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Sunday, 16 July 2017

IMF board approves release of second tranche of extended fund facility

The International Monetary Fund has approved release of the second USD 1.25 bn tranch of the USD 12 bn IMF Extended Fund Facility to Egypt, following an IMF Executive Board review on Thursday. The funds should already have hit Egypt’s coffers, according to MENA. “The continued fiscal consolidation aims to place public debt on a declining path… The main deficit-reducing measures are the increase of the VAT rate, continued reforms of energy subsidies and wage restraint,” according to an IMF statement. The board also said Egypt has made significant progress on structural reforms, noting the passing of industrial permits, investment and bankruptcy acts, which it called “critical pieces of legislation necessary to strengthen the business climate, attract investments, and promote growth.”

Top IMF officials praised the Ismail government’s economic reform program, particularly the recent cuts to fuel and electricity subsidies in addition to the 200 bps interest rate hikes, the latter of which took the nation by surprise. “The government and the central bank have taken the right measures to rein in inflation, reduce the budget deficit, and set the Egyptian economy on a path to stability and growth,” said IMF Managing Director Christine Lagarde. She added that she was “very pleased that the government has taken and will continue to take measures to protect the poor and vulnerable groups, including through increasing social spending.”

“Measures taken by the Egyptian government, such as increasing the prices of fuel and electricity and imposing the value-added tax, should have a positive impact on the budget," IMF mission chief for Egypt Chris Jarvis said in statement to MENA. "Such measures help achieve initial surplus in the budget of the Egyptian government for the first time in 10 years," he added.

On inflation, Jarvis said that the key test is to make sure that high inflation doesn’t become permanent. “The actions that the central bank are taking are the right ones to achieve its inflation targets,” said Jarvis via twitter. He expects inflation to fall by the end of this calendar year and be much lower by next summer.

We would beat the drum again about interest rate hikes being a phenomenally bad idea in a nation as under-banked as Egypt, but it’s rather clear the folks at the IMF aren’t listening to us…

The news comes as the IMF appears to have lowered its growth estimate for the fiscal year that ended a couple of weeks ago, saying the economy is likely to have grown 3.5% in FY2016-17, down from an initial estimate of 4.0%. It has also revised its projection for the current fiscal year, lowering it to 4.5% from 4.8%. The IMF now also expects the budget deficit for FY2016-17 to reach 10.5% of GDP, up from a previously projected 9.8% of GDP. However, the IMF’s projections for the budget deficit in FY2017-18 would appear to be more optimistic than the government’s, with the Fund expecting it to reach 8.5% of GDP from 8.4% of GDP in its previous evaluation. The government is anticipating the deficit this fiscal year will come in at 9.1% of GDP. On inflation, the IMF’s initial estimates proved way off point, with consumer price inflation at the end of last fiscal year being revised to 32.8% from 16.6%. The fund expects inflation to drop to 10.3% at the end of FY2017-18.

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