07 MARCH 2024

Egypt's Economy in Light of Recent Monetary Updates

On the morning of March 6, 2024, the Central Bank of Egypt (CBE raised benchmark interest rates by 6% (600 bps) and fully floated the Egyptian currency. That afternoon, the government and the International Monetary Fund announced a staff-level agreement to increase Egypt’s current USD 3 billion Extended Fund Facility to a total of USD 8 billion.
Against that backdrop, Egypt’s Finance Minister spoke with AmCham Egypt Members, addressing the government’s plan to improve fiscal and monetary discipline, with structural reforms that will restore global and local confidence in Egypt’s economy.

Summary of the Minister’s remarks:

On the current economic challenges:
Geopolitical tensions in the region over the past couple of years have affected Egypt's economy and supply chains, causing macroeconomic disruption and driving up the prices of imported commodities.
Monetary policy around the world and at home tightened, limiting fiscal policy’s ability to deliver on its objectives.
Domestic economic policies have added to the pressure. To create jobs and attract investors, the government had been focusing on public investment in infrastructure, which is critical to solving many of the country's incumbent problems, such as electricity, gas, and roads. Those efforts, however, were costly.

On the immediate steps forward:
We now have a comprehensive package to ensure price stability, stabilize a functioning exchange rate system, and implement deep structural reforms to promote private-sector-led growth and jobs.
We have already started to deliver on those corrective policy measures, as we have seen with the CBE increasing interest rates by 600 basis points and allowing the Egyptian pound's value to be dictated by market supply and demand.
The business community needed the March 6th devaluation. They urged us to move with it as quickly as possible.
One of the issues was to guarantee that the liquidity is there to meet the demand for foreign currency. The [USD 35 billion] Ras El Hikma deal gave us the liquidity we needed.  
When we got the liquidity, we notified the IMF of the date for tightening monetary policy and floating the currency. That led to the IMF’s approving an extension of our USD 3 billion fund facility to reach USD 8 billion over four years.
That will be supported by additional financing from multilateral partners, such as the EU, World Bank, Japan, the UK, and others. We will apply for additional finance from the IMF’s Resilience and Sustainability Facility and will also apply for USD 1.2 billion for climate resilience and mitigation projects.
Altogether, the total expected financing from these sources is USD 20 billion.

On the goals, challenges and clarity for the future:
What we have done is a short-term solution. The medium- and long-term solutions need a private-sector-led economy. We will share our plans with the private sector for the next six years. Uncertainty is the enemy, whether it is good or bad.
Dealing with high inflation rates is essential. We have seen them rise significantly in the past two years. We must bring them back to 7% plus or minus 2%. We did that between 2016 and 2017, when inflation rose to 35% then declined below the CBE target.
The sustainability of our policies is also vital.
Fiscal discipline was always there, most evident when we decreased the budget deficit from 13% to 6% of the total budget. Without the external shocks we have seen in the past two years, we could have been below 5%.
We succeeded in converting the 40-year-old primary deficit to a primary surplus and have maintained this surplus since 2018.
Egypt's debt-to-GDP ratio used to be over 100%; we dropped it to 81%. Our target is to bring it to our historical range between 75% and 80%.
The big problem is that the cost of financing has more than doubled in the past few years. It is now nearly 2.5 times higher than before the currency devalued, due to the war in Ukraine. That rise, plus all the internal and external factors, is the biggest problem.
When the economic situation is bad, revenue decreases, and you need to finance the budget by taking loans. The exchange rate and interest rates impact the cost of loans.
Before inflation hit Egypt, our interest payments were between EGP 550 billion and 585 billion. This year, our financing cost will be EGP 1.12 trillion or higher.

On Growing the Private Sector
One issue that is always raised is public investment in infrastructure. In the past, when the exchange rate and inflation rates were lower, we invested over EGP 1 trillion. Now, we see it is time to switch: Let the private sector invest more in public projects. It is more cost-effective for the government to take that approach.
The government had already started slowing down public investments and national projects by state-owned enterprises (SOEs), economic authorities, and other state entities. It is 10% less than last year, despite inflation.
We set up a committee with the ministries of interior, planning, finance, SOEs, and those with investments in the country and we agreed to limit public investment to EGP 1 trillion a year, as requested by the IMF. The Central Audit Authority will ensure we comply. That will help liquidity, inflation, and pressure on the need for dollars.
The private sector will fill our investment gap. The latest of our efforts to exit the economy is to leave airport management to the private sector. You will get better service, the private sector will benefit, and the government will get a share of those projects' revenues.
We are still committed to selling SOEs to the private sector, and the International Finance Corporation is helping us in the asset sales. We are expected to sign deals worth USD 3.5 billion in the short and medium terms.
We plan to focus on the real economy: industry, agriculture, more FDI, production, exports, and privatization.
We are fully committed, supportive, and convinced of the policy agenda we have enacted to attract FDI and increase exports, and upskill labor.

On Creating a Fair and Favorable Tax System
By June 2024, our debt should be below 90% of GDP, and we plan to return it to below 80%. We will achieve that by rationalizing tax exemptions for companies and sectors.
The private sector has complained that state-owned enterprises (SOEs) and other state entities enjoy privileges on tax and customs. We removed those privileges.
Others have stressed the need to rationalize other exemptions to improve the investment environment. We will work on that.
We don't plan to change taxes or send drafts to the legislature before talking to the private sector first. We can't make everyone happy, but we will ensure no surprises. And we will always give leeway in implementation.
We have a draft income tax law, strategy, and tax policy for 2024-2030. Once we finalize those preliminary versions, we will share them with the private sector.
There will be no increase in corporate income tax. It will be lower. For the nominal rate vs. effective rates, the gap will stay the same or decrease. We will introduce some elements to close that gap.
We plan to issue a decree to deal with the official and black-market rates from a tax point of view. Proving the black-market rate is challenging, but we are working with the CBE to overcome those challenges.

On tackling the impact of inflation:
The persistently high inflation rates in Egypt for the past two years have affected low- and middle-income families. It is a difficult period because we can't control it, as those events are outside our control. The Suez Canal lost 50% of its revenue due to external factors. It used to bring USD 1 billion a year before geopolitical tensions escalated from the Gaza Strip to Yemen.
CBE's tighter monetary policy challenges companies and individuals as it slows GDP growth rates.
Additional steps are needed to protect low-income families from inflation and rising prices. We will soon start consulting with the private sector on how to do this.
The new social protection package, the details of which will be announced, is EGP 180 billion a year. But that is not enough.
A key question is: where will the money come from? Part of it will come from the pension fund, part from the budget reserve, and part from asking Parliament for additional finance.
One method of social protection is to increase the minimum threshold for income tax exemption, which will benefit the private sector as well.

After his speech, the Minister fielded questions from the audience on a range of topics: 
On the CBE’s announcements on March 6:
We are committed to what the CBE governor promised during his press conference: a flexible exchange rate based on the demand and supply market.
We all want to see confidence come back and things move in the right direction. The CBE is helping the country, people, and government move in the right direction.

On the plans for fiscal consolidation:
One of the challenges is that we have 59 economic authorities outside the national budget, and they all want to stay that way.
The national budget is EGP 2.1 trillion, while the revenue from the economic authorities is EGP 2.8 trillion. The state budget is used by international agencies and organizations, as well as rating agencies, to assess and rate Egypt's economic situation.
It is not fair to use only 40% of Egypt's revenue to judge the entire economy. Egypt's public finance indicators should be calculated based on those combined budgets.
I suggested creating a General Government Budget by establishing a holding company that would hold all the budgets under one authority. Parliament will start discussing this law.
We will do this gradually, as we will also begin consolidating the debts of those various budgets. We will start by including 40 budgets in the General Government Budget in FY 2024/2025. The remaining 19 will be included in the coming five years after implementing some structural reforms.
That will help Egypt's public finance indicators to be calculated based on the entire economy's performance.
The main state budget (EGP 2.1 trillion) contains almost 75% of tax revenue. However, by including the revenue from the 59 other budgets (EGP 2.8 trillion), tax revenue will be less than 35% of the budget. It is also better to calculate interest payments against a combined EGP 4.9 trillion budget, rather than the current EGP 2.1 trillion.

On decreasing Egypt’s high debt exposure
There are two definitions for debt exposure. One is the total external debt of Egypt (USD 164 billion), which includes the external debt of the state, economic authorities, Central Bank, commercial banks, and state-owned enterprises.
For the budget, the total external debt for the Ministry of Finance is 50% of that figure (USD 82 billion).
The other definition is budget debt, which includes external and internal debt in local or foreign currency. The Finance Ministry debt in dollars is USD 110 billion (USD 82 billion is from foreign-owned institutions, and we lent the rest to local banks).
Debt sustainability focuses on the budget debt and the ability of revenue to reduce that debt. The budget can manage if the debt-to-GDP ratio under 80%.
This year, it was supposed to be 92%, but we have to wait to see how the exchange rate and interest rates impact the ratio. We will definitely see our import costs and social protection spending increase.
During this correction period, we will face difficulties in reducing debt-to-GDP.  But by June 2025, we should drop it below 90% and reach our target by June 2027.

On the effect of the Ras El Hikma deal:
The Ras El Hikma project provided much-needed liquidity and has two positive impacts. First, that external debt should decrease by around USD 11 billion as the GCC waives its deposits at the CBE. Meanwhile, the incoming new liquidity will increase reserves and can be used to improve government finances.
On the budget side, the Egyptian pound revenue generated from the project will also increase, fortifying the budget.
On overdue payments for international oil companies:
I have discussed this issue with the Minister of Petroleum, and it will be addressed “quickly.” The Minister of Petroleum will make the decision, as he will discuss those payments with the international oil companies.

On how the new manufacturing law will attract investments:
One of the issues we are looking at is the currency devaluation. We are also working to create a more favorable setup for local manufacturers, giving them some privileges. We will examine whether there will be a special tax treatment for them, we have some ideas, but the most important thing is that we will give them some privileges.

On leveling the playing field between the private sector and state-owned enterprises:
We realized that we need a mechanism to contain public investments. All players will limit their combined investments to EGP 1 trillion for FY 2024/2025. We understand that not abiding by those limits would make it difficult to sustain our correction efforts for the long term.
We need to reduce inflation, reduce pressure on currency, and ensure the private sector is leading the way. That is the way forward.

On the draft of the new tax law:
I expect the new income tax law to come to light in March. We will send it to all stakeholders before going to Parliament or Cabinet.