<p style="text-align: justify;">In&nbsp;this week's edition, we take a look at the future of Egypt&rsquo;s IMF loan after official statements of no-float, and other countries&rsquo; non-compliance with IMF conditions. We also discuss the decision to end tax breaks for state-owned enterprises and what it can mean for private investment</p>
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<h2><span style="color: rgb(6, 71, 137);"><strong>Egypt&rsquo;s Future with the IMF: Bumpy Road?</strong></span></h2>
<p style="text-align: justify;">The future of Egypt&rsquo;s agreement with the International Monetary Fund (IMF) is uncertain after President Abdel Fattah al-Sisi ruled out a devaluation of the pound in the near term, leading to another postponement of the first review of the IMF program - originally scheduled for March 2023 - to next September. The second tranche of the IMF loan would have been disbursed after the review.</p>
<p style="text-align: justify;">President Sisi said on June 14, 2023 that the exchange rate is a matter of &ldquo;national security,&rdquo; declaring that the state would not alter it as long as the dollar gap continued to widen. The government is trying to plug the gap by stepping up borrowing and buying dollars on the black market in order to maintain the current price of hard currency against the pound. The Fund&rsquo;s Managing Director Kristalina Georgieva said using foreign exchange reserves to support the pound is like &ldquo;pouring water in a pierced bowl&rdquo; and that the existence of multiple foreign exchange rates was depleting Egypt&rsquo;s hard currency reserves and exacerbating the economic crisis. She urged the government to boost the competitiveness of the Egyptian economy by shrinking the state&rsquo;s role in economic activities, increasing foreign reserves through the IPO program, and instituting a flexible exchange rate, while offering broad support to the poorest and most affected groups.</p>
<h3><strong>What about the IPO program?</strong></h3>
<p style="text-align: justify;">In January 2023, in response to IMF conditions, the Egyptian government pledged to reduce the state&rsquo;s footprint in the economy and privatize USD2 billion worth of public assets before the end of June 2023. Only a fraction of this target was met, however, due to stalled negotiations with Gulf buyers following disagreements over the valuation of the assets. One justification for the sale of assets was that the revenues would plug the growing dollar gap, which might alleviate the pressure to devalue the pound further, but the deals that have been concluded were assessed in Egyptian pounds. For example, an 80% stake in Pachin was sold for EGP770.5 million, followed by an offering of a 9.5% stake in Egypt Telecom for EGP3.7 billion. While Egypt has not declared that it has met its target of USD2 billion, some officials in state-owned media have said that the requisite assets have been sold and the news will soon be announced, though no further details were forthcoming.</p>
<h3><strong>The future of the IMF agreement</strong></h3>
<p style="text-align: justify;">Many experts say that the government has only temporarily postponed the next devaluation, speculating that it will come in September after enough dollars have been collected to cope with the anticipated increased demand for the greenback. The government is seeking to rebuild Egypt&rsquo;s foreign reserves through the asset sales as well as with the returns of Egyptians coming from abroad during the summer holidays and tourism revenues, which rose by 26% in the first 11 months of fiscal year 2022/2023. According to figures from the Ministry of Tourism and Antiquities, Egypt welcomed 1.35 million foreign tourists in April, a one-month record in the country&rsquo;s history. According to experts, however, tourism is not a sustainable source of hard currency because unforeseen circumstances, both domestic and foreign, tend to kill the industry every few years.</p>
<p><img style="display: block; margin-left: auto; margin-right: auto;" src="https://mcusercontent.com/5e42bef7fee7e6a299c3d932d/images/f6de522c-8010-ebbe-2dae-e0450b59e409.png" width="758" height="600"></p>
<p style="text-align: justify;">Experts say it is unlikely that Egypt will back out of the IMF agreement, which could hinder Egypt&rsquo;s ability to seek assistance from other countries and international institutions and deter potential investors. Non-compliance with the agreement would erode confidence in the Egyptian economy in international markets, at a time when credit ratings agencies already hold a dim view of Egypt&rsquo;s economic prospects.</p>
<p style="text-align: justify;">Currently, Egypt is slow-walking its response to some of the IMF&rsquo;s conditions, while facing practical difficulties in implementing others. With the program taking longer than planned, the IMF may alter the interest payable on the current loan. While the president&rsquo;s remarks may have temporarily closed the door on a float, the magnitude of the funding gap ultimately makes a devaluation inevitable.&nbsp;</p>
<p style="text-align: justify;">Hani Geneina, an economist and lecturer at the American University in Cairo, believes that the Egyptian government could cancel the IMF reform program or postpone it until next year pending greater dollar liquidity, especially after the Central Bank of Egypt decided not to raise interest rates. Geneina expects the government to allow the value of the pound to fall by 5&ndash;10% in the third quarter of this year to reduce the gap between the official and unofficial exchange rates. Other observers believe that the IMF periodic review of Egypt&rsquo;s progress was postponed by mutual agreement of the two parties in view of political considerations. In short, the government is loath to increase the inflationary burden on citizens, which may threaten social stability in the run-up to the 2024 presidential election. The IMF director called this the &ldquo;political economy&rdquo; choice.</p>
<h3><strong>Is non-compliance with IMF conditions an option?</strong></h3>
<p style="text-align: justify;">Research shows that borrowing governments often negotiate more favorable/softer terms after starting the implementation of IMF programs by arguing that certain fiscal prescriptions would be &ldquo;politically unfeasible,&rdquo; citing social unrest as a potential risk. Governments could use this concern to justify non-compliance, as did Argentina and Brazil when negotiations reached an impasse.</p>
<p><img style="display: block; margin-left: auto; margin-right: auto;" src="https://mcusercontent.com/5e42bef7fee7e6a299c3d932d/images/e315b483-526e-dad1-4e7f-b6a10a8f382e.png" width="696" height="795"></p>
<p style="text-align: justify;">Many developing countries have faced problems complying with IMF loan terms and have postponed or rejected currency floats. A study of 763 IMF programs conducted between 1980 and 2015 indicates that 67% of them (512 programs) were suspended or discontinued, and of these, 291 (38%) were not resumed. A chief reason for the failure of the programs was the IMF&rsquo;s insistence on privatization, price liberalization policies, and the curtailment of the public sector (when looking at implementation failures, the study controlled for factors such as domestic and global financial crises). The IMF has suspended assistance due to non-compliance at times, but has always been quick to negotiate a new agreement with the offending party. For example, the IMF negotiated 8 separate agreements with Brazil between 1965 and 1972, and 17 separate agreements with Peru between 1971 and 1977. When Argentina failed to comply with the terms of the IMF&rsquo;s expanded program after the country&rsquo;s 1998 recession, the IMF suspended loan payments at the end of 2001 due to non-compliance and failure to meet other international obligations. Argentina again concluded an agreement with the IMF in January 2003 to pay off old IMF loans and service European bond debt. It is now the world&rsquo;s biggest borrower from the IMF.</p>
<p><img style="display: block; margin-left: auto; margin-right: auto;" src="https://mcusercontent.com/5e42bef7fee7e6a299c3d932d/images/a026b19d-678a-2afa-8be2-317e859fa4a7.png" width="681" height="539"></p>
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<h2><span style="color: rgb(6, 71, 137);"><strong>Repeal of Tax Breaks for State Bodies: What&rsquo;s New?</strong></span></h2>
<p style="text-align: justify;">On&nbsp;June 21, 2023, the Cabinet approved a&nbsp;<a href="https://cabinet.gov.eg/Meeting/Details/11739">draft law</a>&nbsp;to repeal tax exemptions granted to state-owned entities for economic and investment activities, with the aim of improving the investment climate and supporting the private sector. But the bill carved out exceptions for tax exemptions related to international agreements in force in Egypt, as well as those granted for businesses and works related to national defense and national security, and exemptions for the provision of basic utilities services. These exemptions will continue for the duration of the contracts pursuant to the laws under which they concluded.</p>
<p><img style="display: block; margin-left: auto; margin-right: auto;" src="https://mcusercontent.com/5e42bef7fee7e6a299c3d932d/images/877cb8bb-389e-1ebe-a137-560db06e0def.png" width="728" height="576"></p>
<p style="text-align: justify;">Military firms&nbsp;<a href="https://carnegie-mec.org/diwan/88785">have enjoyed</a>&nbsp;exemptions far beyond those granted to other state companies and bodies, including exemption from property tax, customs duties, miscellaneous administrative fees, foreign exchange caps, and transport fees.</p>
<h3><strong>Not a novel idea</strong></h3>
<p style="text-align: justify;">The bill was not drafted on the spur of the moment. In fact, the World Bank has <a href="https://carnegie-mec.org/2022/04/07/throwing-down-gauntlet-what-imf-can-do-about-egypt-s-military-companies-pub-86821">recommended</a>&nbsp;this course of action several times in past years and the finance minister alluded to the bill&nbsp;<a href="https://hapijournal.com/2023/05/18/%D9%88%D8%B2%D9%8A%D8%B1-%D8%A7%D9%84%D9%85%D8%A7%D9%84%D9%8A%D8%A9-%D8%AA%D8%B9%D8%AF%D9%8A%D9%84-%D8%AA%D8%B4%D8%B1%D9%8A%D8%B9%D9%8A-%D8%A8%D8%A5%D9%84%D8%BA%D8%A7%D8%A1-%D8%A7%D9%84%D8%A5%D8%B9/">in May</a>&nbsp;this year. The Egyptian government&nbsp;<a href="https://carnegie-mec.org/diwan/88785">pledged</a>&nbsp;to strip state-owned companies and the military establishment of tax exemptions in the Memorandum of Economic and Financial Policies submitted to the IMF to obtain its most recent loan in December 2022, following pressure from the Fund and&nbsp;<a href="https://www.reuters.com/world/africa/egypt-cabinet-approves-draft-law-lifting-tax-exemptions-state-bodies-2023-06-21/">investors</a>, who said it would allow private firms to compete more fairly. The bill comes as the Egyptian government is&nbsp;<a href="https://www.alaraby.co.uk/economy/%D9%85%D8%B5%D8%B1-%D8%AA%D8%AA%D9%88%D8%B3%D8%B9-%D9%81%D9%8A-%D9%85%D9%86%D8%AD-%D8%A7%D9%84%D8%A7%D8%B3%D8%AA%D8%AB%D9%85%D8%A7%D8%B1%D8%A7%D8%AA-%D9%84%D8%B4%D8%B1%D9%83%D8%A7%D8%AA-%D8%A7%D9%84%D8%AC%D9%8A%D8%B4-%D8%A8%D8%AF%D9%84%D8%A7%D9%8B-%D9%85%D9%86-%D8%A7%D9%84%D9%82%D8%B7%D8%A7%D8%B9-%D8%A7%D9%84%D8%AE%D8%A7%D8%B5">granting new</a>&nbsp;investments and state land to state-owned and military companies, in partnership with the Sovereign Fund of Egypt.</p>
<h3><strong>Why now?</strong></h3>
<p style="text-align: justify;">Experts believe that the timing of the law was governed by several considerations, most importantly:&nbsp;</p>
<ul>
<li dir="ltr" aria-level="1">
<p dir="ltr" style="text-align: justify;" role="presentation">Egypt is seeking to meet the terms of its latest agreement with the&nbsp;<a href="https://carnegie-mec.org/2023/05/08/is-egypt-too-big-to-fail-or-too-big-to-bail-pub-89639">IMF</a>&nbsp;by attracting private sector investments after the introduction of the state ownership policy document. The government set a target of investment rates of 25&ndash;30% of GDP in the short term, to reach growth rates of 7&ndash;9% annually.</p>
</li>
<li dir="ltr" aria-level="1">
<p dir="ltr" style="text-align: justify;" role="presentation">Efforts are being made to address the&nbsp;<a href="https://carnegie-mec.org/2023/05/08/is-egypt-too-big-to-fail-or-too-big-to-bail-pub-89639">dwindling</a>&nbsp;volume of private investment, which&nbsp;<a href="https://data.albankaldawli.org/indicator/NY.GNS.ICTR.ZS?locations=EG">fell</a>&nbsp;to its lowest level in 2021&mdash;just 2% of GDP, compared to 7% in 2014.</p>
</li>
</ul>
<p dir="ltr" style="text-align: justify;">Deputy Mustafa Salem, undersecretary of the Council of Representatives' Plan and Budget Committee,&nbsp;<a href="https://almalnews.com/%D9%88%D9%83%D9%8A%D9%84-%D8%AE%D8%B7%D8%A9-%D8%A7%D9%84%D9%86%D9%88%D8%A7%D8%A8-100-%D9%85%D9%84%D9%8A%D8%A7%D8%B1-%D8%AC%D9%86%D9%8A%D9%87-%D8%AD%D8%B5%D9%8A%D9%84%D8%A9-%D9%85%D8%AA%D9%88%D9%82/">stated</a>&nbsp;that the financial impact on the budget after the implementation of this new law -according to a study prepared by the Ministry of Finance- will be around EGP100 billion over the next 5 years.</p>
<h3 dir="ltr"><strong>Does the law offer an adequate solution?</strong></h3>
<p dir="ltr" style="text-align: justify;">The scope of the bill is uncertain because the various exceptions are not clearly defined. <a href="https://1-a1072.azureedge.net/ebusiness/2023/6/26/%D9%85%D8%B5%D8%B1-%D8%AA%D9%84%D8%BA%D9%8A%D8%A7%D9%84%D8%A5%D8%B9%D9%81%D8%A7%D8%A1%D8%A7%D8%AA-%D8%A7%D9%84%D9%85%D9%85%D9%86%D9%88%D8%AD%D8%A9-%D9%84%D8%AC%D9%87%D8%A7%D8%AA">Experts say</a>&nbsp;that we will need to wait for the implementing regulations of the law to know exactly which exemptions have been repealed and which bodies are exempted from the provisions of the new law. This will reveal how serious the new law is in helping improve the investment climate and enhance the role of the private sector in various investment and economic activities.</p>
<p dir="ltr" style="text-align: justify;">According to a&nbsp;<a href="https://www.reuters.com/article/egypt-telecom-mn4-idARAKBN29O210">Reuters story</a>&nbsp;in January 2021, the profits of 17 state-run, non-oil holding companies had more than quadrupled in three years, while investment in the private sector had fallen. In June 2023, non-oil private sector activity&nbsp;<a href="https://tradingeconomics.com/egypt/manufacturing-pmi">continued</a>&nbsp;to decline (albeit at a softer rate) for 21 consecutive months according to the&nbsp;<a href="https://twitter.com/i/status/1671941872720445441">Purchasing Managers&rsquo; Index</a>, with the private sector sustaining significant losses in various vital economic sectors.</p>
<p dir="ltr" style="text-align: justify;">An analysis issued by the&nbsp;<a href="https://documents.worldbank.org/en/publication/documents-reports/documentdetail/288811613142382664/creating-markets-in-egypt-realizing-the-full-potential-of-a-productive-private-sector">International Finance Corporation</a>, an arm of the World Bank focused on stimulating economic development by providing support to private sector companies, recommends radical reforms to the standards of competitiveness and commercial judicial procedures to ensure a uniform, equitable business environment. This is particularly important given the presence of state-owned enterprises in virtually all economic sectors coupled with a lack of information about their size, the nature of their relationship to the state, or their profitability targets, in addition to the lack of frameworks clarifying relevant legal procedures in the event of a conflict of interest.</p>
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<p><em>"Adasa" is a weekly policy digest by Alternative Policy Solutions. "Adasa" provides an analysis of a select number of policy developments and their effect on inclusive development and socioeconomic change</em></p>
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