IMF releases third review of Egypt’s reform program
The IMF released on Thursday its third review of Egypt’s economic reform program, praising it for having “played a key role in stabilizing conditions, with external and fiscal deficit narrowing, inflation and unemployment declining, and growth accelerating.” The outlook for growth remains favorable in the medium-term, especially as the government presses ahead with planned reforms and focuses its efforts on mitigating the impact of risks including higher global oil prices and capital outflows from emerging markets.
Key in light of our hand-wringing about the EM Zombie Apocalypse: The IMF sees Egypt is well-positioned to handle external shocks thanks to a comfortable level of foreign currency reserves (USD 44.26 bn in June 2018), our strong banking system, and a stable macroeconomic policy. The country’s ability to meets its foreign debt obligations also remains “adequate,” but “risks remain,” the IMF warns, saying, “Additional risks include a deterioration of the security situation that would disrupt the emerging recovery in tourism supporting the improved growth outlook, and adjustment fatigue that weakens structural reform momentum.”
Driving growth for the coming year is an expected rebound in tourism as well as rising natural gas production. Based on that, the IMF’s Executive board, which approved the disbursement of a fourth USD 2 bn tranche of Egypt’s USD 12 bn extended fund facility last month, sees:
- GDP growing at 5.5% in FY2018-19 and reaching 6% in the medium-term, “supported by a recovery in tourism and rising natural gas production”;
- Average inflation rising to 14.4% in the current fiscal year and dropping to single digits by mid-2020. Inflation levels in June accelerated for the first in almost a year as the government slashed energy subsidies further and hiked prices for public transportation, measures the IMF views as key to the reform agenda;
- The current account deficit dropping to 2.6% of GDP in FY2018-19 and is projected to narrow further to 2% in the medium-term.
- Egypt achieving its target primary budget surplus of 0.2% for the fiscal year just ended. The country targets a 2% surplus in FY2018-19, which would reduce the budget deficit to 8.1% of GDP.
Key highlights from the IMF’s policy review:
On fiscal policy, the IMF nodded to the central bank’s current approach in maintaining a flexible FX regime and key interest rates, agreeing that “monetary policy should remain cautious to contain second-round effects from the recent increases in energy prices, and that further policy changes should be guided by inflation expectations and demand pressures.” The new Banking Act should “establish price stability as the primary objective of monetary policy, strengthen the CBE’s institutional and operational autonomy, and improve the early intervention and resolution framework (MEFP 9).”
Energy subsidy reform is still key to fiscal consolidation. The report notes that the government must continue to phase-out subsidies to achieve full-cost recovery, with the fuel subsidy bill set to decline to 1.8% of GDP in FY2018-19 from a projected 2.7% in FY2017-18 and 3.3% in the year before. Electricity subsidies are also expected to fall to 0.3% of GDP this fiscal year, from a projected 0.7% in FY2017-18, before they are eliminated entirely by FY2020-21. The government’s plans to modernize the tax system are “essential to create fiscal space for investments in health and education, infrastructure and a sustainable social safety net.”
Structural reforms are necessary to “reorient Egypt toward private sector and export-led growth,” as well as reduce state intervention in the economy. This will include the state’s privatization program, which should see at least four public companies offer stakes on the EGX in 2018. A new system for allocating land to industry — which the report highlights as one of the main challenges to private sector growth — will also be issued in March 2019 and should facilitate the process. The report also cheered initiatives including an overhaul of the public procurement system and ongoing efforts to fight corruption.