Egypt: A Path Forward for Economic Prosperity

IMF News, July 24, 2019

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Addressed significant macroeconomic imbalances that had built up by 2016 due to:
- Large budget deficits, loose monetary policy, and a fixed exchange rate.
- Drastic reduction in foreign exchange reserves, high inflation, and unsustainably high public debt.
- Falling growth and rising unemployment, especially among women and youth.
Immediate priorities:
- Restore macroeconomic stability and avoid a crisis.
- Move to a flexible exchange rate to restore equilibrium in the foreign exchange market and eliminate the shortage of foreign exchange.
- Rein in the budget deficit via a three-year plan; deficit was "at over 10 percent of GDP".
- Tighten monetary policy by raising interest rates to reduce public debt as a share of GDP and limit inflation.
- Address extensive fuel subsidies that made fuel in Egypt "one of the cheapest in the world" and disproportionately benefited the well-off.

Supported by a US$ 12 billion EFF arrangement from the IMF.
Fiscal space from subsidy reform was reallocated to:
- Better-targeted social spending.
- Investment in health, education, and public infrastructure.
Social spending measures:
- Expanded modern cash transfer programs to those most in need.
- Takaful and Karama (Solidarity and Dignity) expanded from about 200,000 households to 2.3 million households, covering 10 million people.
- These programs were designed to ensure the poor did not bear the costs of economic adjustments and to sustain public support for broader reforms.

Achieved the program’s key objective: macroeconomic stability to attract investment, raise growth, and create jobs.
Reported outcomes:
- Current account deficits have fallen.
- Foreign exchange reserves are at all-time high levels.
- Growth recovered from "around 4 percent" to "5.5 percent now", and "is expected to reach 6 percent by next year".
- Unemployment has fallen "below 9 percent" to its lowest level in over a decade.
- Public debt has begun to decline.
- Inflation has fallen steadily—"on track to reach single-digits by next year".
Structural and competitiveness improvements:
- Fuel subsidy reform improves price signals and resource allocation, encouraging private investment into more labor-intensive sectors.
- Reforms in competitiveness, public procurement, and transparency of state-owned enterprises aimed to improve government effectiveness and modernize the economy for greater participation in global trade.

Two overarching priorities:
- Cement the gains in stabilizing the economy.
- Accelerate reforms to make the private sector the engine of growth.
Specific policy directions:
- Preserve the cushion of foreign exchange reserves by maintaining a flexible exchange rate.
- Keep inflation on the decline and continue reducing public debt to create more room for investment in health, education, and public infrastructure.
- Transition the economy toward being increasingly market-oriented, with the state acting as a facilitator rather than the driver of growth.
- Promote private sector-led job creation: Egypt needs "at least 700,000 new jobs annually" to absorb its young and growing population; these jobs "can only come from the private sector."

IMF News — July 24, 2019