IMF Calls on Egypt to 'Broaden, Deepen' Reform Agenda to Maintain Progress

The International Monetary Fund (IMF) said that Egypt should “broaden and deepen” its reform agenda, hailing the country's progress in carrying out its programme for economic reform and modernisation.

First Deputy Managing Director David Lipton made the comments during a conference held in Cairo to discuss the country's economic future. The conference was attended by Prime Minister Sherif Ismail, Central Bank Governor Tarek Amer and Finance Minister Amr El-Garhy.

"This conference comes at a crucial moment for Egypt. In 2016, this country faced severe economic challenges. The response then was bold. It has been sustained, and it has succeeded.

The results are clear: macroeconomic stability and market confidence have been restored, growth has resumed, inflation has fallen, and the public debt ratio is expected to fall for the first time in nearly a decade," Lipton said.

He stressed that now "the time has come to take advantage of the hard-won macroeconomic stability and push on to create jobs and raise living standards through sustainable growth."

Lipton said that this "may be difficult, but it would provide the payoff for all the efforts to date," adding that Egypt will need to “broaden and deepen” its reform agenda to sustain its stabilisation and achieve modernisation.

Lipton said that the IMF has come to Cairo to participate in "forward-looking conversation about those next steps — to ask what can be done to create greater opportunities for all Egyptians, especially the millions of young women and men looking to build a better future."

Lipton highlighted that the current trend of improved global trade and investment provide a favourable environment for Egypt to undertake reforms, stressing that this “is a window that may not be open for too long.” "In 2016, the Egyptian economy was suffering from low growth, lagging investment, rising inflation, and growing government debt. In truth, it was at risk of instability," Lipton said.

Lipton described Egypt’s IMF-supported reform programme – which has included the liberalisation of the country’s currency in November in 2016 and the gradual lifting of subsidies starting 2014 – as "decisive measures to strengthen the business climate and improve the management of public finance."

Egypt is negotiating billions of dollars in aid from various lenders to help revive the economy and ease a dollar shortage that has crippled imports and driven away foreign investors.

The country received the first tranche of a $12 billion IMF loan in November 2016. The second tranche was disbursed in March 2017. The IMF signed off on the third tranche in January 2018.

The IMF undertakes a review twice a year to assess the government’s commitment to reform measures before disbursing a new tranche. Lipton said that “exports and tourism are recovering, and the current account deficit is falling. Confidence has improved, and investment has picked up. As a result, growth so far this year is at a 5.2 percent pace and inflation should decline to 11 percent.

He said that it was evident that the Central Bank of Egypt's monetary policy control has contained the effects of the currency's flotation, the increase in fuel prices, and the Value Added Tax (VAT).

"Subsidy reduction makes possible a more efficient allocation of resources across the economy — which will be an important element in unlocking Egypt’s economic potential," he said.

The IMF deputy also mentioned immediate reasons to press ahead with the reform programme, especially in light of public debt remaining very high despite public finances being strong.

"Delays in following through on the reform of energy subsidies could again leave the budget at risk from higher global oil prices," he said.

"But more than anything else, Egypt cannot delay on jobs. By 2028, Egypt’s working age population will increase by 20 percent. That works out to a labour force of 80 million Egyptians just 10 years from now. Creating jobs for all those people has to be Egypt’s biggest economic challenge," Lipton said.

He added that Egypt would need to have a "business climate in which the rules of the game are simple, transparent and respected, in which small businesses can grow into medium-sized and even large companies."

He said the country will also need enough labour market flexibility to allow young people to find jobs, as well as a reduction of non-tariff barriers and protections for domestic industries so that Egyptian companies can become part of the global supply chain, and can expand to capture a bigger share of the global marketplace.

"The IMF stands ready to help, through our programme and beyond, bringing experiences of other countries that might prove useful to Egypt. A big part of what we do is to help disseminate the success stories of our members.

I am already often telling others about how ownership and boldness has delivered results here in Egypt. We can help you do the same with regard to reform and modernisation. This is a commitment we meet with our advice, technical assistance and training," Lipton said.

Egypt is targeting a growth rate of 5.8 percent of GDP and cuts in the unemployment rate to between 10 and 11 percent for the 2018/19 fiscal year.

Egypt's unemployment rate dipped to 11.8 percent in 2017, from 12.5 percent in 2016, according to CAPMAS.

The country hopes to reduce the budget deficit to 8.4 percent of GDP in 2018/19 and achieve a primary surplus of two percent of GDP and reduce public debt to 91 percent of GDP.

The government also seeks to achieve a 10 percent inflation rate, down from 13 percent last March, the lowest level since May 2016. The country's inflation rate reached a record high of 33 percent in July 2017 following 2016's depreciation of the pound.

The once soaring inflation prompted the central bank to begin loosening monetary policy, raising key interest rates by 700 basis points after the flotation and further cutting rates by 200 basis points since February as inflation eased.

According to the country's 2018/19 budget, subsidies on fuel will witness a trimming by around 21 percent, leaving total spending at around EGP 89 billion in the new budget.

Electricity subsidies will also witness cuts of around 45 percent. According to previous statements by the IMF, Egypt’s fuel-subsidy bill has decreased from a peak of 5.9 percent of GDP in 2013/14 to 3.3 percent in 2016/17.

It is expected to decline further to 2.4 percent of GDP in 2017/18. The government has committed to implementing the next fuel price increase by December 2018, according to the IMF.

It has also committed to periodically increasing the pre-tax cost-recovery ratio on most fuel products, in order to achieve 100 percent in 2018/19 and to eliminate electricity subsidies entirely by 2020/21.