Egypt: The Economy Is Gathering Strength

IMF News, September 26, 2017

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IMF staff report for the first review of Egypt’s economic reform program published on September 26, 2017.
IMF Executive Board approval of the government's program led to a disbursement of $1.25 billion of the $12 billion support under the IMF’s Extended Fund Facility.
Program objectives: restore economic stability, pave the way for higher long-term growth, protect the poor.

Egypt launched the IMF-supported program in November 2016 in response to rising imbalances: high public debt, a widening current account deficit, and declining official reserves.
With the floating of the Egyptian pound, the foreign exchange market normalized and the parallel market for foreign currency disappeared.
Inflation reached more than 30 percent since April, mainly due to the sharp depreciation of the pound and the impact of energy and tax reforms.
Monetary policy focus: bring down inflation through the end of this year and into next year.

Reduction of the budget deficit pursued through:
- Implementation of a value-added tax (VAT) to increase tax revenues sustainably.
- Expenditure reforms, notably energy subsidy reform.
Expected fiscal impact: resources from higher VAT and more efficient spending will slow the accumulation of public debt, which had been rising rapidly.

Energy subsidy reform described as a bold step; subsidies previously benefited mostly the rich and skewed production to energy-intensive industries.
Part of the resources freed by subsidy reform has been reallocated to social spending, including health and education, and to targeted cash transfers aimed at protecting the most vulnerable.

Measures to increase employment and labor force participation for women and youth:
- Budget resources allocated to increase access to and quality of public nurseries to help women join the labor force.
- Planned improvements to the safety of public transportation.
- Implementation of specialized training programs and job search schemes for youth.
Objective: broaden the benefits of growth and address concentrated unemployment among women and young people.

Parliament approved measures to improve the business climate, including less red tape in industrial licensing and easier access to financing for small and medium-sized enterprises.
These measures are expected to create more new jobs and help alleviate unemployment.
The IMF assessment: economic activity has been gathering strength, efforts at reining in the budget deficit have begun to bear fruit, and the policy mix is supportive of a decline in inflation.
Forward-looking opportunity: by locking in gains from macroeconomic stabilization and harnessing full growth potential, Egypt can transition to a higher growth trajectory and increase prosperity for all.

“The Egyptian authorities have embarked on an ambitious reform program and have taken decisive measures aimed at restoring macroeconomic stability and sustainable public finances. At the same time, by strengthening social protection measures, they have sought to protect the most vulnerable. We have seen that economic activity has been gathering strength and efforts at reining in the budget deficit have begun to bear fruit. With the liberalization of the foreign exchange market, foreign currency shortages have disappeared. Looking ahead through the end of this year and into next year, the policy mix is also supportive of a decline in inflation from the high levels in the summer,” said Subir Lall, the head of the team dealing with Egypt at the IMF.

IMF News — Egypt: The Economy Is Gathering Strength (September 26, 2017).