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Sunday, 7 April 2019

IMF releases fourth review of Egypt’s reform program

IMF releases fourth review of Egypt’s reform program: The IMF was out yesterday with its fourth and penultimate policy review of Egypt’s economic reform program, which saw a marked improvement in Egypt’s macroeconomic situation to date. “The program performance has been broadly on track,” the fund writes, noting that the public debt was the only target missed. The outlook remains remains favorable in the medium-term “supported by strong policy implementation,” the IMF noted. The fifth review is scheduled for completion on or after 20 June, paving the way for the disbursement of the sixth and final USD 2 bn tranche of the USD 12 bn loan. The team conducting the review will be in town in May, Egypt Mission Chief and Assistant Director for Middle East and Central Asia Department Subir Lall said last week.

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You can expect 92-octane gasoline prices to rise sometime in September: Fuel subsidy reforms are on track, the IMF writes, with the government expected to lift all subsidies (apart from on liquified petroleum gas and fuel oil used for electricity and bakeries) by the end of FY2018-19. The recent indexing of the price at the pump to global fuel prices for 95-octane petrol will be rolled out to fuel stocks on 5 June, and the first price adjustment is scheduled for the end of 3Q2019. Plans to fully eliminate electricity subsidies by the end of FY2020-21 are also on course.

The IMF still sees Egypt’s economy growing at a 5.9% clip in the coming financial year and at a 6% pace in FY2020-21. The government debt-to-GDP ratio has also markedly improved amid fiscal consolidation and is expected to continue falling over the coming years. The fund sees debt-to-GDP falling to 86% by the end of FY2018-19, and continuing to decline to reach 71% in FY2023-24. Meanwhile, the government is on track to hit its 2% FY2018-19 primary surplus target, and the overall deficit is expected to narrow to 8.3%.

Inflation forecasts have fallen slightly since the third review, with the IMF now predicting 10.7% consumer price inflation by the end of the upcoming fiscal year compared to a previous forecast of 10.9%.

Don’t expect single digit inflation until the end of the 2020-2021 fiscal year, by which time inflation should be at a 7.7% clip before falling further to below 6.9% in FY2022-2023. In the interim, the fund is expecting 13-14% inflation by the end of the current fiscal year as subsidy cuts and seasonal factors produce upward pressure on prices. The single-digit inflation target will continue to heavily factor in monetary policy decisions, the IMF says, adding that policy will “remain restrictive to contain possible second-round effects.”

The EGP-USD exchange rate has remained stable but the against other trading partner currencies the EGP has appreciated in nominal and real effective terms. The fund warns that further appreciation could hurt the government’s attempts to tackle the current account deficit.

Foreign currency reserves are currently above the fund’s reserve adequacy metric, and are expected to rise to USD 44.9 bn by the end of the current fiscal year before hitting USD 50.8 bn in 2022-23.

Net foreign direct investment meanwhile will grow moderately over the coming years rising to USD 11.3 bn from USD 9.5 bn in FY2019-20 before reaching USD 16.9 bn in FY2022-23.

Global financial conditions are worsening and the Madbouly government will need to maintain “consistent policy implementation” if it is going to continue to benefit from the reform program. Public debt levels could come under pressure by an increase in real interest rates or a sharp fall in the EGP. Limited flexibility in the exchange rate continue to hamper inflows into the local treasury market while banks remain exposed to the EGP due to their short positions on foreign currency. Although the government’s record of commitment to reform somewhat mitigates these risks, deteriorating external conditions make it all the more important that Egypt pursues greater exchange rate flexibility, the fund says.

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