How Can Egypt Achieve Economic Stability and Better Living Standards Together?

IMF Blog, February 11, 2015

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Political transition over the past four years left chronic economic problems unaddressed and made new problems acute.
Key socioeconomic outcomes in 2013/14:
- Economic growth: 2.2 percent.
- Unemployment: peaked at 13.4 percent, with highest levels among youth and women.
- Poverty: rose to 26.3 percent the year before, with another 20 percent of the population estimated to be close to the poverty line.
- Average inflation: 10 percent.
- Central bank reserves: fell short of covering three months worth of imports.
Fiscal and debt deterioration between fiscal year 2010/11 and 2013/14:
- Overall fiscal deficit rose from 9.8 percent of GDP in fiscal year 2010/11 to 13.8 percent in 2013/14.
- General government debt increased from 76.6 percent of GDP to 90.5 percent over the same period.
Structural weaknesses predating 2011 include inefficient subsidies, cumbersome business regulations, low human capital, poor infrastructure, low access to finance, and poor external competitiveness.

Fuel subsidies:
- In 2013/14, Egypt spent over 6 percent of its GDP on fuel subsidies—more than on health or education.
- Fuel subsidies tend to benefit better-off segments and capital-intensive industries rather than the poor and labor-intensive industries needed to reduce unemployment.
- Subsidies contribute to large fiscal deficits and rising public debt, limiting spending on infrastructure.
Subsidy reform measures and effects:
- Increasing fuel prices can generate large savings.
- Savings can finance conditional cash transfers to vulnerable people and allow more resources for roads, schools, hospitals, and power plants.
- The authorities began implementing subsidy reform the previous summer and are designing a conditional cash transfer system financed in part by subsidy-savings.
- Rebalancing spending toward health, education, and infrastructure can help the poor in the short term and raise potential growth in the longer term.
Exchange rate flexibility:
- A more flexible exchange rate can strengthen competitiveness, attract foreign investment and tourism, and support exports of new industries.
- These developments can create jobs and support long-term growth and higher living standards.
- Recent movement of the exchange rate of the Egyptian pound against the U.S. dollar is described as a step in the right direction.

Improve business environment:
- Example: According to the World Bank, it takes 218 days to get a construction permit in Egypt, compared to only 29 days in the Republic of Korea.
- Dismantling inefficient regulations and red tape is essential to increase investment, spur jobs, and formalize the informal sector.
- Current plans to issue a revised investment law are noted as moving in the right direction.
Build modern, transparent institutions:
- Institutions should encourage accountability, good governance, and fair, transparent rules to ensure gains from growth benefit all and access to jobs and opportunities is evenhanded.
Financial sector improvements:
- Only 10 percent of Egyptians currently have bank accounts.
- Increasing diffusion of financial services and extending more credit to small job-creating businesses could help the economy.
- Adoption of a micro-finance law could help develop the financial sector.
Education and human capital:
- Improving the educational system is paramount; jobs require graduates prepared for the modern labor market.
- The constitution mandates rebalancing spending toward health and education; if implemented efficiently, this could support higher, more inclusive growth while preserving fiscal sustainability.

The objectives of restoring economic stability and improving living standards are complementary; several policies can advance both goals.
Steadfast implementation of reforms can:
- Restore economic stability (lower deficits, debt, inflation; rebuild reserves),
- Spur jobs and growth,
- Improve poverty and social outcomes through targeted transfers and spending on human capital and infrastructure.
The IMF remains committed to helping Egypt achieve better living standards.

Christopher Jarvis, February 11, 2015