IMF Positive about Egypt’s Economic Trajectory

Egypt has successfully completed the three-year arrangement under the Extended Fund Facility and achieved its main objectives, according to the fifth and final International Monetary Fund (IMF) review on Egypt in the wake of disbursing the last tranche of the IMF's $12 billion loan.

The review also asserted that Egypt's macroeconomic situation has improved markedly since 2016, driven by authorities’ strong ownership of the economic reform programme and decisive policy actions.

"Critical macroeconomic reforms have been successful in correcting large external and domestic imbalances, achieving macroeconomic stabilisation and a recovery in growth and employment, and putting public debt on a clearly declining trajectory," according to the IMF.

It added that Egypt's monetary policy remains anchored by the medium-term objective of bringing inflation to single digits. While core inflation appears to be well contained, the Central Bank of Egypt (CBE) should remain cautious until disinflation is firmly entrenched, the IMF said.

"Exchange rate flexibility remains essential to improve resilience to shocks and preserve competitiveness, and the FY 2018/19 primary surplus target of two percent of GDP was met, helping to anchor a further decline in the public-debt-to-GDP ratio. It will be important to maintain primary surpluses at this level over the medium term to keep public debt on a downward trajectory," the review said.

The review also touched on the phasing out of fuel subsidies, describing their elimination as encouraging energy efficiency, helping to protect the budget from unexpected changes in oil prices, and free up fiscal space for social spending. It added that improved revenue mobilisation is also essential to spending on health, education, and social protection.

“The outlook remains favourable and provides 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 enterprises, and sustained implementation will be essential to ensure that statutory changes achieve meaningful results in the business climate. Deepening and broadening of effective reforms is critical to underpin the positive outlook for growth and unemployment," reads the review.

The review found that recent volatility in inflation is mainly attributable to developments in the prices of fruits and vegetables, adding that core inflation, which excludes volatile and regulated items, is contained at around eight percent.

Regarding the CBE’s monetary policy, the IMF found it remains appropriate to ensure that second round effects of food price volatility do not spill over into broader inflation, anticipating that if supply-side constraints are duly addressed to ensure more efficient functioning of market mechanisms, and prudent monetary policy maintained, inflation would be expected to reach single digits in 2020. A decline in inflation does not mean lower prices, but rather a slower pace of price increases.

The unemployment rate, according to the IMF's review, has declined from 12 percent in FY 2016/17 to around eight percent in December 2018, which is the lowest in 20 years thanks to efforts Egyptian authorities made to increase job opportunities for youth and promote women’s participation in the labour force. But more reforms are needed to increase the dynamism of the private sector and boost investment and growth, which are critical for sustaining the declining trend of unemployment.