On December 20, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with the Arab Republic of Egypt and completed the second review of Egypt’s economic reform program supported by an arrangement under the Extended Fund Facility (EFF Arrangement) (see Press Release No. 17/511).
Egypt’s reform program, supported by the EFF Arrangement, has played a critical role in stabilizing the economy. By the end of 2015/16, a long-standing and ultimately unsustainable policy mix had resulted in low growth and investment, elevated general government debt, an overvalued exchange rate, a widening current account deficit, declining gross international reserves and severe shortages of foreign exchange. Underpinned by political and social stability, nearly one year since the launch of the authorities’ ambitious economic reform program, Egypt’s economy is rebounding and confidence is returning.
Egypt’s economic outlook is favorable, provided prudent macroeconomic policies are maintained and the scope of growth-enhancing reforms is broadened. GDP growth rebounded from 3.5 percent in 2015/16 to 4.2 percent in 2016/17, and is projected to strengthen further to 4.8 percent in 2017/18 and to 6 percent in the medium term. In July 2017, inflation peaked at 35 percent, reflecting the pass-through from the devaluation of the pound and the increases in energy prices and the VAT rate, and has started to moderate since then supported by the tightening of the monetary policy stance. Inflation is expected to decline to around 12 percent by June 2018 and to single digits by 2019. The current account deficit remained unchanged at about 6 percent of GDP in 2016/17, but with improved external competitiveness, reforms of the business environment, and a further recovery in tourism, it is expected to narrow to about 4.5 percent of GDP in 2017/18 and to about 3.5 percent of GDP by 2021/22. With the floating of the exchange rate, the parallel market disappeared, capital inflows increased and international reserves reached 5 months of imports of goods and services. The primary fiscal deficit narrowed from 3.5 percent of GDP in 2015/16 to 1.8 percent of GDP in 2016/17, and is projected to turn into a surplus of 0.2 percent of GDP in 2017/18.
To sustain economic reform momentum, in the medium term, policy priorities should aim to raise potential output and promote 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. Reforms should include modernization of the regulatory framework to create a level playing field for all; 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.
Executive Board Assessment2
Executive Directors commended the authorities’ strong ownership of the program and their continued progress in stabilizing the Egyptian economy. They welcomed the ongoing recovery in GDP growth, gradual moderation of inflation, significant fiscal adjustment, resilience of the banking system, and strengthening of market confidence. They noted, however, that risks remain, and urged the authorities to maintain steadfast implementation of policies to solidify macroeconomic stability and advance structural reforms to unlock Egypt’s growth potential.
Directors welcomed the authorities’ medium term objective of raising inclusive growth and increasing employment. They noted that this will require a more efficient allocation of resources in the economy through market driven mechanisms, with the private sector taking the lead in investment and job creation, and the state focusing on the provision of a stable macroeconomic environment and the efficient delivery of public goods. Directors welcomed the steps the authorities have already taken and urged them to deepen reforms to improve the business climate, reduce corruption, and streamline the role of the state in the economy. They stressed 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. They noted that careful sequencing and effective communication of the reform agenda will be crucial for success.
Directors commended the Central Bank of Egypt (CBE) for maintaining a prudent monetary policy stance. They urged CBE to remain vigilant and welcomed the intention to consider a gradual easing of policy interest rates only once the authorities are confident that demand pressures and inflation expectations remain contained. Directors took positive note of the authorities’ intention to move to inflation targeting in the medium term. Notwithstanding the significant groundwork in place, they highlighted the need to complete the preparatory work, including the reform of the central bank law and further reducing fiscal dominance.
Directors endorsed the authorities’ continued commitment to a floating exchange rate regime. They welcomed the intention of CBE to refrain from interventions in the interbank market except to potentially mitigate disorderly conditions and CBE’s decision to introduce a fee upon entry for the repatriation mechanism, which could help enhance the flexibility of the pound and strengthen monetary transmission.
Directors stressed the need to reduce the fiscal deficit and public debt. They welcomed, in this context, the authorities’ commitment to achieve primary surpluses of about 2 percent of GDP in the medium term. Directors urged implementation of the automatic fuel price adjustment mechanism as soon as possible and the phasing out of most fuel subsidies by the end of the Fund supported program. They commended the enhancement of the social safety net to protect the vulnerable, and recommended greater reliance on targeted cash transfer programs rather than product subsidies.
Directors noted that fiscal space is needed for spending on infrastructure, human capital, and the social safety net. They underscored, in this context, the importance of implementing tax policy reforms to broaden the tax base and modernize tax and customs administration. Directors also emphasized the need to strengthen public finance management, and guard against increases in government debt originating from outside the budget sector.
It is expected that the next Article IV consultation with the Arab Republic of Egypt will be held in accordance with the Executive Board decision on the consultation cycles for members with Fund arrangements.
Under Artide IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.