared the economic conditions attached. Below is a summary of the IMF staff report on the loan, as well as the Egyptian government’s letter of intent in securing it.

Loan Details

• Risks to implementation of loan program are “significant,” but “backing at the highest political level” helps to mitigate those risks, the IMF staff said
• Egypt’s government requested loan for budget support
• Access to the loan to be distributed evenly over three years
• Egypt’s economic program is fully financed in 2016/17, additional financing will be needed for 2017/18 and 2018/19. Financing gaps in these two years are “much smaller,” with “good prospects that they can be covered with multilateral support, rollovers of some maturing liabilities, and little fresh financing,” the IMF staff said
• Loan reviews will be semi-annual; first to be completed on or after March 15. Second review on or after Nov. 11

Growth

• Egypt’s current-account deficit to narrow to 3 percent of gross domestic product by 2018/19 (it was 5.6 percent in June, according to official data)
• GDP growth to rebound to 5 percent to 6 percent in medium term; 2016/17 output to remain “well below" its potential (Egypt cut its 2016/7 growth forecast to 4 percent from 5 percent this week)
• “Fiscal consolidation coupled with monetary tightening would inevitably constrain growth. The planned structural reforms will take time to bear fruit,” the IMF staff said

Reserves

• Central bank to accumulate $4.9 billion in gross reserves between June 2016 and June 2017; $7 billion in 2017/18 and $4 billion in 2018/19. Reserves to reach almost $33 billion -- equivalent to 5 months’ of imports and services -- by end of program (it was $24.3 billion in December)
• Central bank to develop new investment guidelines for reserve management, including capping allocation of investments to foreign subsidiaries and branches of Egyptian banks’ stock at $5.6 billion
• Financing gap for the program is $35 billion, half of it due to the need to boost reserves

Monetary policy

• Monetary policy framework during the program will rely on “money targeting”
• Monetary policy instruments to include deposit auctions, standing facilities; central bank may also resort to changing reserve requirements as needed
• Program aims to bring inflation to mid-single digits over the medium term (headline inflation was 23.3 percent in December)
• Central bank to “maintain short-term interest rates at levels that ensure tight liquidity conditions,” the IMF staff said
• As inflation starts to decline in 2017/18, interest rates will come down to permit credit recovery
• Direct central bank financing of the budget through overdrafts to fall to below 75 billion pounds in 2016/17. In the letter of intent, Egyptian authorities said they would convert 250 billion pounds to government securities by Dec. 31
• Starting March 2017, Egypt’s central bank will publish quarterly monetary policy and/or inflation reports

Exchange Rate, Banking

• Egypt to lift $100,000 limit on transfers abroad by individuals, as well as the $50,000 cap on cash deposits for importing non-priority goods, by June 30
• IMF staff will conduct a full analysis of the exchange system before the first loan review to verify Egypt’s compliance with Article VIII
• Egypt to develop a collateral registry by end-March 2017 to help grant credit to small- and medium-sized enterprises

Deficit, Debt

• Government debt to decline from 94.6 percent of gross domestic product in 2015/16 to 85.8 percent by 2018/19, and 78.2 percent by 2020/21
• The overall deficit is expected to fall during the program from 12.1 percent of GDP to 4.7 percent
• Program aims to turn primary balance (excluding interest payments) to a 2.1 percent surplus in 2018/19 from a deficit of 3.4 percent of GDP in 2015/16. The budget for 2016/17 targets a primary deficit of 0.8 percent of GDP

Taxes, Revenue

• Tax revenue to increase by 2.5 percent of GDP over the length of the program
• Before the end of March 2017, Egypt will introduce a simplified tax regime for small- and medium-sized enterprises, where smaller tax payers will pay a reduced flat rate on annual recorded turnover
• Capital gains tax to be reinstated from May 2017, effective no later than 2017/18. Revenue generated will likely be 0.1 percent of GDP initially, but has the potential to grow strongly over the longer term
  • Deputy Finance Minister Amr El Monayer said after report was released on Wednesday that the government does not plan to reinstate the levy in May 2017, and will amend the tax law to formalize its Nov. 2 decision to postpone the capital gains tax for three years
• Other measures, including sale of telecom licenses and land, to boost revenue by 0.3 percent of GDP in 2016/17, rising to 0.5 percent in 2018/19
• First offering of stakes in government-owned enterprises to take place in the first quarter of 2017

Spending

• Increase in the wage bill to be contained below the projected level of inflation, to generate fiscal savings equivalent to 0.9 percent of GDP
• Government will increase the level of fuel costs it recovers to 100 percent in 2018/19
• Government to develop roadmap for pension reform by June 2017

Oil and Gas

• Gas production to increase to 4.9 bcf per day from 3.8 bcf per day by June 2017, and to 7.7 bcf per day over the next three years; Egypt’s domestic needs are 5.2 bcf per day
• Government will adopt an energy sector reform strategy based on a report prepared by an international consultant
• State-run Egyptian General Petroleum Corporation will seek to reach agreements with creditors on a schedule for the repayment of its arrears by the end of June 2019. It will ensure that no new arrears are accumulated