Public Information Notice: IMF Concludes 2004 Article IV Consultation with the Arab Republic of Egypt

July 12, 2004

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On May 24, 2004, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Arab Republic of Egypt.1


Egypt began to experience a modest economic recovery in mid-2003 following three years where the rate of growth averaged 3 percent. The economic performance between 2000-03 reflected difficulties related to September 11 and the Iraq war, uncertainties about the direction of macroeconomic policies, especially exchange rate policy, and slow progress in structural reforms. During this period real GDP growth remained considerably below the minimum required to absorb labor force growth and reduce poverty.

The disruption from the Iraq war was short-lived. Since mid-2003, export performance has benefited from the upswing in global economic growth and the depreciation of the Egyptian pound. In real effective terms, the pound has depreciated by close to 40 percent since 2000, greatly improving Egypt's external competitiveness. Real GDP growth could reach 4 percent in 2003/04, driven by the export sector, particularly manufacturing exports and tourism. The current account surplus is expected to double to over 4 percent of GDP in 2003/04, although the capital account has weakened because of subdued foreign borrowing and higher outflows through the banking system. This has led to a stable level of foreign reserves at about US$14-$15 billion (eight months of imports).

Inflationary pressures began to emerge in 2003, reflecting the large exchange rate depreciation and lax liquidity conditions in the second half of the year. The wholesale price index increased by 14 percent, up from 6½ percent in 2002. Year-end CPI inflation was 5½ percent. With the exception of a short-lived hike in interest rates early in the year, interest rates have been low in real terms. A surge in central bank credit to the government in the second half of 2003 is being sterilized with the aim of keeping broad money growth at about 10 percent in 2003/04. Credit to the private sector is projected to decline in real terms, reflecting banks' cautious approach to new lending.

The deficit of the consolidated general government will be contained below 2.5 percent of GDP in 2003/04, but public debt will continue to rise, in part because of off-budget outlays. Net public sector debt is projected to reach nearly 70 percent of GDP in June 2004 compared with 47 percent of GDP in 2000. Higher domestic debt accounts for the bulk of this increase, largely reflecting domestic financing of the public sector borrowing requirement in the order of 7 percent of GDP per annum. The authorities aim to reduce the deficit by about 1 percent of GDP in 2004/05.

In late January 2003, the authorities abandoned the currency band and allowed the pound to float. Following a nominal depreciation of about 30 percent in the initial months, banks gradually adopted a less flexible approach to rate setting, and foreign exchange shortages worsened, putting pressure on the parallel market. The parallel market premium stabilized in late 2003 and has been declining somewhat in recent months. The authorities plan to unify the exchange rate in 2004 and have been working to establish a self-regulatory interbank market convention to facilitate the development of spot and forward markets for foreign exchange. They also have been making efforts to strengthen monetary policy: a new banking law was introduced in 2003, and the central bank recently established a committee to oversee the modernization of its monetary policy infrastructure.

The pace of structural reforms in recent years has been slow. The authorities have recently taken steps to bring some tariffs into World Trade Organization compliance, but overall protection remains high. In the financial sector, the authorities have introduced some measures to facilitate the recovery of collateral through the courts and improve the management of public banks. There has been limited progress in privatizing state enterprises and state banks, but the government is contemplating launching an ambitious privatization program. Plans for restructuring the entire portfolio of state enterprise debts to banks are under discussion and could be finalized in 2004/05.

Executive Board Assessment

Executive Directors noted the economy's resilience in 2003 in the face of some adverse factors in the regional environment and welcomed the recovery in economic activity and strong export performance. They advised bolstering the recovery by attaching the highest priority to improving the monetary framework with appropriately tight policies to support a flexible and unified exchange rate and a reduction in inflationary pressures, and to strengthening fiscal adjustment to reverse the rise in public debt.

Over the medium term, Directors encouraged the authorities to sustain macroeconomic stability and undertake a more ambitious pace for structural reform aimed at improving incentives for private sector activity, which they saw as essential to support a rate of economic growth sufficient to reduce unemployment and poverty. They noted that external vulnerability remained manageable, despite capital outflows through the banking system related to the current account surplus and low levels of foreign investment, owing to the authorities' prudent approach to external borrowing and a high level of reserves.

Directors emphasized the importance of a unified and flexible exchange rate in supporting investment and growth. In this regard, they welcomed the efforts by the authorities in early 2003 to address the imbalances in the foreign exchange market by floating the currency, but many noted that policies to support the float had not been fully effective, leading to the persistence of a parallel market for foreign exchange. Directors encouraged the authorities to take advantage of the conditions now in place-including a fairly small spread between the two exchange markets-to eliminate the dual market, and to establish the infrastructure for a modern interbank market for foreign exchange. Directors welcomed the initiatives being taken in this regard, which would support a reflotation of the pound. They urged the authorities to eliminate Egypt's exchange restrictions and multiple currency practices and move toward accepting the obligations of Article VIII, Sections 2, 3, and 4.

Directors recognized that the Central Bank of Egypt had made efforts to contain last year's expansion of broad money growth, but emphasized the need to tighten liquidity conditions further to support the unification of the foreign exchange markets and contain inflationary pressures. They noted that in the context of a flexible exchange rate regime, the central bank would need to be strengthened as an independent institution capable of preserving low and stable inflation, implementing the limits on financing of the budget stipulated in the recent banking legislation, and improving coordination with the ministry of finance.

Directors welcomed the recent establishment of a monetary policy committee as a first step toward modernizing the monetary policy infrastructure. Directors also emphasized the critical importance of developing a more reliable measure of inflation, strengthening mechanisms for liquidity forecasting and control, and improving communication with the financial markets. They endorsed Fund technical assistance in this area.

With regard to fiscal policy, Directors recognized the authorities' efforts to contain the general government deficit in 2003/04 at a level slightly below its level last year, in spite of an increase in interest payments associated with the tightening of monetary policy. However, despite the reduction of the consolidated government deficit, they noted the continued rapid rise in net public sector debt driven mostly by off-budget outlays. In this regard, they expressed concern at the persistence of these off-budget outlays. Directors welcomed the introduction of measures in 2004/05 aimed at lowering the deficit, but saw a need for significant additional fiscal consolidation beyond this year to reverse the upward trend in net public debt. They welcomed the government's intention to extend fiscal reforms beyond 2004/05 to achieve this objective.

Directors noted and encouraged the authorities' announcement to flesh out a multiyear fiscal consolidation strategy, which would focus on both on-budget and off-budget fiscal activities. To adequately gauge and reduce the off-budget outlays, they stressed that the authorities needed to further improve budgetary management, plan for contingent fiscal liabilities, and, especially, strengthen oversight and control of the financial operations of the National Investment Bank.

Directors welcomed the proposed reform of the income tax law and encouraged further tax reforms, notably transforming the general sales tax into a value-added tax and phasing out existing tax incentives. They also welcomed the government's efforts to strengthen tax administration and looked forward to further progress in this area. Directors stressed the need to reduce budgetary subsidies and price controls and to improve the efficiency of the social safety net. They also urged the authorities to constrain public sector wage growth and to reduce the civil service, mindful of concerns for social stability.

To further enhance the conditions for private investment, Directors urged a significant acceleration in the pace of structural reform that would reduce the role of the state, improve governance, and remove administrative barriers to market forces. They welcomed the steps taken to reform the system of international trade, including through adjusting tariff rates in accordance with WTO obligations and ongoing improvements to customs administration. However, Directors urged the adoption of a more comprehensive strategy for trade liberalization comprising a rationalization of the tariff structure, the abolition of fees and surcharges, and a reduction of customs exemptions. They recommended that the authorities make full use of the Association Agreement with the European Union.

Directors welcomed the recently announced privatization program, which they viewed as ambitious in scope, and urged the authorities to implement it forcefully. They also took note of the government's recent plan to restructure the debt of state enterprises.

Directors welcomed the progress achieved to implement the recommendations in the 2002 Financial Sector Assessment Program. In particular, they welcomed the ratification of the new banking law (Law 88), which provides greater internal consistency to legislation, and the important steps taken to strengthen the management of public sector banks. While recognizing the challenges of privatizing state banks, they supported their privatization soon. Directors also took note of improvements in banking supervision, including increased training and frequency of inspections. They supported the strengthening of the treasury bill market. They emphasized the importance of continuing to build a strong and effective anti-money laundering regime.

Directors encouraged further work to improve Egypt's macroeconomic database. They urged the authorities to quickly implement the recommendations for improving the national accounts and price indices made by the October 2003 data Review of Standards and Codes. They welcomed the authorities' efforts to prepare for subscription to the Special Data Dissemination Standard and encouraged them to resolve the outstanding technical issues related to the international investment position and the reserves template. With regard to fiscal data, several Directors expressed concerns about unresolved discrepancies in the fiscal accounts and advocated further joint work with Fund staff to improve fiscal data.

Egypt: Selected Economic Indicators, 2000/01-2004/05 1/


Projected 2/








(Annual changes in percent; unless otherwise indicated)

National income and prices


Nominal GDP (in billions of U.S. dollars)






Real GDP growth






Consumer prices (period average)






WPI (period average)







(In percent of GDP)

Government finances


Revenue and grants






Expenditure and net lending






Fiscal balance (budget sector)






Fiscal balance of consolidated general government






Primary balance of consolidated general government






Net public debt (consolidated general government) 3/







Money and credit 4/


Broad money (annual growth)






Credit to the private sector and public enterprises (annual growth)






Interest rate (average three-month treasury bills)







(In billions of U.S. dollars; unless otherwise indicated)

External sector


Exports, f.o.b.






Imports (c.i.f.)






Current account (in percent of GDP)






Overall balance







Gross international reserves (in billions of U.S. dollars, e.o.p.) 5/






In months of imports of goods and services






Gross external debt






Gross external debt (in percent of GDP)






External debt service (in percent of exports (goods and services)







Exchange rates


Egyptian pounds per U.S. dollars (period average) 6/






Real effective exchange rate (period average, percent change)






Sources: Egyptian authorities; and IMF Staff estimates.

1/ Fiscal year July 1 to June 30.
2/ Projections based on active policy scenario for fiscal and monetary policies starting in the last quarter of 2003/04.
3/ Includes publicly guaranteed debts, but not other contingent fiscal liabilities. Net of deposits with the banking system (including prepayments to the central bank in respect of Paris Club debts).
4/ Excluding exchange rate valuation effects.
5/ Excludes resident banks' dollar deposits with the central bank.
6/ Estimate for 2003/04 is the average banking rate during the period July 2003 to March 2004.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


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