By Doaa Farid and Abdel Rahman Youssef
After two weeks of closely observing Egypt’s economy, the International Monetary Fund’s (IMF) Article IV review mission concluded the job on 25 November, and announced the results.
Mission chief Chris Jarvis announced in a Wednesday statement that Egypt’s economy has begun to recover after four years of slow activity, adding that the current period is a good opportunity for Egypt.
“Equally important, there is growing national consensus on the need for economic reform,” Jarvis noted.
For the first time after the 25 January Revolution, the IMF mission visited Egypt to consult on Article IV of IMF guidelines and the economic reforms undertaken recently by the government. These include, most notably, the energy subsidies and tax system. As stated by the government, the importance of the mission lies in its leading-up to the economic summit in March 2015 to create a vision for healthy economic performance.
Jarvis said Egypt faces many challenges during the “prolonged” political transition, as growth fell and unemployment and poverty increased to high levels. He added that the budget deficits grew and external pressures led to a fall in foreign exchange reserves.
In his review, Jarvis said that the Egyptian authorities have already begun to take the action needed to achieve their objectives – including bold subsidy and tax reforms, a disciplined monetary policy, expanding social policies, and initiating wide-ranging regulatory and administrative reform efforts to improve the business environment and boost investment.
“Policies implemented so far, along with a return of confidence, are starting to produce a turnaround in economic activity and investment, and we now project that growth will reach 3.8% in FY 2014/15,” stated Jarvis.
The IMF mission statement added that interest rate actions adopted by the Central Bank of Egypt (CBE) after the July 2014 increases in prices, affected by increases in energy prices, have helped anchor inflation expectations.
“While there has been a notable movement of the nominal exchange rate over the past two years, a more flexible exchange rate policy focused on achieving a market-clearing rate and avoiding real appreciation would improve the availability of foreign exchange, strengthen competitiveness, support exports and tourism, and attract foreign direct investment. This would foster growth and jobs and reduce financing needs,” the IMF mission said.
The banking system has been resilient in the face of economic stagnation in recent years and the CBE has appropriately reinforced the supervisory framework by strengthening regulations, the IMF mission said, adding that they welcome the CBE’s commitment to increase the timeliness and scope of disclosure of banking sector data.
For the FY 2014/15, the mission estimates that the budget deficit will reach about 11 percent of GDP, as measures yielding about 2.5% of GDP have already been approved. Policy measures on which work is already underway, including reducing untargeted energy subsidies, controlling the wage bill, the VAT and mining laws, and improving the efficiency of public financial management, will be important, the mission said.
The IMF mission added that in FY 2015/16, it will be important to keep expenditure in check, including through continued subsidies reform to reduce the budget deficit below 10% of GDP.
According to the mission, the fiscal consolidation, as designed, is expected to minimise the drag on growth and protect the poor. More public spending on education, health, and research & development and stronger social protection policies should improve quality and availability of public services, support long-term growth, and help the poor and other vulnerable people achieve a better life.
“We welcome the launch of innovative cash transfer schemes and the recent reform of food ration cards, as well as the government’s commitment to take further steps to improve targeting and increase benefits,” the mission noted.
Energy sector reforms and sizable investments will be critical to reduce energy supply bottlenecks and raise potential growth, the IMF mission said, adding that the megaprojects offer prospects for jobs and growth but should be carefully designed and monitored to limit potential fiscal risks, for example if they entail additional public investment or large contingent liabilities.
Egypt is “vulnerable” to adverse global economic developments and regional security risks. For the reform effort to succeed it will need to be pursued steadfastly, the mission said. “The measures already taken by the authorities demonstrate their commitment to reform, however, building buffers, especially by raising international reserves and preparing contingency plans for the budget in case risks materialise, would be useful to address unforeseen shocks,” it added.