In light of IMF’s third review report, analysts recommend authorities to boost Egyptian exports, refraining risks

Hagar Omran
13 Min Read

While the International Monetary Fund (IMF) mentioned in its Thursday staff report for the Egyptian economy’s third review that Egypt’s macroeconomic conditions have continued to improve during 2018 and the authorities’ reform programme has played a key role in stabilising conditions, with external and fiscal deficits narrowing, inflation and unemployment declining, and growth accelerating, the report also said that  external risks have increased in recent months, with a shift to capital outflows as tightening global financial conditions have contributed to a pullback by investors from emerging markets. 

The report added that Egypt’s foreign reserves coverage remains comfortable at about seven months of prospective imports and flexible exchange rate leaves Egypt well-positioned to manage any acceleration in outflows, but this reinforces the importance of a sound macroeconomic framework and consistent policy implementation.  

The report said that the near-term growth outlook looks favourable, supported by the recovery in tourism and rising natural gas production, while the current account deficit is projected to remain below 3% of the GDP and public debt to fall to 74% of the GDP by 2022/2023. 

Daily News Egypt examines the current economic in the light of the latest IMF report, with the help of economic experts, trying to put a recipe for the decision makers that might help improving the situation.

High-level external debts require boosting foreign currency sources

Youmn El-Hamakki, economic expert, said that the worrying high levels of external debts require setting detailed strategy aiming at increasing values of foreign reserves’ sources to well face the debts burden, noting, “we will have to rely more on sustainable sources of foreign currency. I think that boosting Egyptian exports should be the main governmental goal in the next period.”

Egypt’s external debts are expected to record a peak level of $91.5bn in the current fiscal year (FY) 2018/2019, compared to $86.9bn in FY 2017/2018, according to the third review staff report.

The report added that Egyptian exports of goods and services are projected to reach $53.1bn in the current FY 2018/2019, $57.9bn in FY 2019/20, $62.5bn in FY 2020/2021, and $74.4bn in FY 2022/23.

“Hot money, tourism revenues aren’t sustainable sources as they are related to politics, interest rates,” said El-Hamakki, mentioning that tourism is a major source of hard currency but the past experiences proved that it is not reliable.

El-Hamakki said that boosting Egyptians’ abroad transactions face many risks as the world economy witness a lot of changes and some Egyptians who are working in Arab countries are fired because of employment localisation policies.

“The exports sector suggested strategy will offer many categories great advantages,” said El-Hamakki, noting that annual ready-made garments exports can reach $30bn compared to current average of $3bn.

El-Hamakki added that the Egyptian authorities face a big challenge to attract more foreign direct investments (FDIs), during the next period despite the governmental efforts to improve the investment climate, adding, “Many of the current investments focus more on oil and gas sector.”

The IMF third review staff report mentioned that FDIs are projected to reach $9.5bn by the end of FY 2018/2019, before increasing to $11.3bn in FY 2019/2020, $12.6bn in FY 2020/2021, and $16.9bn in FY 2022/2023.

The report said that the authorities’ objective is to unlock Egypt’s growth potential through market-friendly reforms that will attract investments, raise productivity and competitiveness, support exports, and create jobs, adding “the governmental ambition is to significantly improve our rankings in the Doing Business and Global Competitiveness ratings, where Egypt’s position has declined in recent years.”

Sherif El-Diwany, former head of Middle East at the World Economic Forum in Geneva

Meanwhile, Sherif El-Diwany, former head of Middle East at the World Economic Forum in Geneva, said that the only tool to face increasing external debts is to boost exports, adding that the current external debt ratios of the GDP are very worrying.

“If we achieved the max of tourism revenues, Egyptian transactions, and Suez Canal receipts, we will not be able to fulfil our needs,” said El-Diwany, adding that debts service exceeds 38% of the EGP 1424.4bn in FY 2018/2019, compared to 10% of the expenditure in FY 2008/2009.

The report said that the Egyptian economy’s gross financing requirements will increase to $15.9bn in FY 2019/2020 from $13.4bn in the current FY. 

The report mentioned that the net financing gap is estimated by $1bn in the current FY, adding that gross international reserves (GIR) are expected to reach $44.8bn in the current FY before decreasing to $42.5bn, and then it will be increased to $47.5bn in FY 2022/2023.

Criticism of wage imbalances 

Moreover, El-Diwany said that the Egyptian budget suffers from wage imbalances, noting, “wages are being increased despite the challenges that face the Egyptian authorities. I understand the political dimensions to keep employees satisfied following the high inflation levels.”

Notably, that real the GDP growth accelerated from 4.2% in 2016/2017 to 5.2% in the first half of 2017/2018, led by natural gas, construction, and tourism. The CPI inflation declined steadily from 33% in July 2017 to 11.4 % in May, while core inflation (excluding volatile food items and regulated prices) also fell from 35.3% to 11.1% in May.

According to the IMF’s third review staff report, wages and other remunerations are expected to record 5% of GDP in FY 2018/19, slightly decreasing to 4.5% in FY 2019/2020, and remaining at the same level of 5% in the next three fiscal years.

By October 2018, a new draft law will be submitted to Parliament to ensure that the Egyptian Competition Authority (ECA) reports directly to the prime minister and is independent from any minister, in order to avoid conflict of interest, adding that the planned law exempts the ECA from the salaries cap, which provides the ECA independence in hiring, aiming at strengthening competition, optimising public spending, and reducing corruption, according to the IMF report.

El-Diwany said exemption of the ECA from the salaries cap is acceptable and logical, adding, “the suggested law will face monopolisation issues and eliminate corruption.”

The report said that Egypt faces long-standing structural challenges stemming from past economic policies that emphasised inward-oriented economic policies and an expansive role of the state, adding that a more inclusive and private sector-led growth model is needed to absorb the significant increase in the labour force expected over the foreseeable future. 

The report noted that the authorities will have to deepen and broaden structural reforms to improve the efficiency of resource allocation and reorient Egypt toward private sector and export-led growth.

The IMF said that further increases in global oil prices would put pressure on the Egyptian budget, and require a larger adjustment of domestic fuel prices to achieve cost recovery and preserve the fiscal consolidation objectives under the economic programme.

Praising governmental policies to eliminate fuel subsidies

The IMF said that further increases in global oil prices would put pressure on the Egyptian budget, and require a larger adjustment of domestic fuel prices to achieve cost recovery and preserve the fiscal consolidation objectives under the economic programme.

The Egyptian economic programme gains added importance in uncertain global financial conditions, mentioned the report, adding that there has been a shift to capital outflows in recent months as tightening global financial conditions have contributed to a pullback by investors from emerging markets.

Egypt’s comfortable level of foreign reserves leaves it well positioned to manage any acceleration in outflows, said the report, adding that the global situation heightens the importance of Egypt’s maintaining the sound macroeconomic policy framework established under the economic programme and consistent policy implementation.

The report said that the automatic fuel price indexation mechanism for most fuel products will be implemented by the end of December 2018, noting that the new mechanism will adjust fuel prices to changes in global oil prices, the exchange rate, and the share of imported fuel in domestic consumption, adding that it is designed to maintain the cost-recovery ratios for fuel products.

The mechanism will safeguard the budget from unexpected changes in the exchange rate and global oil prices. In addition, electricity subsidies are projected to decline from 0.7% of the GDP in 2017/18 to 0.3% in 2018/2019, and to be fully eliminated by 2020/2021, mentioned the report.

The fuel subsidy bill is expected to decline to 1.8% of GDP in 2018/2019, despite the significant increase in world oil prices over the past year, added the report.

The report added that the fuel subsidy bill has decreased from 3.3% of the GDP in 2016/2017 to a projected 2.7% of the GDP in 2017/2018, noting, “despite significant increases since the start of the programme, prices for fuel products in Egypt remain among the lowest in the world, which benefits the well-off disproportionately rather than the poor.”

El-Diwani said that Egypt historically faced subsidies issues, praising the governmental policies to eliminate fuel subsidies.

In June 2018, the authorities increased fuel prices by another 44% on average, which raised the pre-tax price-to-cost ratios to about 73% for gasoline, diesel, kerosene, and fuel oil, said the report, noting that increases are planned to achieve the objective of full cost recovery by end-2018/2019.

El-Diwani added that the government is working extensively on social safety nets and expand on social expenditure.

The report said that some of the savings from subsidy reform would be used to increase social spending by 0.3% of the GDP to mitigate the impact of the energy price reform on the most vulnerable, noting that the authorities will delay lower-priority expenditures as a buffer against any revenue under performance to ensure that the target is achieved.

In FY 2018/2019, Egypt will spend EGP 600m to improve availability of public nurseries for children up to four years old and other facilities that can enhance the ability of women to actively seek jobs, aiming at improving labour force participation for women, the report noted.

The authorities will publish a report on all state-owned enterprises defined as enterprises where the state has a significant control through full, majority, or significant minority ownership by 31 December, aiming at improving transparency and accountability of public enterprises.

On 29 June, the IMF completed the third review of Egypt’s economic reform programme supported by an arrangement under the Extended Fund Facility. 

The completion of the review allowed the authorities to draw the equivalent of SDR 1,432.76m, worth about $2.02bn, bringing total purchases to SDR 5,731.05m, worth about $8.06bn.

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