COMMISSION STAFF WORKING DOCUMENT ex-ante evaluation statement Accompanying the documents Proposal for a COUNCIL DECISION on providing short-term macro-financial assistance to the Arab Republic of Egypt and Proposal for a DECISION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on providing macro-financial assistance to the Arab Republic of Egypt
Date: 2024-03-15
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: EU aid, EU loan, Egypt, European Neighbourhood and Partnership Instrument, European neighbourhood policy, economic reform, economic stabilisation, financial aid, macro-financial assistance, structural adjustment

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 15.3.2024  SWD(2024) 461 final  COMMISSION STAFF WORKING DOCUMENT ex-ante evaluation statement Accompanying the documents   Proposal for a COUNCIL DECISION on providing short-term macro-financial assistance to the Arab Republic of Egypt    and   Proposal for a DECISION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on providing macro-financial assistance to the Arab Republic of Egypt      {COM(2024) 461 final} - {COM(2024) 460 final}  
 
 
Ex-ante evaluation statement 

EU Macro-Financial Assistance to the Arab Republic of Egypt 

Table of Contents 

1.1 

1.2 

Introduction .................................................................................................................. 2 

Egypt's macroeconomic situation ................................................................................. 3 

1.3. 

IMF and other donor support ....................................................................................... 5 

1.4.  External financing needs .............................................................................................. 6 

1.5.  Structural reforms ......................................................................................................... 7 

2.1.  Objectives ..................................................................................................................... 9 

2.2  Monitoring indicators ................................................................................................... 9 

3.1  Delivery mechanisms ................................................................................................. 10 

3.2  Risk assessment .......................................................................................................... 10 

5.1 

5.2 

Exceptional Character and Limited Time-frame ........................................................ 11 

Political preconditions and EU-Egypt relations ......................................................... 12 

5.3  Complementarity ........................................................................................................ 12 

5.4  Conditionality ............................................................................................................. 12 

5.5 

Financial Discipline.................................................................................................... 14 

6.1 

Evaluation................................................................................................................... 14 

6.2  Achieving cost-effectiveness...................................................................................... 14 

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PROBLEM ANALYSIS AND NEEDS ASSESSMENT  

 1.1 

Introduction  

The European Union  (‘EU’)  and Egypt have agreed to  deepen their relationship and develop  a 
strategic and comprehensive partnership for shared prosperity, stability and security, based on joint 
interest  and  mutual  trust  and  building  on  the  already  existing  positive  agenda  in  EU-Egypt 
relations. The Strategic and Comprehensive Partnership will cover specific areas of cooperation 
and its implementation will unleash the full potential of the EU-Egypt relationship. 

Underpinning the partnership will be a financial package of EUR 7.4 billion consisting of short- 
and longer-term support for the necessary macro-fiscal and socio-economic reform agenda. This 
financial package will be provided in a challenging economic situation where Egypt continues to 
have  sizeable  and  unmet  financing  needs.  In  this  context,  the  Egyptian  authorities  requested 
support  through  macro-financial  assistance  (‘MFA’)  from  the  EU  on  12  March  2024  after  an 
International  Monetary  Fund  (‘IMF’)  staff  level  agreement  on  an  augmented  Extended  Fund 
Facility of USD 8 billion was announced on 6 March 2024.  

Egypt’s  macroeconomy  has  shown  resilience  during  the  period  before  Russia’s  invasion  of 
Ukraine, largely due to first wave of structural reforms implemented since 2016 in the context of 
successive IMF-supported programmes. Egypt was one of the few countries to maintain positive 
economic  growth  during  the  COVID-19  pandemic.  However,  over  the  past  two  years,  Egypt’s 
macro-fiscal  situation  has  faced  significant  challenges  and  deteriorated  noticeably  over  recent 
months,  as  external  pressures  have  intensified  and  debt  has  increased  further,  amid  sluggish 
implementation  of  reforms  agreed  on  in  the  October  2022  staff  level  agreement  with  the  IMF. 
Russia’s war on Ukraine has led to protracted capital outflows. The repercussions of the Hamas 
terrorist attacks across Israel on 7 October 2023 resulted in lower services exports, notably from 
tourism and Suez Canal proceeds. Egypt continues to face very significant challenges, including 
high inflation, the state’s entrenched economic footprint, inefficiencies in  the foreign exchange 
market, and the spillovers from the conflict in Gaza, which further weakened Egypt’s economic 
stability  and  put  pressure  on  the  country’s  external  and  fiscal  position  while  increasing  the 
country’s overall vulnerability to external shocks. 

In December 2022, the IMF adopted a USD 3 billion Extended Fund Facility (EFF) to support 
Egypt,  but  progress  had  been  limited.  As  a  result,  no  review  had  been  completed  and  no 
disbursement  had  been  made  (except  for  the  initial  USD  347  million  disbursement  at  Board 
adoption) until January 2024, when a review mission (first and second) began. The IMF and the 
Egyptian authorities agreed on a new staff level agreement and programme augmentation by USD 
5 billion to USD 8 billion upon conclusion of this review mission.  

Compared  to  the  2022  programme,  Egypt’s  external  overall  financing  gap  had  widened 
substantially  from  USD  15  billion  to  around  USD  28.5  billion  over  the  programme  period  of 
FY22/23-FY26/27.  The  IMF  identified  continued  sizeable  financing  needs,  with  the  external 
overall financing gap estimated at USD 9.3 billion in the upcoming fiscal year (FY, July-June) 
2024/25, and USD 17.7 billion during FY24/25-26/27. 

Given Egypt’s critical economic and financial situation and Egypt’s role as an important stabilising 
factor amid geopolitical tensions in an increasingly volatile region, the Commission proposes to 
support Egypt with a macro-financial assistance (MFA) operation of up to  EUR 5 billion. This 

2 

 
 
 
could help bridge the significant external financing gap identified by the IMF, while supporting 
progress with key reforms to address the root causes of the crisis and thus help Egypt help itself.  

As further elaborated in this Commission Staff Working Document accompanying the proposals, 
the  Commission  considers,  based  also  on  the  assessment  of  the  political  situation  made  by  the 
European  External  Action  Service,  that  the  economic  preconditions  for  the  proposed  MFA 
operation are satisfied, while progress in relation to the political pre-conditions will be monitored 
continuously so as to ascertain that compliance with the criteria moves in a satisfactory direction. 

1.2 

Egypt's macroeconomic situation  

Growth slowed down on the back of both domestic and external factors. Following a strong post-
pandemic  recovery  of  6.7%  during  FY21/22,  real  GDP  growth  eased  to  3.8%  in  FY22/23  and 
continued to ease to 2.6% year on year during the July-September 2023 quarter. High inflation, 
uncertainty  surrounding  the  exchange  rate  and  sluggish  reform  implementation  weighed  on 
consumption and investment. The previously strong services exports have come under pressure as 
the conflict in Gaza dampens tourism and the Houthi attacks in the Red Sea roughly halved the 
usual Suez Canal proceeds, amounting to a monthly loss of around USD 400-500 million (around 
0.1% of annual GDP). Non-oil private sector activity, gauged by the Purchasing Managers’ Index, 
remained contractionary in February 2024 as order books weakened and output declined. Business 
expectations deteriorated under ailing client demand. By December 2023, unemployment receded 
slightly to 6.9%. The outlook is subject to significant downside risks in relation to the ongoing 
regional tensions related to the conflict in Gaza and the Red Sea attacks. It will also be affected by 
the implementation of the USD 35 billion United Arab Emirates (UAE) investment deal announced 
on  23  February  2024,  although  its  ultimate  impact  on  real  GDP  growth  and  Egypt’s  external 
balance  remains  to  be  seen,  as  additional  domestic  investment  will  be  accompanied  by 
corresponding higher imports.  

Inflation  has  remained  high,  amid  a  very  volatile  parallel  exchange  rate  which  diverged 
substantially from the virtually stable official exchange rate throughout most of 2023 and early 
2024. Consumer price inflation stood at 29.8% year on year in January 2024, following an annual 
average of 33.8% in 2023. Importantly, food price increases moderated somewhat but were still 
high  at  47.9% in January, where corresponding spending  accounts for roughly  one third of the 
consumer basket. Already before the current crisis, around 30% of the population was in poverty, 
thereby particularly affected by the higher food price inflation. While official reserves inched up 
slightly to USD 35.3 billion or around 7½ months of imports in January, and total net foreign assets 
of the financial system reached a negative position of USD 27.2 billion in December 2023, both 
are expected to improve on account of the UAE investment inflows and the new flexible exchange 
rate regime. As the official exchange rate was fixed at around 31 Egyptian pounds per US dollar 
since the last devaluation in February 2023 until March 2024, foreign exchange shortfalls gave 
rise to an increasing parallel market with rates fluctuating between 50 and 70 EGP/USD. When 
the SLA with the IMF was signed on 6 March 2024, the authorities enacted a flexible currency 
regime  and  the  EGP  settled  at  around  50  EGP/USD.  The  Central  Bank  of  Egypt  (CBE) 
accompanied the move to a flexible exchange rate with a sizeable interest rate hike of 600 bps in 
an attempt to curb inflation. 

The fiscal deficit deteriorated over spiralling interest payments while public debt remains high. 
The  overall  budget  deficit  had  remained  broadly  stable  in  FY22/23  at  around  6%  of  GDP. 
However, the first half of FY23/24 (July-December 2023) has seen a 75.3% year-on-year increase 

3 

 
 
in the deficit in nominal terms as expenditure growth outpaced revenue growth, notably owed to a 
doubling in interest payments which now eat up as much as 97.8% of total budget revenues during 
the same period. For FY23/24 as a whole, the IMF projects interest payments to reach 87.2% of 
total budget revenues. The overall budget deficit is projected at 6.3% of GDP in FY23/24. Public 
debt stood at 95.9% of GDP at end-FY22/23, up from 88.5% the FY before and the highest since 
2017, and is projected to rise to 96.4% this FY.  

The current account improved but regional crises pose risks. At the same time, the UAE investment 
deal  will  probably  raise  imports.  Following  a  deficit  of  3.5%  in  FY21/22,  the  current  account 
deficit narrowed to 1.2% last FY and improved by another 12% year on year in nominal terms 
during  the  July-September  quarter.  While  tourism  and  Suez  Canal  proceeds  provided  strong 
support,  goods  exports  eased.  Remittances  declined  strongly  as  Egyptians  abroad  avoided  the 
overvalued official exchange rate. Strong import compression helped keeping the overall deficit 
low. High-frequency data suggest that the usually strong income earners tourism and Suez Canal 
proceeds have since been hit particularly hard by the conflict in Gaza and the Red Sea attacks. The 
unification of the previously fragmented exchange rate system is likely to help lure remittances 
back  into  official  channels.  At  the  same  time,  implementing  the  UAE  investment  deal  on  the 
ground in early 2025 will probably push up imports.   

In FY22/23, Egypt nearly reached its goal of USD 10 billion in FDI inflows, up by 12.3% over 
FY21/22.  This  included  public  asset  sales  under  the  new  state  ownership  policy.  The  UAE 
investment  deal  will  provide  a  further  boost  to  FDI  still  this  FY,  although  it  remains  unclear 
whether the state-directed investment by the Emirati sovereign fund will also induce market-driven 
investment from elsewhere. Portfolio investment flows, previously a significant although volatile 
source of hard currency, have not yet returned to Egypt after the massive outflow that started when 
Russia’s  war  on  Ukraine  began,  reflecting  a  key  vulnerability  for  Egypt.  The  so  far  existing 
backlog  of  domestic  reforms,  including  the  long  overdue  exchange  rate  unification  and,  most 
recently, uncertainty due to the conflict in Gaza are likely to have deterred capital inflows further. 
Moody’s lowered Egypt’s sovereign credit outlook from stable to negative in mid-January 2024, 
citing the risks from growing interest service, the exchange rate rebalancing and mounting external 
pressures. Earlier in October 2023, Moody’s, S&P and Fitch all downgraded Egypt’s sovereign 
debt to below-investment grade due to record inflation, a chronic foreign currency shortage and 
the government’s growing public debt.  

4 

 
 
  
 
 
Table 1: Egypt – Selected macro-economic indicators, FY17/18-FY22/23  

Sources: National authorities, IMF. 

1.3. 

IMF and other donor support  

On 16 December 2022, the IMF Executive Board approved a 46-month Extended Fund Facility 
for Egypt with an amount of around USD 3 billion. The Executive Board’s decision allowed for 
an immediate disbursement of USD 347 million to help Egypt meet the balance of payments need 
and provide support to the budget. As mentioned, none of the two reviews planned for 2023 took 
place over concerns about insufficient reform implementation, while the overall external financing 
gap widened, also following spillovers from the conflict in Gaza starting in October 2023. 

In January 2024, the IMF conducted the first and second formal review mission in Cairo, followed 
by continued virtual discussions, which resulted in the signing of a new staff level agreement on 6 
March. The IMF agreed with the Egyptian authorities on augmenting the financial support by USD 
5 billion, leading to a total envelope of USD 8 billion of the revamped programme. Driven by 
lower FDI and portfolio flows, weaker oil and gas receipts and the spillovers from the conflict in 
Gaza,  Egypt’s  overall  external  financing  gap  had  widened  substantially.  While  the  UAE 
investment deal will boost FDI in the current fiscal year and help rebuild some buffers, its medium-
term implications on domestic investment, imports and the role of the state in the economy are not 
yet fully clear. Additional financial support from other bi- and multilateral donors amounts to USD 
5.2 billion over the whole programme period and include the AIIB, AfDB, the Arab Monetary 
Fund, the China Development Bank, the Abu Dhabi Commercial Bank, the UAE central bank, 
Japan, France, and the UK. The World Bank contributes USD 2.6 billion. 

The main elements of the augmented EFF arrangement remain similar to the original programme 
design: 

•  Reforming monetary and exchange rate policy by anchoring monetary policy firmly in a 

medium-term inflation objective and by making the exchange rate durably flexible. 

•  Focusing  fiscal  policy  on  putting  public  debt  on  a  declining  path,  including  the 
implementation  of  the  medium-term  revenue  strategy,  a  strengthened  debt  management 
strategy  and  enhanced  public  financial  management,  in  combination  with  adequate  and 
targeted social spending to protect vulnerable groups. 

5 

EgyptFY17/18FY18/19FY19/20FY20/21FY21/22FY22/23LatestDate of LatestNominal GDP, USD billion263.2317.9382.5423.3475.2398.4Nominal GDP per capita, USD2710.23240.53802.44145.94587.23770.1Real GDP, % change5.35.53.63.36.73.82.6Jul-Sep 2023Consumer price inflation, %, end-period13.89.45.65.013.135.829.8Jan 24Key monetary policy rate, %, end-period16.815.89.38.311.318.327.3Mar 24Unemployment rate, % 10.98.68.37.37.37.26.9Dec 23General government balance, % of GDP-9.7-8.0-7.0-7.2-6.2-6.0Public debt, % of GDP87.980.186.289.988.595.9Current account balance, % of GDP-2.3-3.4-2.9-4.4-3.5-1.2International reserves, USD billion44.344.538.240.633.434.835.3Jan 24International reserves, months of imports7.06.76.35.75.66.87.6Jan 24Gross external debt, % of GDP37.036.033.932.633.040.3Net foreign direct investment, % of GDP2.92.61.91.22.02.6Fiscal year is from July to June. 
 
 
 
•  Strengthening private sector development by reducing the role of the state in the economy, 
improving  SOE  transparency  and  governance,  and  leveling  the  playing  field  between 
public and private companies.  

•  Following the 2024 review and signing of the new SLA, the IMF and authorities agreed on 
the necessity to limit and monitor infrastructure spending, notably if operated outside the 
regular budget oversight.  

1.4.  External financing needs  

The IMF’s estimates the overall external financing gap to amount to USD 28.5 billion during the 
FY22/23-FY26/27  period  (see  table).  While  the  ongoing  fiscal  year’s  unidentified  residual 
financing need, taking all multilateral and bilateral partners’ existing contributions into account, is 
zero following the UAE investment, the IMF still expects a sizeable  external financing gap for 
FY24/25  and  beyond  as  portfolio  inflows  are  expected  to  keep  lagging  initial  projections  and 
depleted buffers in official reserves need to be rebuilt. EU support through an MFA could help 
narrow these gaps. The IMF notably estimates these to have a front-loaded profile, with an overall 
external financing gap of USD 9.3 billion for FY24/25, USD 5.2 billion in FY25/26 and USD 3.2 
billion in FY26/27, taking into account both increased foreign direct investment in the short-run 
and a deteriorating current account balance on the back of slumping remittances. 

The  IMF’s  augmented  programme  foresees  disbursements  over  four  years  totalling  USD  7.7 
billion1 following the new SLA in March 2024. This corresponds to 30.2% of the overall external 
financing  gap  for  the  remaining  programme  period  (FY23/24-FY26/27).  The  combined 
IMF/World Bank contributions add up to USD 10 billion over the remaining programme period, 
FY23/24-26/27, covering 39.2% of the corresponding overall external financing gap.  

Projected asset sale proceeds of USD 7.7 billion are expected during the four-year period (of which 
USD 6.4 billion are frontloaded in FY23/24-FY24/25).  

1 Resulting from the augmented total programme amount of USD 8 billion, deducting the initial USD 347 million 

disbursement of December 2022. 

6 

 
 
 
 
 
 
Table 2: Egypt’s External Financing Gap (USD billion)  

1.5. 

Structural reforms  

Reform achievements on IMF programmes in 2016-2023  

Egypt has made considerable reform efforts since its reengagement with the IMF in 2016, although 
progress  has  slowed  in  recent  years.  The  most  urgent  reforms  to  achieve  macroeconomic 
stabilisation included a significant currency devaluation, accompanied by monetary policy reforms 
focused  on  an  inflation  target  corridor.  Fuel  subsidy  reform  was  coupled  with  a  significant 

7 

FY22/23FY23/24FY24/25FY25/26FY26/271 Current account balance-4.7-21.8-7.8-9.0-10.72 Capital and financial account7.229.17.214.815.13 Errors and omissions -3.31.40.00.00.04 Overall balance (1+2+3)-0.88.7-0.65.84.45 Gross reserves (- increase)-4.8-12.0-3.0-8.0-6.06 IMF repayments-1.3-4.5-5.8-3.1-1.77 Other below-the-line adjustments*3.90.00.10.00.08 Overall financing gap (4+5+6+7)-3.0-7.8-9.3-5.2-3.29 Exceptional financing by the IMF and WB0.71.93.23.11.8IMF0.31.62.52.51.2World Bank0.40.30.70.60.610 Residual financing gap (after IMF and WB)-2.3-5.9-6.1-2.1-1.411 Other prospective financingAIIB0.00.00.30.00.0African Development Bank0.30.20.00.00.0Arab Monetary Fund0.00.30.00.00.0China Development Bank0.01.00.00.00.0Abu Dhabi Commercial Bank1.00.00.00.00.0UAE Central Bank0.01.40.00.00.0Sales of state-owned assets (including to GCC)0.02.83.60.90.4New deposits at CBE (to be converted in divestment)1.00.00.00.00.0Japan 0.00.20.00.00.0France 0.00.10.00.00.0United Kingdom0.00.00.20.20.0Unidentified financing0.00.02.11.01.0Source: IMF.*Includes changes in gold valuation and a statistical correction for programme purposes, eliminates transfers from Tier 1 to Tier 2 from errors and omissions.FY22/23FY23/24FY24/25FY25/26FY26/271 Current account balance-4.7-21.8-7.8-9.0-10.72 Capital and financial account7.229.17.214.815.13 Errors and omissions -3.31.40.00.00.04 Overall balance (1+2+3)-0.88.7-0.65.84.45 Gross reserves (- increase)-4.8-12.0-3.0-8.0-6.06 IMF repayments-1.3-4.5-5.8-3.1-1.77 Other below-the-line adjustments*3.90.00.10.00.08 Overall financing gap (4+5+6+7)-3.0-7.8-9.3-5.2-3.29 Exceptional financing by the IMF and WB0.71.93.23.11.8IMF0.31.62.52.51.2World Bank0.40.30.70.60.610 Residual financing gap (after IMF and WB)-2.3-5.9-6.1-2.1-1.411 Other prospective financingAIIB0.00.00.30.00.0African Development Bank0.30.20.00.00.0Arab Monetary Fund0.00.30.00.00.0China Development Bank0.01.00.00.00.0Abu Dhabi Commercial Bank1.00.00.00.00.0UAE Central Bank0.01.40.00.00.0Sales of state-owned assets (including to GCC)0.02.83.60.90.4New deposits at CBE (to be converted in divestment)1.00.00.00.00.0Japan 0.00.20.00.00.0France 0.00.10.00.00.0United Kingdom0.00.00.20.20.0Unidentified financing0.00.02.11.01.0Source: IMF.*Includes changes in gold valuation and a statistical correction for programme purposes, eliminates transfers from Tier 1 to Tier 2 from errors and omissions. 
 
 
strengthening  of  a  targeted  social  transfer  system  with  World  Bank  assistance.  Public  finance 
management  was  strengthened  by  developing  medium-term  revenue  and  debt  management 
strategies. The authorities also began improving the governance of state-owned enterprises (SOEs) 
by compiling financial data of SOEs and other state-connected entities in a systematic manner. 
Structural  reform  efforts,  however,  experienced  repeated  setbacks  as  the  focus  shifted  back  to 
macroeconomic  and  social  stabilisation  under  the  significant  external  shocks  related  to  the 
COVID-19 pandemic, the Russian invasion of Ukraine, the consequences of the Hamas terrorist 
attacks across Israel of 7 October 2023.  

In the framework of Egypt’s renewed IMF-supported reform programme, agreed in October 2022, 
the  authorities  adopted  and  published  a  state  ownership  policy  in  December  2022,  aiming  at 
reducing the large and distorting presence of the state in the economy and clarifying the rationale 
of  continued  state  involvement  in  certain  strategic  sectors.  The  authorities  achieved  state  asset 
sales of USD 1.9 billion by the end of FY22/23, although the numerical target agreed under the 
EFF was slightly missed and not all sales generated the envisaged foreign exchange inflows. Given 
the economic uncertainty created by the recent regional tensions, the authorities and the IMF have 
agreed to backload the asset sales while keeping the overall target for the full programme period. 
The  recent  UAE  investment  is  separate  from  the  state  ownership  policy;  the  government  will 
assume a 35% share in the new real estate development project. In an effort to level the playing 
field between public and private companies, parliament adopted a law to abolish tax privileges of 
SOEs, although the effects of potential exemptions on the basis of national security remain unclear 
so far. Until early March 2024, Egypt had not implemented its commitment to make the currency 
durably  flexible,  leading  to  a  largely  stable  official  exchange  rate  since  the  last  managed 
devaluation in early 2023, and a substantial parallel market with a highly volatile rate at about half 
the value of the official rate. This fragmentation presented a major drag on foreign investment and 
exacerbated the divide between public companies with access to the official exchange rate, and 
private companies and consumers who were depending on the parallel market rate. Eventually, the 
fresh liquidity thanks to the UAE investment deal facilitated the flexibilization of the exchange 
rate on 6 March 2024, enabling the unification of rates.  

Main government reform priorities ahead   

Egypt’s reform priorities as spelt out in the IMF-supported programme adopted in December 2022 
remain valid, as reflected in the new SLA from 6 March 2024. The authorities aim at anchoring 
monetary  policy  firmly  in  a  medium-term  inflation  objective  and  allowing  the  exchange  rate 
flexibility to reflect underlying market and balance of payment dynamics. Fiscal policy priorities 
include  an  overall  fiscal  consolidation  to  strengthen  debt  sustainability,  accompanied  by 
implementing the medium-term revenue strategy, fostering debt management to lower the high 
interest burden, and further enhancing public financial management by promoting transparency 
and  better  managing  fiscal  risks.  This  path  of  fiscal  prudence  shall  be  accompanied  by  more 
adequate levels of social spending to protect vulnerable groups. The authorities also committed to 
empower  private  sector  development  through  implementing  the  state  ownership  policy  and 
continuing state asset sales, strengthening the transparency and governance of public companies 
and improving the competition environment.  

In addition to these previously existing priorities, the IMF and the Egyptian authorities also agreed 
on  introducing  a  new  framework  to  slow  down  infrastructure  spending,  notably  with  regard  to 
operations outside the regular budget oversight, supported by a new monitoring mechanism. 

8 

 
 
Moreover,  the  Egyptian  authorities  are  currently  working  on  a  more  detailed  reform  matrix 
together with the World Bank, which is set to also reflect the main areas of IMF-supported reforms 
within  a  broader  framework  that  could  be  expected  to  also  involve  measures  addressing  other 
important structural issues facing Egypt such as the need to improve its business environment and 
public services or to facilitate the green transition. 

2. 

OBJECTIVES AND RELATED INDICATORS OF THE MACRO-FINANCIAL ASSISTANCE 

2.1.  Objectives 

The objectives of the proposed MFA operation are to:  

i)  Contribute  to  covering  the  external  financing  needs  of  Egypt  in  the  context  of  a  sizeable 
external financing gap brought about by persistent macroeconomic imbalances and external 
shocks. 

ii)  Support  the  fiscal  consolidation  effort  and  external  stabilisation  expected  in  the  IMF 

programme. 

iii) Support  structural  reform  efforts  aimed  at  improving  overall  macroeconomic  management, 
strengthening  economic  governance  and  transparency,  and  improving  the  conditions  for 
sustainable growth. 

iv)  Facilitate and encourage efforts by the Egyptian authorities to implement measures identified 
under  the  EU-Egypt  Association  Agreement  and  in  the  context  of  bilateral  cooperation 
programmes (including capacity-building), and strengthen the EU’s economic policy dialogue 
with the authorities. 

2.2  Monitoring indicators  

The fulfilment of the objectives of the assistance will be assessed by the Commission, including 
in the context of the ex-post evaluation (see below), on the basis of the following indicators:  

i)  Progress with macroeconomic and financial stabilisation, notably by assessing the degree of 

adherence to the IMF-supported programme.  

ii)  Progress with the implementation of structural reforms, notably the specific policy actions to 
be  identified  as  conditions  for  disbursement  of  the  assistance,  which  will  be  included  in  a 
Memorandum of Understanding to be negotiated between the Commission and the Egyptian 
authorities. 

3.  DELIVERY MECHANISMS AND RISK ASSESSMENT 

3.1 

Delivery mechanisms  

The proposed new MFA operations would cover part of the residual financing gap for the 2024-
2027 period and amount to up to EUR 5 billion in loans, divided into a short-term MFA operation 
of up to EUR 1 billion to be disbursed in one instalment, and a regular MFA operation of up to 

9 

 
 
 
 
 
 
 
EUR 4 billion to be disbursed in three instalments. As usual, these loans would have favourable 
conditions in terms of long maturities (of up to 35 years and an interest rate corresponding to the 
EU’s favourable credit rating, at which it borrows the funds in the international capital markets).  

As the proposed amount is significant in terms of its share in the coverage of the residual financing 
gap (i.e. by 56.7% during the period of FY24/25-FY26/27), it is important to ensure the MFA’s 
value added, notably by providing the EU with sufficient leverage to promote reforms. To that 
end,  policy  conditions  will  be  attached  to  the  MFA’s  disbursements,  with  each  instalment, 
including the first one, being subject to good progress with the IMF programme and the specific 
actions agreed with the EU in the Memorandum of Understanding as well as progress in relation 
to the political preconditions.  

3.2 

Risk assessment 

Any MFA operation faces external and domestic risks. On the external side, Egypt has experienced 
significant  shocks  related  to  the  COVID-19  pandemic,  Russia’s  invasion  of  Ukraine  and  the 
consequences of Hamas terrorist attacks across Israel of 7 October 2023. Further escalation of the 
regional  tensions  could  adversely  impact  Egypt’s  economic  situation  and  further  increase  its 
external  financing  needs.  On  the  domestic  side,  risks  relate  to  potential  underperformance  of 
macroeconomic and structural reforms, linked to political perceptions of possible social unrest and 
to  resistance  to  reforms  from  vested  interests  in  SOEs  or  other  state-connected  entities.  Taken 
together,  these  risks  could  endanger  macroeconomic  stability  and  prevent  the  effective 
disbursement of the MFA, but also highlight the need for urgent action to start to address the root 
causes of Egypt’s problems and is hence the very reason to propose this MFA package in the first 
place.  

Moreover, in line with the requirements of the Financial Regulation, the Commission services will 
carry out before the implementation of the MFA an Operational Assessment of the financial and 
administrative  circuits  of  Egypt  in  order  to  ascertain  that  the  procedures  in  place  for  the 
management of programme assistance, including MFA, provide adequate guarantees.  

Finally,  the  assistance  will  be  liable  to  verification,  control  and  auditing  procedures  under  the 
responsibility  of  the  Commission,  including  the  European  Anti-Fraud  Office  (OLAF),  and  the 
European Court of Auditors.  

Having made a thorough assessment of the risks, the Commission services consider that there are 
sufficient grounds and guarantees to proceed with the proposed MFA to Egypt.  

The Commission services will maintain close contacts with the  Egyptian authorities during the 
implementation  of the macro-financial assistance in  order to  address  quickly  any concerns that 
may arise.  

4.  ADDED VALUE OF EU INVOLVEMENT  

The  Union's  financial  support  to  Egypt  including  under  the  new  Strategic  and  Comprehensive 
Partnership reflects the country's strategic importance to the EU in the context of the European 
Neighbourhood  Policy.  The  MFA  instrument  is  a  policy-based  instrument  directed  to  alleviate 
short- and medium-term external financial needs. As a part of the overall EU package of assistance 
under the Strategic and Comprehensive Partnership, composed of financial instruments, such as 
guarantees and blending instruments, as well as support for specific priorities implemented under 

10 

 
 
the  Neighbourhood,  Development  and  International  Cooperation  Instrument  (NDICI),  it  would 
contribute to fostering the Union's objectives of economic stability and economic development in 
Egypt. By supporting the authorities' efforts to establish a more stable macroeconomic framework 
and improve economic governance, the proposed assistance would help improve the effectiveness 
of other EU financial assistance to the country. The proposed MFA would increase substantially 
the EU's leverage on policy making in Egypt, helping steer the country towards a reform trajectory 
that  should  help  maintain  macroeconomic  stability,  address  structural  economic  problems  and 
boost potential growth in the longer run. 

Moreover,  the  MFA  is  part  of  an  international  joint  effort,  effectively  complementing  the 
programmes  and  resources  provided  by  the  IMF,  the  World  Bank  and  other  bilateral  and 
multilateral  donors.  In  combination,  the  financing  provided  by  the  multilateral  and  bilateral 
creditors/donors (including state asset sales, including to the GCC) other than the EU to cover the 
overall financing gap over the envisaged MFA period from FY24/25-FY26/27 would cover at least 
77% of the overall external financing gap, ensuring reasonable burden sharing between the Union 
and other donors, as well as the added value of the overall Union involvement.  

5.  CHARACTERISTICS OF MACRO-FINANCIAL ASSISTANCE  

5.1 

Exceptional Character and Limited Time-frame 

The planned assistance package would be divided into two MFA operations: a short-term MFA 
operation,  under  a  strictly  limited  timeframe  of  9  months  to  be  provided via  one  instalment  to 
ensure a disbursement still in 2024, which therefore has a clear exceptional character. This would 
be followed by a regular MFA operation of 2.5 years, to be disbursed in three instalments.  

The legal basis for the proposal for the second, medium-term part of the MFA package would be 
Article 212 TFEU, while for the proposal for the short-term MFA operation it would be Article 
213 TFEU. Using Article 213 TFEU is clearly a second-best option, but a first disbursement still 
in  2024  in  response  to  Egypt’s  particularly  acute  financing  needs  this  year  would  appear 
impossible if the decision was to be adopted by both the Parliament and the Council in accordance 
with Article 212 TFEU under the ordinary legislative procedure, taking into account the constraints 
imposed by the upcoming end of the Parliament's legislative period in conjunction with the time 
still needed thereafter to fully enact the MFA, including for agreeing on a set of policy reforms to 
underpin the assistance. The Commission considers it therefore justified to use Article 213 TFEU 
providing for the adoption of the decision by the Council only for the first part of the package, 
without  prejudice  to  other  future,  regular  MFA  operations.  The  recognition  of  the  second-best 
nature of relying on Article 213 motivates the split of the package into two proposals, rather than 
one  proposal  under  Article  213  for  the  entire  support,  where  the  limited  share  of  the  first  part 
within the overall volume of support under the package has been calibrated taking this into account, 
in addition to Egypt’s urgent financing needs. 

5.2 

Political preconditions and EU-Egypt relations  

Human rights challenges in Egypt remain significant, particularly in relation to the protection of 
fundamental freedoms, governance and the rule of law. However, in the last few years, the political 
leadership  in  Egypt  has  taken  several  steps  putting  greater  emphasis  on  the  importance  of  the 
respect  for  human  rights;  it  abolished  the  state  of  emergency  (apart  from  areas  in  the  Sinai), 
launched the first ever National Strategy for Human Rights, relaunched the Presidential Amnesty 

11 

 
 
Committee,  releasing  over  1000  political  prisoners,  and  embarked  on  the  National  Dialogue. 
Further, Egypt has intensified its engagement on human rights with the EU, allowing for the first 
time the visit of the EU Special Representative for Human Rights to Cairo in 2022. Egypt has also 
recently started engaging in international fora and it is cooperating with the UN OHCHR in an EU 
funded project that aims to establish an EU-UN partnership, joining synergies to reinforce respect 
of human rights in Egypt. Egypt has further declared in its National Strategy for Human Rights its 
intention to reform the law on pre-trial detention, ameliorate detention conditions, limit the number 
of  crimes  punished  by  death  sentence  and  enhance  the  respect  of  human  rights  across  all 
government institutions. Effective implementation is needed, progress having so far been made in 
the institutional track. 

In light of the above, it can be assessed that Egypt has taken some relevant steps towards fulfilling 
the criteria. At the same time, effective progress on implementation needs to continue, notably in 
the framework of Egypt’s own National Strategy for Human Rights. Progress will be monitored 
continuously throughout the implementation of the MFA so as to ascertain that compliance with 
the criteria moves in a satisfactory direction.  

5.3 

Complementarity  

As outlined above, the planned MFA would be part of a joint effort with other multilateral and 
bilateral donors in the context of the IMF-supported programme, where it would thus complement 
other  international  assistance.  This  is  consistent  with  standard  practices  on  burden-sharing  for 
MFA operations (for a country with  an Association  Agreement, the upper limit  would be 60% 
according  to  the  Council  conclusions  of  8  October  2002),  taking  into  account  the  assistance 
pledged to Egypt by other bilateral and multilateral donors.  

The MFA would also complement additional assistance under the Strategic and Comprehensive 
Partnership to be agreed between the EU and Egypt. This assistance, which will be programmed 
under  the  NDICI,  will  consist  of  financial  instruments,  such  as  guarantees  and  blending 
instruments, aimed at mobilising public and private investments with the objective of generating 
substantial  new  investments,  as  well  as  programmes  to  support  specific  priorities  under  the 
Strategic and Comprehensive Partnership through individual projects and technical assistance. 

5.4 

Conditionality 

Disbursements under the proposed MFA operation would be subject to successful reviews under 
the IMF programme and on the effective drawing by Egypt on IMF funds, as well as on continued 
monitoring of progress in relation to the political precondition. In addition, the Commission – on 
behalf of the EU – and the Egyptian authorities would agree on a specific set of structural reform 
measures, to be defined in two Memoranda of Understanding, one for each of the two operations. 
These  reform  measures  would  support  the  authorities’  reform  agenda  and  complement  the 
programmes  agreed  with  the  IMF,  the  World  Bank  and  other  donors,  as  well  as  the  policy 
programmes associated with the EU’s budget support operations. A structural reforms matrix that 
is currently being agreed under World Bank coordination can further inform the prioritisation of 
reform  measures  to  be  associated  with  the  EU  assistance.  The  reform  measures  would  also  be 
consistent  with  the  main  economic  reform  priorities  agreed  between  the  EU  and  Egypt  in  the 
context of the Association Agreement and the Partnership Priorities. 

12 

 
 
 
The  agreed  reform  priorities  could,  in  principle,  include  the  key  areas  of  reducing  the  state’s 
economic  footprint,  reducing  inefficiencies  in  the  foreign  exchange  market,  improving  public 
financial management.  This  remains  important  to increase external  financial inflows and foster 
investment  both  being  necessary  requirements  to  underpin  a  more  resilient  and  sustainable 
economic recovery.  

•  Reducing the state’s economic footprint  

The state’s significant footprint in the economy is a major drag on economic growth and at the 
root of many of Egypt’s economic and fiscal issues. The excessively high state involvement in the 
Egyptian economy causes economic inefficiencies, crowds out private sector activity and weighs 
on the business and investment climate. Moreover, it is weighing on Egypt’s fiscal space, which 
is  urgently  needed  given  persistent  fiscal  deficits  and  growing  public  debt.  In  this  regard,  it  is 
important  that  the  Egyptian  Competition  Authority  has  sufficient  resources  to  supervise  and 
enforce  competitive  neutrality  independently,  and  that  the  state  asset  sale  programme  is  duly 
implemented.  

•  Reducing inefficiencies in the foreign exchange market 

Following the signature of the new staff level agreement in March 2024, the authorities floated the 
exchange rate and committed to allowing the exchange rate to be determined by market forces. 
Beforehand, the pound had remained fixed at an overvalued level, which had led to the emergence 
of a parallel market with a significant mark-up. Experience from other countries has shown the 
inefficiency and high costs of multiple exchange rate regimes for businesses and households while 
benefitting a privileged few with exclusive access to the official rate. It will therefore be important 
to monitor the effective implementation of the authorities’ commitment to keep the exchange rate 
durably flexible.  

•  Improving public financial management (PFM) 
Egypt has structurally relatively low budget revenues, and is in ongoing discussions with the World 
Bank on how to enhance budget generation. It would be important for Egypt to improve its public 
finance management framework (including for debt management) and implement the PFM law, 
including the adoption of a medium-term revenue strategy. Other areas of PFM warranting reform 
are public procurement and social transfer mechanisms.  

In  addition  to  these  core  objectives,  it  is  clear  that  Egypt  needs  a  broader  set  of  reforms.  The 
Egyptian authorities are currently devising a reform matrix in collaboration with donors including 
the World Bank, which could serve as a guiding document for the selection of further reforms that 
could be supported by the MFA, also to help ensure ownership from the Egyptian side. 

5.5 

Financial Discipline  

The proposed MFA assistance package of up to EUR 5 billion in loans for Egypt would be divided 
into two MFA operations. First, a short-term MFA operation under a strictly limited timeframe of 
9 months to be provided via one instalment to ensure a disbursement still in 2024. This would be 
followed by a regular MFA operation of 2.5 years, to be disbursed in three instalments of broadly 
similar size between 2025 and 2027. The required provisioning at a rate of 9% of the External 

13 

 
 
 
Action Guarantee will be programmed under the NDICI, for a total amount of EUR 450 million 
(budget line 14 02 01 70 “NDICI – Provisioning of the Common Provisioning Fund”)2. 

To  ascertain  that  the  beneficiary  has  in  place  a  sound  financial  management  in  line  with  the 
requirements  of  the  Financial  Regulation,  the  Commission  will  undertake  an  Operational 
Assessment  that  should  provide  a  report  on  the  reliability  of  the  financial  circuits  and 
administrative controls at the Ministry of Finance and the Central Bank of Egypt, before the first 
disbursement would take place.  

6.  EVALUATION AND COST-EFFECTIVENESS 

This assistance is of exceptional and macroeconomic nature and its evaluation will be undertaken 
in line with the standard Commission procedures.  

6.1 

Evaluation  

Ex-post evaluations of MFA operations are foreseen in the Multi-Annual Evaluation Programme 
of  the  Commission's  Directorate-General  for  Economic  and  Financial  Affairs.  An  ex-post 
evaluation of the proposed MFA to Egypt will be launched within a period of two years after the 
availability period has expired. A provision for the ex-post evaluation is included in the proposed 
Decision  for  the  assistance  and  will  also  be  included  in  the  Memorandum  of  Understanding. 
Budget appropriations from the macro-financial assistance grant budget line will be used for this 
evaluation.  

6.2 

Achieving cost-effectiveness  

The proposed assistance would entail a high degree of cost effectiveness for several reasons:  

i) 

 Since  the  assistance  would  be  leveraged  by  that  provided  by  the  international  financial 
institutions, with which, as noted, it would be closely coordinated, its ultimate impact could be 
very significant compared to its cost. Moreover, in negotiating specific policy conditions, the 
Commission will be able to draw on the expertise of those institutions, including the IMF and 
the World Bank, and to influence their conditionality as well in ways that will take into account 
the EU's views.  

ii)   Providing coordinated macroeconomic support to Egypt on behalf of the EU countries, the 
MFA would be more cost efficient than the provision of a similar total amount of financial 
support by EU Member States individually.  

iii)  As the proposed assistance would be provided in the form of loans, the budgetary impact of 

which is more limited. 

2 The budget line will be reinforced from a geographical NDICI budget line. 

14 

 
 
 
 
 
 
 
 
iv)   Finally,  the  Commission  will  aim  at  achieving  synergies  with  other  EU  policies  and 
instruments used to support the implementation by the beneficiary of the relevant measures 
(notably in the area of PFM).  

15 

 
 
 
 
 
ANNEX 

EUROPEAN EXTERNAL ACTION SERVICE 

Managing Director 

MD-MENA  Middle East and North Africa 

Brussels, 11 March 2024 

ASSESSMENT ON DEMOCRACY, HUMAN RIGHTS, RULE OF LAW AND 
REFORMS IN THE ARAB REPUBLIC OF EGYPT 

Human rights challenges in Egypt remain significant, particularly in relation to the protection of 
fundamental freedoms, governance and the rule of law. However, in the last few years, the political 
leadership in Egypt has taken a few steps putting greater emphasis on the importance of the respect 
for human rights; it abolished the state of emergency (apart from areas in the Sinai), launched the 
first ever National Strategy for Human Rights, relaunched the Presidential Amnesty Committee, 
releasing over 1000 political prisoners and embarked on the National Dialogue. Further, Egypt has 
intensified its engagement on human rights with the EU, allowing for the first time the visit of the 
EUSR for Human Rights to Cairo in 2022. Egypt has also recently started engaging in international 
fora and it is cooperating with the UN OHCHR in an EU funded project that aims to establish an 
EU-UN partnership, joining synergies to reinforce a culture of human rights in Egypt. Egypt has 
further declared in its National Strategy for Human Rights its intention to reform the law on pre-
trial detention, ameliorate detention conditions, limit the number of crimes punished by death and 
enhance the culture of human rights across all government institutions. Effective implementation 
is needed, progress having so far been made in the institutional track. 

In light of the above it can be assessed that Egypt has taken some relevant steps towards fulfilling 
the criteria. At the same time, effective progress on implementation needs to continue, notably in 
the framework of Egypt’s own National Strategy for Human Rights. Progress will be monitored 
continuously throughout the implementation of the MFA so as to ascertain that compliance with 
the criteria moves in a satisfactory direction.   

16