Egypt’s economic reform program has played a key role in improving the country’s macroeconomic situation. The currency was floated in November 2016, addressing its overvaluation and the resulting shortage in foreign exchange.

Fiscal consolidation measures simultaneously boosted government revenues and reined in public expenditures through sustained energy subsidy reform and control of the public‐sector wage bill.

Together with these macroeconomic reforms, the government of Egypt has made important strides in improving the business environment through a modern and comprehensive investment law, a new industrial licensing law, and a progressive insolvency law. These have helped lay the groundwork for more dynamic private sector participation in the economy in response to improved macroeconomic conditions.

The government’s reform program is widely endorsed, including through the World Bank’s programmatic development policy financing (DPF) engagement in the amount of US$4.15 billion and the International Monetary Fund’s (IMF) three‐year US$12 billion Extended Fund Facility, approved in November 2016.

Policies supported by the IMF program have aimed to correct external imbalances, restore competitiveness, reduce the budget deficit and place public debt on a declining path, boost growth, and create jobs while protecting vulnerable groups. Total disbursements under the Facility amount to about US$10 billion.

Egypt’s economic reforms are showing early signs of success. In FY18, real gross domestic product (GDP) grew by 5.3 percent, compared to an average of 4.3 percent in the three years before. This pickup in growth has been driven by public investments, private consumption, and exports of goods and services, while the private sector response has remained muted.

Although inflation has begun to ease over the past 18 months, slowing from a record 33 percent in mid‐2017 to 12.7 percent in January 2019, it remains high by historical standards. The positive impact of macroeconomic and policy reforms has markedly improved Egypt’s external position. The current account deficit narrowed to 2.4 percent of GDP in FY18, down from 6.0 percent in the previous year, driven primarily by strong remittances and the recovery in tourism. A resurgence of portfolio and international financial institution inflows has supported the capital and financial account.

Important fiscal reforms on both the expenditure and revenue sides have prompted a gradual decline in the fiscal deficit, but the public debt ratio remains elevated. Over the past three years, the overall fiscal deficit narrowed by three percentage points to 9.7 percent of GDP in FY18, while the deficit in the primary balance improved by 3.6 percentage points—and turned positive for the first time in more than 15 years—during the same period.

The new value‐added tax (VAT) regime, introduced in September 2016, boosted tax revenues, while energy subsidy reforms and measures to rein in the wage bill reduced expenditures as a share of GDP.

Still, the debt ratio remains high at 98.7 percent of GDP in FY18. Though the debt ratio is expected to continue on a downward path, significant risks remain in terms of size, composition, contingent liabilities, and policy reversal. The large debt ratio has translated into significant interest payments that have increased gradually to almost 10 percent of GDP, absorbing 70 percent of tax revenues.

Despite impressive fiscal gains overall, important challenges remain in sustaining and further increasing revenues, managing fiscal risks, and containing new spending pressures. The tax‐to‐GDP ratio, at under 15 percent, remains low among middle‐income countries worldwide. To sustain and improve revenues, further examination of tax expenditures will be required and tax administration reforms will be needed.

The fiscal risk management function has been stepped up, with new policies on sovereign guarantees, calculations of contingent liabilities, and transparency of state‐owned enterprises’ (SOE) financial statements; capacity to manage these new functions will need to be developed.

A draft public financial management strategy was developed in 2016, but implementation has been partial. Notably, an internal audit function has been introduced. Several public financial management reforms, such as integrated (capital and recurrent) budgeting linked to strategic priorities and updates to the integrated financial management information system, have not been policy priorities recently but remain important to the future reform agenda, particularly if new spending pressures are to be managed.

Source: World Bank document, "PERFORMANCE AND LEARNING REVIEW OF THE COUNTRY PARTNERSHIP FRAMEWORK", April 3, 2019.