While Egypt’s IMF programme will support gradual improvements to the country’s fiscal and external position, its social and economic costs risk slowing the pace of fiscal reform, Moody’s Investors Service said in a report on Wednesday.
“The implementation of the targets of the IMF programme—including reductions in fiscal deficits and government debt levels, as well as improvements in Egypt’s external liquidity position—will help address Egypt’s key credit challenges,” said Steffen Dyck, a Moody’s senior credit officer and co-author of the report.
“However, ambitious fiscal consolidation targets will be challenging to achieve and could face implementation risks in a scenario of mounting public discontent,” he noted.
Moody’s projects that Egypt’s fiscal deficit will decrease to 11% of its GDP in fiscal year (FY) 2017 and 8.5% in 2019—down from 12.6% in 2016. Moody’s forecasts are more conservative than the IMF programme projections of 10% of GDP in FY 2017, reducing to 6.1% in FY 2019, driven by Moody’s somewhat lower growth assumptions and potential fiscal slippage, both in the near and medium-term.
Although Moody’s expects Egypt’s fiscal challenges to remain high, the country’s monetary, fiscal, and structural reforms will likely lead to slow but steady improvements for the sovereign credit profile beyond the timeframe of the IMF programme.
The liberalisation of Egypt’s foreign exchange regime and the depreciation of the Egyptian pound will initially keep the current account deficit high due to the pent-up demand for imports and the lower sensitivity of exports to the exchange rate.
The report stated that following the approval of a $12bn three-year extended fund facility (EFF) for Egypt (B3 stable) in November last year, the IMF published a detailed report on programme implementation targets in January. The implementation of the programme targets credit improvements beyond the time frame of the IMF programme.
The report added that the IMF programme helps to improve Egypt’s external liquidity position. The liberalisation of the foreign exchange regime and currency devaluation under the programme will increase the current account deficit as a proportion of GDP in the short term, but higher incoming portfolio and FDI flows. Moreover, additional external funding will support the accumulation of foreign exchange reserves and improvements in the external liquidity position, the statement read.