Fitch: IMF delay highlights Egypt implementation challenges

A short postponement of the IMF programme would not have negative rating implications. But if the current political polarisation leads to more significant delays in the political transition and in IMF programme approval, economic and financial pressures are likely to mount and Egypt's ratings could come under renewed pressure.

A number of sales tax increases, which were required prior actions ahead of IMF board discussion on 19 December, were rescinded on Monday after complaints of lack of prior consultation. These events also highlight the lack of formal consultation mechanisms, notably a functioning lower house of parliament.

The authorities have mentioned a relatively short delay to the IMF board discussion of around one month. Meanwhile, a number of other prior actions have gone ahead, notably the scrapping of the subsidy on 95 octane fuel and, more significantly, restriction of subsidised butane gas cylinders to people eligible for food subsidies through the existing "smart card" system. The proposed sales tax increases were to rationalise the system at a 10% unified rate. If agreement is eventually forthcoming, or substitute fiscal measures are devised, the IMF board discussion should go ahead in January, as the government hopes.

The fiscal adjustment in the first year of the IMF programme, which aims to reduce the budget deficit from 11% of GDP to 10.4% of GDP, does not seem harsh. However, it is tougher than it appears due to budget overshoots in the fiscal year so far (Egypt's fiscal year runs from July to June). Nevertheless, the adjustment required in next year's budget, starting in June, is tougher, amounting to around 2% of GDP, and will involve further restricting the numbers of those eligible for fuel subsidies. Even if the IMF programme is approved in January, implementation risks will continue to be a threat to future disbursements.

All this also serves to highlight the urgency of instating credible political institutions that command popular support and can buy into the fiscal and structural measures needed to make room for investment and promote inclusive growth. With the postponement of the IMF programme, attention is now even more focused on this weekend's referendum on the constitution: whether it goes ahead, the turnout it attracts, and the ultimate outcome.