Statement by the IMF Staff Representative

Economic conditions in Egypt are favorable, and the economic reform is moving forward. The discussions focused on the elements of a macroeconomic policy. IMF staff discussed the following with authorities: a multiyear fiscal consolidation plan, the monetary policy stance and strategy appropriate for maintaining inflation in low single digits, the exchange rate policy, and progress in financial sector reform. Executive Directors recommended the reforms that are needed to support central bank operational autonomy and strengthen policy formulation, and they also stressed the need to enhance the flexibility of labor and improve education.

Abstract

Economic conditions in Egypt are favorable, and the economic reform is moving forward. The discussions focused on the elements of a macroeconomic policy. IMF staff discussed the following with authorities: a multiyear fiscal consolidation plan, the monetary policy stance and strategy appropriate for maintaining inflation in low single digits, the exchange rate policy, and progress in financial sector reform. Executive Directors recommended the reforms that are needed to support central bank operational autonomy and strengthen policy formulation, and they also stressed the need to enhance the flexibility of labor and improve education.

1. The following information has become available since the issuance of the staff report on June 15, 2006. It does not change the thrust of the staff appraisal.

2. Inflation (as measured by the CPI) accelerated in May to 5.4 percent (y/y), from 4.4 percent in April, mainly due to higher food and telecommunication prices. M2 growth in the year through April 2006 remained virtually unchanged from previous months at 12.8 percent. Available balance of payments data through March 2006 confirm the weakening of the current account compared to last year. The accumulation of net international reserves slowed to US$66 million in May, from a monthly average of US$226 million during January–April.

3. The stock market correction deepened somewhat; as of June 29, the broad CASE 30 index was down 25 percent for the year and 41 percent from the peak in early 2006. The EMBI spread for Egypt widened to 94 basis points (June 28), from 58 basis points at end-2005. Staff's views on the likely economic impact of these developments have not changed.

4. Parliament passed a general accounting law establishing the legal basis for the introduction of a treasury single account (TSA). The TSA will be operational for flow transactions by October 2006; existing government deposits will be integrated over 2–3 years.

5. In June 2006, the World Bank Board approved a Financial Sector Development Loan of US$0.5 billion in support of Egypt's financial sector reform.

6. Since March 31, 2006, another 10 state assets were sold under Egypt's privatization program, of which half were land sales and the other half stakes in firms. This brings the number of asset sales in 2005/06 to 59, for a total of US$ 2.6 billion.

7. Staff has concluded the review of Egypt's exchange system in connection with Egypt's acceptance (January 2, 2005) of the obligations under Article VIII, sections 2, 3 and 4 of the Articles of Agreement. On the basis of the information provided by the government and in discussions with market participants, staff concludes that Egypt maintains an exchange system that is free of exchange restrictions and multiple currency practices on the making of payments and transfers for current international transactions. Staff also welcomes the issuance of Decree No. 40 of 2006 issued by the CBE on June 8, 2006 which provides for intra day adjustments of the CBE's exchange rates used for official transactions outside the interbank foreign exchange market.

Arab Republic of Egypt: Staff Report for the 2006 Article IV Consultation—Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for the Arab Republic of Egypt
Author: International Monetary Fund