IMF sees confidence returning in Egypt’s economy

CAIRO – 23 January 2018: Egypt’s economy is rebounding and confidence is returning, backed by political and social stability, the International Monetary Fund (IMF) said Tuesday, affirming that the country’s economic outlook is “favorable”.

In its staff report on the Executive Board conclusion of Article IV consultation1 with Egypt and the completion of the second review of Egypt’s economic reform program supported by an arrangement under the Extended Fund Facility (EFF), the fund noted that “Egypt’s reform program, supported by the EFF Arrangement, has played a critical role in stabilizing the economy.”

On the completion of the second program, the Egyptian authorities were approved by the fund’s executive board in December to draw about $2.03 billion, bringing total disbursements to $6.08 billion.

The IMF executive board approved in November 2016 a $12 billion three-year loan to Egypt to support its economic reform program.

In 2016/17, Egypt gross domestic product grew by 4.2 percent, up from 3.5 percent in the previous fiscal year, according to the report. The fund forecasts Egypt economy to expand further to 4.8 percent in 2017/18 and to 6 percent in the medium term.

“Egypt’s economic outlook is favorable, provided prudent macroeconomic policies are maintained and the scope of growth-enhancing reforms is broadened,” the fund stated.

Inflation to drop to 12% in June

The IMF also predicts Egypt’s inflation which peaked at 35 percent in July, 2017 to drop to around 12 percent by June 2018 and to single digits by 2019, a sign of passing-through price shocks that followed the pound flotation, energy subsidy cuts and raising the rate of value added tax (VAT).

While the current account deficit remained unchanged at about 6 percent of GDP in 2016/17, the fund said it is predicted to shrink to about about 4.5 percent of GDP in 2017/18 and to about 3.5 percent of GDP by 2021/22, boosted by improved external competitiveness, reforms of the business environment, and a further recovery in tourism.

Listing the positive impacts of the excnage rate libarlization on the economy, the IMF said the long-awaited step demolished the currency parallel market, and attracted more capital inflows increased and pushed the international reserves to the highest rates since the January 2 Revolution in 2011, to be sufficient for five months of imports of goods and services.

The fund expects primary fiscal deficit to turn into a surplus of 0.2 percent of GDP in the current fiscal year, after narrowing from 3.5 percent of GDP in 2015/16 to 1.8 percent of GDP in 2016/17.

To maintain economic reform momentum, in the medium term, the IMF recommended that policy priorities should target raising potential output and promoting inclusive growth to create jobs for Egypt’s young and growing population.

“This will require the private sector to become the primary engine of growth and the state to provide a stable macroeconomic environment, a friendly business climate and efficient delivery of public goods. Strengthening social protection will also be important to shield the most vulnerable,” the fund added.

for the fund, enhancing competition in input and product markets; supporting greater trade integration and the removal of non-tariff barriers; improving access to finance and land; strengthening governance, transparency, and accountability of state owned enterprises; and strengthening the labor market are key required reforms.

Positive

“The authorities’ strong ownership of the program and their continued progress in stabilizing the Egyptian economy,” was commeded by the IMF’s executive directors, who also hailed “the ongoing recovery in GDP growth, gradual moderation of inflation, significant fiscal adjustment, resilience of the banking system, and strengthening of market confidence.”

On the other hand, the directors warned of some risks, urging the authorities to maintain steadfast implementation of policies to solidify macroeconomic stability and advance structural reforms to unlock Egypt’s growth potential.

Also welcoming the authorities’ medium term objective of raising inclusive growth and increasing employment, the IMF doirectors said a more efficient allocation of resources in the economy through market driven mechanisms is required to achieve this goal.

The measures taken by the Egyptian authorities to improve business climate, reduce corruption and streamline the role of the state in the economy were also welcome by the IMF’s directors, who called for deepening these reforms.

The need to strengthen competition, improve the governance and transparency of state owned enterprises, reduce barriers to trade, improve access to finance and land, and facilitate better integration of women and young people in the labor market, were also among the fund’s recommendations.

“Careful sequencing and effective communication of the reform agenda will be crucial for success,” the Imf’s directors said in their report. The Central Bank of Egypt (CBE) was also hailed by the fund for maintaining a prudent monetary policy stance. The fund’s directors called on the CBE to remain vigilant, welcoming the intention to consider a gradual easing of policy interest rates only once demand pressures and inflation expectations remain contained.

Ongoing commitment from the authorities to a floating exchange rate regime was also endorsed, as well as the CBE’s intention to refrain from interventions in the interbank market except to potentially mitigate disorderly conditions.

Stressing the need to reduce the fiscal deficit and public debt, the fund’s directors welcomed the authorities’ commitment to achieve primary surpluses of about 2 percent of GDP in the medium term. They also urged the authorities to fully implement the automatic fuel price adjustment mechanism as soon as possible and to slash most fuel subsidies by the end of the fund’s supported program.

At the same time, the fund called for enhancing the social safety net to protect the vulnerable, and recommended greater reliance on targeted cash transfer programs rather than product subsidies.

To increase spending on spending on infrastructure, human capital, and the social safety net, a fiscal space is needed, the IMF’s directors said, stressing the need to implement tax policy reforms to widen the tax base and modernize tax and customs administration. They also asserted the importance of strengthening public finance management, and curbing government debt originating from outside the budget sector.