Overcoming The Bottleneck

After three years of applying tough authority measures as part of an economic reform program, backed by a $12 billion loan agreement from the International Monetary Fund (IMF), Egypt has successfully overcome the bottleneck and the country has started to reap the fruits of painful reforms.

On July 24, the IMF’s Executive Board ap- proved the disbursement of the sixth and final $2 billion tranche in its $12 billion Extended Fund Facility (EFF) to Egypt, after Cairo had successfully reached a staff-level agreement with the fund’s mission over the fifth review of the tranche in May. The board’s approval came merely days after the government raised fuel and electricity prices in July as part of the IMF- backed reform program. The disbursement of the tranche has been pending the board’s ap- proval since then.

The IMF deal has helped Egypt restore con- fidence in the economy, which was battered by political instability and security disorder after the 2011 revolution. Egypt’s gross domestic product, remittances, tourism revenues, for- eign reserves and foreign investments in the local treasuries have all seen significant hikes.

Following the fund’s executive board discus- sion on Egypt, Acting Managing Director and Chairman of the Board David Lipton said that Cairo has “successfully” completed the three- year arrangement and managed to achieve its main targets. “The macroeconomic situation has markedly improved since 2016, supported by the authorities’ strong ownership of their reform program and decisive upfront policy actions. Critical macroeconomic reforms have been successful in correcting large external and domestic imbalances, achieving macroeco- nomic stabilization and a recovery in growth and employment, and putting public debt on a clearly declining trajectory.”

Lipton added that Egypt met its FY2018/19 primary surplus target of 2% of GDP, contrib- uting to a further drop in public-debt-to-GDP ratio. Keeping primary surpluses at this level over the medium term is necessary to maintain public debt on a downward trajectory. “The elimination of most fuel subsidies, which are re- gressive, will encourage energy efficiency, help protect the budget from unexpected changes in oil prices, and free up fiscal space for social spending. Improved revenue mobilization is also essential to create room for spending in health, education, and social protection,” Lip- ton said.

“Egypt’s IMF deal has proved successful in helping repair the country’s balance sheets… Overall, macroeconomic stability has been re- stored. Admittedly, government debt remains high at more than 90% of GDP. But it has started to fall back and should continue to do so over the coming years. The devaluation and fiscal tightening – combined with rising gas exports and a recovery in the tourism sector
– has led to marked improvement in the cur- rent account position. Inflation also appears to be coming under control and we expect it to fall further,” says Capital Economics’ Senior Middle East Economist Jason Juvey. He adds that the improvement in Egypt’s balance sheets has paved the way for a continued pick-up in economic growth over the next couple of years. “Austerity is coming to an end and, if inflation continues to fall as we expect, there is scope for monetary policy to further loosen.”

IMF’s Lipton further sees that “monetary policy remains anchored by the medium-term objective of bringing inflation to single digits.

Core inflation appears to be well contained, but the central bank should remain cautious until disinflation is firmly entrenched.” He affirmed that exchange rate flexibility is essential to im- prove resilience to shocks and maintain com- petitiveness.

While the recent energy subsidy cuts are ex- pected to spike some inflationary pressures in the first quarter of 2019/2020, some econo- mists expect that inflation will not skyrocket and will stabilize in single digits by the end of the current fiscal year. On July 5, the govern- ment announced the final round of fuel subsidy cuts, raising prices by 16%- 30%. Also, electric- ity tariffs hiked by up to 15% effective July 1. Furthermore, the government plans to imple- ment a fuel price-indexation mechanism starting September. This mechanism allows retail fuel prices to fluctuate depending on global oil prices and the exchange rate.

“Our view is that inflation will not soar due to some reasons: The increase in fuel prices to reach cost-recovery was on its last legs. That is, the largest part was over. In the IMF’s fourth review document, the Egyptian government an- nounced that fuel products are at an 85-90% price-to-cost ratio at a Brent price of early 60s. This translated into a lower average increase than the previous rounds (around +23% in 2019, as opposed to +45%, +59%, and +48% in 2016, 2017, and 2018 respectively). The second reason is that electricity tariffs’ average increase this year is, once again, the lowest of the preced-ing rounds (+30%, +40%, and +26% in 2016, 2017, and 2018, respectively). Thirdly, the base effect is favorable throughout most of the fiscal year, especially the first half FY2019/20. Finally, the [local currency] EGP’s recent appreciation would mitigate a portion of inflation,” says Shuaa Securities’ Senior Economist Esraa Ahmed. While there are concerns that any price pressures will hurt the more vulnerable segments, the government moved a head with a package of procedures aiming to migitate the consequences of the recent reforms.

The World Bank’s board of directors ap- proved in July an additional $500 million fund to support Egypt’s ongoing efforts to expand and improve social safety nets. This step en- sures access to the needy families while build- ing sustainable paths out of poverty, according to Minister of Investment and International Co- operation Sahar Nasr.
“As Egypt moves ahead with the second wave of the economic reform program, we continue to commit ourselves to ensure the well-being of all Egyptians, and we are also dedicated to pro- viding sustainable income opportunities,” Nasr said.
The minister added that this partnership with the World Bank is based on the Takaful and Karama Program’s success and the World

Bank’s support for promoting sustainable growth in Egypt.

The new project aims to support and expand the Takaful and Karama program with the ap- plication of employment and economic empow- erment programs for the members of targeted families, in addition to the provision of voca- tional training for the poorest family members and linking them with economic opportunities, with priority given to youth and women.

The Takaful and Karama project covers about two million families (nine million people). The project reaches disadvantaged families across Egypt’s 27 governorates; 88% of the total ben- eficiaries so far are women.

President Abdel-Fattah al-Sisi announced in March a bundle of procedures furthering social security, including a 60% increase in the mini- mum monthly wages of public sector employees (to 2,000 from LE 1,200) starting 30 June, re- gardless of whether they are subject to the Civil Service Act.

This is the first minimum wage hike for state employees since January 2014, when it in- creased to LE 1,200 from LE 700. The president also announced that the annual raise for state employees will increase to 7% of the minimum wage under the salary scheme of the civil ser- vice law, while those who are not subject to this act will receive 10% of the basic wage as an an- nual raise, at a minimum of LE 75.

An exceptional addition bonus of LE 150 to all state employees was also among the an- nounced series of measures. Additionally, pen- sions were raised to LE 900 from LE 750.
These measures are expected to add more than LE 58 billion to the FY 2019/20 state bud- get, with the wage hike adding nearly LE 30.5 billion to the state’s annual salary budget and the pensions’ boost costing LE 28 billion.

“Continued reduction in energy subsidies will create some fiscal space to expand spend- ing for targeted income transfers and social welfare payments, including an increase in pen- sion transfers to 1.3% of GDP from 1.2% in FY 2018/19,” global credit rating agency Moody’s stated.

Such efforts to boost social safety nets and alleviate the impact of reforms is flagged as a top priority by the government, especially af- ter the recent CAPMAS income and expendi- ture survey showed that almost a third of the Egyptian population are living in poverty. The poverty rate surged to 32.5% in FY2017/18, up from 27.8% in the previous edition of the report, which measured living conditions and consumption patterns during 2015. The pover- ty line also went up to LE 735.5 monthly, while it was previously at LE 482 per month in the 2015 report.

Under the steps aiming to provide affordable goods for the needy, the government launched Kollena Wahed (We Are All One) initiative. It was welcome by many producers and traders who are selling their products and commodities at discounted prices in mobile outlets and fairs. Going to the IMF and its strict supervision on the economic reform program came as a “bitter bill”, as it was a must to revive the economy and restore investor confidence to bring in much- needed foreign direct investments and thereby create more jobs to raise the quality of people’s lives. Now, with the deal almost officially com- pleted by the approval of the last tranche, Cairo will face the challenge of moving ahead with the rest of structural reforms to maintain the positive results gained thus far.

“The outlook remains favorable and pro- vides an opportune juncture to further advance structural reforms to support more inclusive private-sector led growth and job creation.
The authorities have launched important reforms of competition policy, public procurement, industrial land allocation, and state-owned en- terprises, and sustained implementation will be essential to ensure that statutory changes achieve meaningful results in the business cli- mate. Deepening and broadening of effective reforms is critical to underpin the positive out- look for growth and unemployment,” the IMF’s Lipton concluded.