Public Information Notices
Arab Republic of Egypt and the IMF
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On October 31, 2001, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Arab Republic of Egypt.1
During most of the 1990s, Egypt made considerable progress in macroeconomic stabilization and structural reform. The fiscal deficit was greatly reduced, inflation fell to low single digits under a currency peg to the U.S. dollar, and debt service indicators strengthened substantially, aided by debt reduction from official bilateral creditors. On the structural front, progress was made in financial and trade liberalization, and privatization. These advances contributed to rising investment and stronger real GDP growth.
Executive Directors commended the authorities for the progress made in strengthening Egypt's economy over the past decade by substantially reducing the fiscal deficit, bringing inflation to low levels, improving debt service indicators, and advancing structural reforms. At the same time, they noted that balance of payments pressures emerged in the late 1990s. These were linked to adverse shifts in the external environment as well as to a rapid growth of domestic credit. Directors noted that, although a reduction of private credit growth since early 2000 had helped to strengthen external performance and stabilize official reserves, it was also associated with the slowdown in economic growth. They further noted that the outlook for growth and external performance had deteriorated somewhat following the events of September 11. In light of these considerations, Directors agreed that the key challenge in the period ahead is to restore strong economic growth and robust job creation, while maintaining macroeconomic stability. This requires persistence in the implementation of structural reforms and sound financial policies.
As regards fiscal policy, Directors noted that it would be important to avoid exacerbating the current economic slowdown to provide adequate room for growth of private sector credit and agreed that the broadly unchanged fiscal stance projected for 2001/02 appears appropriate. Directors noted that downside risks to economic growth from recent developments could have repercussions for fiscal policy, and recommended that automatic stabilizers be allowed to work fully at the present time. They indicated, however, that attempts to foster stronger economic growth through discretionary fiscal policies could adversely affect confidence and prove counterproductive. A few Directors indicated that some consolidation may be warranted over the medium term to reduce the public debt ratio.
Directors supported the authorities' commitment to continuing exchange rate flexibility, which would allow Egypt to ride out periods of market turbulence while avoiding further significant declines in official reserves from the currently relatively strong position. They indicated that flexibility would be particularly important in the period ahead to help Egypt to weather any external shocks that might emerge following recent events. Directors underlined the importance of ensuring that the foreign currency market remains liquid, and urged that the currency band be adjusted, as needed, in response to market conditions to ensure that external competitiveness is maintained.
As regards monetary policy, Directors welcomed the slowing of private credit growth, which has reduced pressures on the exchange rate. Looking forward, they supported the intention to guide monetary policy using a range of indicators, given uncertainties about money demand, and encouraged efforts to strengthen the tools of monetary policy and to further develop financial markets, particularly through greater interest rate flexibility. Directors welcomed recent progress in strengthening banking supervision and commended the authorities' decision to participate in the Financial Sector Assessment Program in early 2002. Directors also commended the authorities' intention to strengthen the criminalization and detection of money laundering, noting the importance of strong safeguards in this area.
Directors noted that Egypt's rapidly rising labor force will require significant further progress with structural reform to foster strong output and employment growth. Key goals should be to broaden the activities of the private sector, eliminate impediments to international trade and investment, and reduce official bureaucracy and red tape. On privatization, Directors welcomed the government's plans to offer the remaining nonfinancial public companies for sale by end-2002. They noted, however, that privatization of the state-owned banks-already considerably delayed-was not envisaged in the near term, and encouraged the authorities to give this a high priority.
Directors commended the recent signing of the Association Agreement with the European Union. At the same time, they emphasized the importance of multilateral tariff reduction in order to secure the full benefits of trade liberalization. In this context, Directors encouraged the authorities to move toward a much lower and more uniform tariff structure. The authorities were encouraged to accept the obligations of Article VIII, Sections 2, 3, and 4 of the Articles of Agreement.
Directors viewed the authorities' agenda for tax reform as timely given prospective declines in some revenue categories over the period ahead. They welcomed the extension of the general sales tax (GST) to the wholesale and retail levels, as well as the authorities' intention to further amend the GST to move in the direction of uniform rates, more limited exemptions, and a stronger rebate system. Directors also welcomed the intention to seek parliamentary approval later this year for reforms of the personal and corporate income tax system, and noted that progress in significantly reducing exemptions to income taxation and customs tariffs will be key. They supported efforts to strengthen tax and customs administration, noting the high priority of these reforms, and stressed the need for strengthened public management as well.
Directors welcomed Egypt's successful debut Eurobond issue in June 2001, noting that further integration into global markets would require strong economic policies and institutions. In this connection, they noted the importance of comprehensive, high-quality macroeconomic data, and welcomed recent progress in strengthening Egypt's database, including by developing more comprehensive and internally consistent fiscal accounts. Directors also welcomed completion of the fiscal module of the Report on the Observance of Standards and Codes. Directors noted that further efforts are needed to strengthen and clarify reporting on National Investment Bank (NIB) operations, and encouraged the timely completion of the ongoing audit of the NIB. The authorities were urged to publish the updated fiscal accounts, together with supporting fiscal documents, including the audited year-end treasury statements, after parliamentary approval. In regard to other macroeconomic data, the initial work toward compilation of a monthly index of industrial production was commended, and further improvements in the real sector database were seen as important. Directors encouraged the authorities to subscribe to the General Data Dissemination System and the Special Data Dissemination Standard.
|The Arab Republic of Egypt: Selected Economic Indicators|
|Real GDP growth (factor cost)||6.0||5.1||3.3|
|CPI inflation (period average)||3.8||2.8||2.4|
|Fiscal balance of budget sector||-3.0||-3.9||-3.6|
|Fiscal balance of general government 1/||0.6||-0.7||-0.6|
|Broad money growth||11.5||8.8||11.6|
|Current account balance (in percent of GDP)||-1.9||-1.2||0.0|
|Overall external balance (in percent of GDP)||-2.4||-3.1||-0.9|
|Exchange rate (end-period, LE per U.S. dollar)||3.40||3.45||3.86|
Sources: Egyptian authorities, and IMF staff estimates.
1/ Including the budget sector, National Investment Bank (NIB), General Authority for Supply of Commodities (GASC), and the Social Insurance Funds (SIFs).
2/ Fiscal year begins July 1 and ends June 30.
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. This PIN summarizes the views of the Executive Board as expressed during the October 31, 2001 Executive Board discussion based on the staff report.
IMF EXTERNAL RELATIONS DEPARTMENT