Egypt 1 Nigeria 1 (before extra time)

We recall the drawing of parallels with Nigeria in November when Egypt agreed an extended fund facility worth the equivalent of US$12bn with the IMF. Within what the Fund generously termed a “homegrown” programme, the Egyptian authorities have introduced a more flexible exchange-rate regime, launched VAT, raised the benchmark interest rate by seven percentage points, and twice made reductions to energy subsidies. The FGN will not borrow from the Fund due to the attached conditionality, prompting the question of whether it has missed a trick.

In certain respects, the Egyptian macro picture is worse than the Nigerian. In July 2016-March 2017 general government subsidies consumed EGP77bn, equivalent to 11% of total spending. This was after the first round of cuts: after the second, more recent round, the retail cost of gasoline/petrol is still only between 20 and 30 US cents/litre. The greater burden of subsidies in Egypt (and the new fx regime) explain why inflation has surged above 30% y/y although by most accounts it is close to its peak in the current cycle.

Egypt’s public finances are in worse shape: for the 2016/17 fiscal year (July-June), the authorities project a deficit equivalent to 10.8% of GDP. Gross government indebtedness is far higher, at 94.7% of GDP in March 2017.

Since signing the IMF programme, Egypt’s gross official reserves have increased by US$12bn and the government has tapped the Eurobond market. The offshore portfolio community has returned to local financial markets.

The FGN can claim the same achievements without borrowing from the IMF.

We cannot judge the long-term success of the programme in Egypt until we see the size of FDI inflows, the boost to spending on the social safety net as a result of fiscal savings and the response from domestic investment. For now, the jury has to stay out.

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