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Annual Assessment: Egypt: Reforms Trigger Economic Growth

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
March 2008
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Growth in Egypt has picked up steadily since 2004 (see chart), making it one of the Middle East's fastest growing economies. Egypt launched bold reforms in 2004 that, along with a favorable external environment, have triggered an impressive acceleration of growth, to 7 percent in 2006/07.

In its most recent review of Egypt's economy, the IMF says the expansion has broadened from energy, construction, and telecommunications to agriculture and manufacturing. According to the IMF, the Egyptian economy will continue to grow at 7-8 percent if ongoing improvements in the business environment succeed in raising investment to more than 25 percent of GDP.

Between end-2004 and end-March 2007, 2.4 million jobs were created. As a result, unemployment—chronically high in this emerging market economy—has dropped from 10.5 percent to 9 percent. Exports and imports also rose sharply, along with workers' remittances, Suez Canal receipts, and tourism revenues.

Better business climate

The reforms have started to tackle critical impediments to private business and investment.

In 2004, the establishment of a well-functioning foreign exchange market lifted formal and informal restrictions on access to foreign exchange that had long hampered business in Egypt. The weighted average import tariff was cut to about 6.9 percent by 2007, accelerating integration with the global economy. Personal and corporate income tax rates have been slashed, and tax administration is being modernized. Business regulations have been streamlined to speed up customs clearance and facilitate registration of new businesses and property. A wide range of productive assets have been privatized, and more than half of the banking system is now in private hands. Finally, governance and financial soundness of state banks and banking supervision have been strengthened.

On the move

Egypt's per capita growth has picked up since 2004.

Citation: 37, 3; 10.5089/9781451967593.023.A009

Source: IMF, World Economic Outlook database (October 2007).

Structural reforms were complemented by prudent macroeconomic policies. Monetary policy, underpinned by greater exchange rate flexibility, has become more effective in targeting and containing core inflation. The fiscal deficit for 2006/07 was reduced to about 7.7 percent of GDP from an average of 9 percent in recent years. The decline is due to the tax reforms, fuel price adjustments, wage restraint, and windfall receipts from a telecom license sale.

In a global environment flush with cash, investors took notice. Large capital inflows, mostly foreign direct investment, reinforced the growth impact of the reforms. Egypt's balance of payments has recorded a surplus since 2004/05, bringing official reserves to the equivalent of more than six months of imports and eight times short-term debt.

Tasks ahead

With Egypt's labor force growing rapidly, job creation will be essential and will require sustained higher investment. Structural reforms need to continue to tackle inadequate infrastructure, red tape, poor public service delivery, and the scarcity of skilled labor.

Reducing the budget deficit is key to raising national saving to finance higher investments. It is also key to supporting monetary policy in containing inflation and speculative inflows and to reducing the net public debt. The government has embarked on a program that aims to reduce the deficit gradually to 3 percent of GDP by 2010/11, which would put public debt on a firmly declining path.

The authorities have also started to tackle the underpricing of energy. They hiked diesel prices in mid-2004; further adjusted retail prices in mid-2006; and, in late 2007, launched a three-year program to phase out most industrial energy subsidies.

But prices for most energy products are still far below global prices. This distortion could attract investment into sectors where Egypt does not have a long-run comparative advantage. It also encourages levels of energy consumption with high environmental costs and uses up public funds that could be spent more productively, such as on education or infrastructure.

The favorable external environment and Egypt's continued strong growth provide an opportunity for early action in these areas. Early action would also contribute to a strong and swift investor response. At the same time, the authorities should continue to strengthen social safety nets and help the poorest segments of society benefit from opportunities offered by a growing economy.

Klaus Enders IMF Middle East and Central Asia Department

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