Press Release: IMF Approves 24-month Stand-By Credit for Egypt
October 11, 1996
The International Monetary Fund (IMF) today approved a 24-month stand-by credit for Egypt equivalent to SDR 271.4 million (about US$391 million) in support of the Government's economic and financial reform program. In view of Egypt's present strong international reserve position, the Government does not intend to draw on the stand-by credit.
Since 1991, Egypt has successfully implemented wide-ranging macroeconomic stabilization and structural reform measures supported by two successive IMF credits. Over the period, progress was made in strengthening public finances and creating a more decentralized, market-oriented and open economy. Real GDP growth accelerated to over 4 percent in 1995/96 from virtual stagnation in 1991/92, while the rate of inflation declined to 7 percent from over 21 percent. The overall balance of payments remained in surplus, leading to a substantial accumulation of net international reserves (reserves are currently equivalent to about 17 months of imports). With limited external borrowing and further debt relief from the Paris Club, the ratio of external debt to GDP fell to 47 percent in mid-1996 from about 75 percent in 1991/92, and the debt service ratio declined to about 11 percent of current account receipts (excluding official transfers) from 14 percent in 1991/92. Nevertheless, performance under the three-year economic program supported by the IMF under the 1993 credit, which expired last month, fell short of Egypt's considerable potential, particularly with regard to structural reforms.
Medium-Term Strategy and the 1996-98 Program
The Government sees the principal challenge for the medium term to be that of increasing economic growth so as to create employment opportunities for a rapidly growing population and raise living standards. To this end, the two-year economic program, which is set in a medium-term framework, focuses on consolidating the gains of macroeconomic stabilization and broadening and intensifying the structural reform agenda through privatization, deregulation, trade liberalization, and fiscal and financial sector reform.
For the period 1996-98, the program aims at achieving a further increase in real GDP growth to about 5 percent in 1997/98, a further decrease in inflation to about 6 percent, and maintenance of a viable external position. The external current account deficit is projected to shift from approximate balance in 1995/96 to a deficit of about 1 percent of GDP in each of the program years, reflecting the anticipated strong growth of imports driven by the recovery and higher investments. The increase in the growth rate is expected to create some 400,000 new jobs a year, which will help bring down the rate of unemployment and raise living standards. Underpinning the strengthened economic performance is a rise of about 2.5 percentage points in investment and savings relative to GDP over the program period.
To achieve these objectives, the overall budget deficit for 1996/97 will be reduced to 1.1 percent of GDP, excluding privatization receipts and any further debt relief. Other demand management policy elements will continue to be restrained, consistent with a further reduction in inflation and maintenance of a sound external position.
The program incorporates a number of structural reforms designed to foster the expansion of the private sector in order to promote investment, growth, and employment. A central goal of the program is to bring about a fundamental change in the ownership structure of the Egyptian economy, where public enterprises account for as much as one-third of Egypt's manufacturing sector, half of investment expenditure, and about 15 percent of total employment. To this end, the program already under way envisages significant divesture of nonfinancial public sector enterprises over the next two years. Other key structural reforms to be implemented over the medium term include (1) further liberalization of Egypt's international trade system, including further tariff reductions and elimination of quantitative restrictions; (2) fiscal revenue reforms, including the transformation of the general sales tax into a value-added tax (VAT); the rationalization of the income tax to make it simpler, broader based, and more transparent and equitable; (3) a well-articulated medium-term program for improving the civil service; and (4) an acceleration of financial sector reform, including privatization of banks and insurance companies, and a further strengthening of banking supervision. In addition, the Government has initiated a series of administrative reforms aimed at reducing bureaucracy and red tape, including preparation of a unified investment law aimed at simplifying and rationalizing investment regulations.
Addressing Social Needs
The Government is committed to improving Egypt's health and education systems by increasing the number of qualified personnel such as nurses and teachers. This need will be met within the framework of a comprehensive civil service reform program aimed at the elimination of bureaucratic impediments to economic activity, improving the efficiency of Government services, and building a cadre of well-paid and efficient civil servants. The authorities are further strengthening the social safety net while improving its targeting. Foreign donors are also increasing their support of the Social Fund for Development, which will facilitate increased assistance to displaced workers through compensation pay, retraining, and redeployment.
The Challenge Ahead
The present juncture offers a propitious point of departure for a reinvigorated economic reform program. The experience of the past few years attests to the benefits of economic reform. In addition, new challenges and opportunities are presented by recent international developments. Egypt needs to continue its structural reforms if it is to meet those challenges and exploit its considerable potential.
Egypt, a founding member of the IMF, signed the Articles of the Agreement on December 27, 1945; its quota 1 is SDR 678.4 million (about US$976 million); and its outstanding use of IMF credit currently totals SDR 16.35 million (about US$24 million).
Sources: The Egyptian authorities; and IMF staff estimates.