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Wednesday, 24 January 2018

IMF releases report on second review of economic reform program

The IMF released its report on the second review of the economic reform program, and as expected, the performance review was stellar across all key indicators. “This macroeconomic turnaround at home and the supportive global economic environment provide a unique opportunity to carry the reform momentum into areas that have historically been hard to tackle. Deep and lasting structural reforms are needed to create jobs as speedily as needed for Egypt’s growing population,” said IMF Mission Chief for Egypt Subir Lall.

Read for yourself: You can catch the landing page of the report here, or read the full report directly (pdf).

The IMF board has a favourable outlook on Egypt’s economy, “provided prudent macroeconomic policies are maintained and the scope of growth-enhancing reforms is broadened.” Drilling down, the board sees:

  • GDP in FY2017-18 growing to 4.8% from 4.2% in the previous year, and reaching 6% in the medium-term.
  • Inflation, which peaked in July 2017 at 35%, is expected to decline to around 12% by June 2018 and to single digits by 2019, reflecting the diminishing of the impact of the EGP float, subsidy cuts, and implementing the value-added tax and supported by the tightening of the monetary policy stance.
  • The account deficit is expected to narrow to about 4.5% of GDP this fiscal year and further on to about 3.5% of GDP by FY2021-22. The primary fiscal deficit is projected to turn into a surplus of 0.2% of GDP in during th current fiscal year, after narrowing from 3.5% of GDP in FY2015-16 to 1.8% of GDP in FY2016-17.

Key highlights of the IMF’s policy review include:

  • On inflation targeting and interest rates, “the CBE will need focus on seasonally-adjusted monthly inflation trends, and consider gradual monetary easing only if inflation expectations and key macroeconomic indicators consistently point to the absence of demand pressures,” said the report.
  • Gov’t must target public debt: “Placing public debt on a clearly downward path will remain the program’s fiscal anchor,” with the ultimate target being to reduce general government debt from 103 percent of GDP in FY2016-17 to 87 percent of GDP in FY2018-19.
  • Energy subsidy reforms must continue: The ongoing energy subsidy reform will continue to play a key role in fiscal consolidation, with energy subsidy spending expected to be cut to 4% of GDP in FY2017-18.
  • Strengthening the private sector further is key: Strengthening competition and addressing corruption are key to achieving greater economic efficiency, while access to land continues to be one of the main hurdles for the private sector.

The IMF made a point to note that adopting policies for further inclusive growth must be a key focal point of the reform agenda. It gave three main recommendations on this front:

  • Increasing revenues by reducing tax exemptions in the value-added tax and other policies which would make the tax system “more progressive.”
  • Continuing cutting fuel subsidies, which mainly benefit the rich, and shift subsidy spending towards cash transfer programs like Karama and Takaful.
  • Allowing the private sector to flourish.

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