IMF Executive Board Concludes 2006 Article IV Consultation with the Arab Republic of Egypt

Public Information Notice (PIN) No. 06/75
July 11, 2006
Corrected: August 13,2007

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. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2006 Article IV Consultation with the Arab Republic of Egypt is also available.

On July 5, 2006, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Arab Republic of Egypt.1


Over the last two years, Egypt has accelerated reforms aimed at tackling impediments to higher growth and employment creation. Implementation of a broad range of reforms aimed at modernizing government and boosting private sector activity, and a favorable external environment, have contributed to macroeconomic stability.

Growth accelerated to 5.7 percent in the first half of 2005/06. While the external sector remains an important engine of growth, the expansion has become more broad-based, with construction and services now increasing at a healthy rate. Employment is rising, but continued high unemployment points to the need to further boost private investment and growth.

Inflation fell sharply during 2005, and real interest rates turned positive for the first time in years. Headline CPI inflation declined from 17 percent (y/y) to 4 percent (y/y) over the 15 months through end-April 2006. The Central Bank of Egypt (CBE) introduced a corridor for the overnight interbank rate in May 2005 that has reduced the volatility of short-term rates. With inflation declining, the CBE started easing monetary policy in mid-2005. Money aggregates expanded rapidly in 2005, but have decelerated in 2006. Lower policy rates have not been fully passed through to bank lending rates, and growth of credit to the private sector remains weak.

The interbank foreign exchange market launched in late-2004 is functioning well, with banks free to buy and sell foreign exchange at market determined rates. In a context of ample dollar liquidity from large balance of payments surpluses, the CBE has been buying large amounts of foreign exchange, in part to strengthen international reserves. As a result, the Egyptian pound-U.S. dollar exchange rate has been virtually unchanged since early 2005, while the growth in the net foreign assets of the banking system was the main source of money creation in 2005.

The balance of payments and external positions remain comfortable. International reserves have increased from US$15 billion to US$22.5 billion (7½ months of imports) over the 15 months through end-March 2006. With non-oil imports growing rapidly, and non-oil exports stagnating, the current account surplus has started to narrow. However, the country's net foreign asset position, both at the central bank and in the banking system, is being bolstered by capital inflows, mostly nondebt creating. The external debt-to-GDP ratio, currently at 30 percent of GDP, is projected to decline in the coming years, reflecting prudent external borrowing.

The authorities implemented a range of reforms in the fiscal area in 2005. On the revenue side, the government reduced and streamlined corporate and individual income taxes, moved to self-assessment procedures, and established a large taxpayer center. While expected to lose revenue in the short run, the reforms have reportedly triggered greater tax compliance and filing. On the expenditure side, a new budget classification in line with the IMF's Government Finance Statistics Manual (GFSM-2001) has been adopted. This has improved fiscal transparency considerably. For instance, the budget for 2005/06 made explicit for the first time the large fuel subsidy provided through the state owned Egyptian General Petroleum Corporation (EGPC).

The consolidated general government deficit is projected at 8.3 percent of GDP in 2005/06, down from 9.1 percent of GDP in 2004/05. The fiscal position in 2005/06 has benefited from exceptional revenues arising from a payment of tax arrears by EGPC and the sale of 20 percent of Egypt Telecom. Net public debt is projected to rise by about 1.6 percentage points in 2005/06 to 69.8 percent of GDP by June 2006. The authorities are in the process of preparing a package of measures aimed at reducing the deficit in the following years by at least 1 percent of GDP per year, including streamlining of subsidies, introduction of a full fledged VAT, and reduction in the growth of the wage bill.

Significant progress in the structural reform program of the government has taken Egypt further along the road to a market economy. The privatization program is gaining momentum. Regulatory and supervisory standards in the capital markets, insurance industry, and the banking sector are being strengthened. The restructuring of state-owned banks is progressing, including the sale of joint venture banks, and restructuring and settlement of nonperforming loans. The privatization of the fourth-largest state bank (Bank of Alexandria) is expected to be completed in 2006. Egypt's stock market was the strongest performer in the region in 2005.

Executive Board Assessment

Directors noted in particular the impressive decline in inflation, while the economic recovery further accelerated and had become more broad based. This was supported by strong achievements in privatization and financial sector reform, which had greatly increased market confidence. They also commended the authorities' strong efforts to put in place structural reforms in the fiscal area that have improved the transparency and efficiency of budget preparation and control. Looking ahead, Directors noted that important challenges remain to enable Egypt to raise economic growth on a sustained basis and lower unemployment, pointing in particular to the high government borrowing and debt levels, and the shallow financial intermediation and bureaucratic barriers to private sector activity.

Directors expressed concern about the large fiscal deficit and therefore welcomed the authorities' medium-term plan to reduce it by at least 1 percent of GDP per year. However, they encouraged them to consider a more ambitious pace of adjustment to reverse more decisively the debt dynamics, secure macroeconomic stability over time, and increase investor confidence and the economy's resilience to exogenous shocks. Directors urged the authorities to swiftly implement measures to ensure the envisaged fiscal adjustment, noting in particular the urgent need to reduce fuel subsidies and target them better.

Directors commended the efforts of the Central Bank of Egypt to modernize monetary policy formulation and operations and agreed that the current stance of monetary policy appears to be broadly consistent with stabilizing inflation at current levels. They nonetheless cautioned that any additional interest rate reductions should wait until liquidity growth decelerates further and low inflation becomes firmly entrenched, and noted that financing of the government should be strictly limited.

Directors recommended accelerating the reforms needed to support central bank operational autonomy and strengthen policy formulation, with a view to moving to a formal inflation targeting framework over the medium term. However, they cautioned that this would also require greater exchange rate flexibility.

Directors noted the smooth operation of the interbank foreign exchange market. However, they favored allowing market forces to play a greater role in determining the exchange rate, which will also foster the development of risk management instruments. They considered that stepping up the pace of structural reforms would be well suited to counter the effect of exchange rate appreciation by enhancing productivity and the competitiveness of the economy.

Directors welcomed the achievements in the area of financial sector reform, including the sale of many joint venture banks and the pending sale of Bank of Alexandria. They encouraged the authorities to develop a clear medium-term plan for the privatization of the remaining major state banks. Directors also welcomed the resolution of a large amount of private sector nonperforming loans and noted the improvements in capital market regulation and efforts to bring supervision in banking and insurance into compliance with international best practices. Directors agreed with the authorities that a Financial Sector Assessment Program update in 2007 would be a useful tool to assess progress in the financial restructuring program and identify possible areas of weakness.

Directors were encouraged by the government's intention to reduce barriers to private sector activity through a further liberalization of the trade regime, a reduction of red tape, and the improvement of the legal framework for business activities. They also pointed to the need to further enhance the flexibility of the labor market and improve education and training to help reduce skill mismatches.

Directors welcomed the establishment of the inter-ministerial committee to address weaknesses in statistics, notably the CPI and FDI data. They urged the authorities to attach high priority to strengthening the legal and institutional framework for the production of economic statistics and to increase inter-agency cooperation.

Arab Republic of Egypt: Selected Economic Indicators 1/

        Proj. Proj.
  2002/03 2003/04 2004/05 2005/06 2006/07

Real Sector


Real GDP growth

3.1 4.1 4.9 5.6 5.6

CPI inflation (12-month change, average)

3.2 10.3 11.4 4.1 5.5

Unemployment rate (in percent)

10.5 11.1 10.5 ... ...

Public Finances


Balance of the general government (in percent of GDP)

-9.0 -8.3 -9.1 -8.3 -8.1

Net public debt (in percent of GDP)

66.6 64.8 68.2 69.8 70.5

Money and credit


Broad money growth (annual rate)

16.9 13.2 13.6 13.8 14.7

Net claims on government sector (annual growth rate)

22.7 25.8 26.0 5.9 17.3

Credit to the private sector (annual growth rate)

7.3 4.1 3.8 6.8 7.7

Interest rates on 91-day treasury bills (in percent)

8.3 8.4 10.2 8.8 ...

External Sector


Trade balance (in percent of GDP)

-8.1 -9.9 -11.6 -10.5 -10.8

Current account balance (in percent of GDP)

2.4 4.3 3.3 2.0 1.2

Reserves (in billions of U.S. dollars)

14.8 14.8 19.3 23.1 26.3

   (in months of imports of goods and services)

9.1 7.6 7.7 7.5 7.7

Gross external debt (in percent of GDP)

36.1 37.9 32.4 30.3 26.4

Exchange rates


Egyptian pounds per U.S. dollar (average)

5.13 6.16 6.00 5.75 ...

Real effective exchange rate (average; percent change)

-20.1 -21.6 4.2 ... ...

Sources: Egyptian authorities; and IMF staff estimates.

1/ Egyptian fiscal year 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.


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