Statement by the IMF Mission on the 2006 Article IV Consultation with the Arab Republic of Egypt

Press Release No. 06/74
April 18, 2006

The following statement was issued on April 17, 2006 by the International Monetary Fund's (IMF) staff mission following its 2006 Article IV Consultation with the Arab Republic of Egypt:

"A mission of the International Monetary Fund led by Mr. Klaus Enders, the mission chief for the Arab Republic of Egypt in the Middle East and Central Asia Department (MCD), visited Egypt during April 3-16, 2006 to conduct the 2006 Article IV Consultation discussions. Mr. Mohsin Khan, the Director of MCD, attended the policy discussions.

"The mission took stock of recent economic developments and reviewed future economic policies. The discussions serve as input for the preparation of the annual report on Egypt for the IMF Executive Board. The discussions were conducted against the backdrop of accelerating economic growth, low inflation, strong balance of payments and foreign reserves positions and, more broadly, growing confidence in the direction and depth of economic policies. The establishment of a smooth-functioning foreign exchange market has been a major source of market confidence. Banking sector reform and privatization are moving ahead at a pace exceeding expectations. In the fiscal area, there has been progress in strengthening the tax and customs regimes and bringing more transparency and efficiency to budgetary operations.

"Job creation is the paramount challenge facing the Egyptian authorities today. Indeed, the ongoing reforms are aimed at laying the ground for sustained private sector-led investment and growth. The next phase of reforms would need to reduce the constraints on private sector activity arising from weaknesses in financial intermediation, absorption of a large share of national savings by the public sector, and bureaucratic barriers to business development. Implementing these reforms will require building a strong political and social consensus. At the same time, the timing is appropriate, given the unique combination of favorable economic conditions, the strong reform momentum, and growing investor confidence.

"The IMF team views fiscal policy as the key to maintaining macroeconomic stability. The budget deficit and public debt in Egypt—while still manageable—are relatively high, and cannot be sustained at current levels without compromising Egypt's economic potential. The recent tax reforms were an important development, and need to be complemented by an ambitious and credible medium-term fiscal consolidation strategy that puts public debt as a share of GDP on a firmly declining path. Toward this end, the authorities agreed with the team on the need for a comprehensive expenditure reduction program, aimed at rationalizing the size of government, increasing the productivity of expenditure, and improving the targeting of pro-poor spending. Meanwhile, the team welcomes the authorities' structural reform efforts aimed at streamlining cash management.

"The policy focus of the Central Bank of Egypt (CBE) should remain on keeping inflation low, building on its success so far. The CBE is also moving forward on schedule to implement its multi-year program of financial sector restructuring and divestiture, and to strengthen bank supervision.

"The government has made impressive progress with its privatization program. Ongoing efforts to reduce red tape, enhance the flexibility of labor markets, and facilitate access to finance and land for small and medium-sized enterprises, are welcome and should accelerate in order to bring Egypt's business environment closer to those prevailing in successful emerging markets.

"Finally, much progress has been made on data quality in Egypt, but both the authorities and the Fund team share the view that further improvements in this area are required in order to better support economic analysis and effective policy formulation. In particular, additional work is needed to improve statistics on prices, balance of payments, real indicators of economic activity, and public finances. The IMF stands ready to continue providing technical assistance to Egypt in improving the statistical base."



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