IMF Survey: Egypt: Reforms Trigger Economic Growth

IMF News, February 13, 2008

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Growth accelerated to 7 percent in 2006/07 following bold reforms launched in 2004 and a favorable external environment.
Expansion has broadened from energy, construction, and telecommunications to labor-intensive sectors such as agriculture and manufacturing.
The IMF projects the economy will continue to grow at 7-8 percent if ongoing improvements in the business environment succeed in raising investment to more than 25 percent of GDP.
Between end-2004 and end-March 2007, 2.4 million jobs were created.
Unemployment fell from 10.5 percent to 9 percent over the same period.
Exports and imports rose sharply, alongside workers' remittances, Suez Canal receipts, and tourism revenues.

Establishment in 2004 of a well-functioning foreign exchange market, lifting formal and informal restrictions on access to foreign exchange.
Weighted average import tariff cut to about 6.9 percent by 2007 through two rounds of reductions, accelerating integration with the global economy.
Personal and corporate income tax rates were slashed; tax administration modernization includes a move to self-assessment of personal income taxes.
Business regulations streamlined to speed customs clearance and facilitate registration of new businesses and property; Egypt earned the honor of top reformer in the World Bank's 2007 Doing Business Report.
Privatization of a wide range of productive assets, including joint-venture banks and the fourth-largest state bank; more than half the banking system is now in private hands.
Strengthened governance and financial soundness of state banks and banking supervision as part of broader financial sector reforms; reforms also modernize the insurance sector and capital markets.

Structural reforms were complemented by prudent macroeconomic policies and greater exchange rate flexibility, making monetary policy more effective in targeting and containing core inflation.
Fiscal deficit for 2006/07 reduced to about 7.7 percent of GDP from an average of 9 percent in recent years, reflecting tax reforms, fuel price adjustments, wage restraint, and windfall receipts from a telecom license sale.
Large capital inflows—mostly foreign direct investment—from Europe, the Gulf Cooperation Council, and North America reinforced growth.
Balance of payments recorded a surplus since 2004/05, bringing official reserves to the equivalent of more than 6 months of imports and 8 times short-term debt.

Sustained, job-rich growth requires sustained higher investment; structural reforms need to continue to address constraints such as inadequate infrastructure, red tape, poor public service delivery, and scarcity of skilled labor.
To improve access to finance, particularly for smaller firms:
- Rapidly complete the bank recapitalization and restructuring program.
- Further improve banking supervision.
- Implement complementary regulatory and judicial reforms (e.g., setting up specialized economic courts and enhancing the role of the private sector-led credit bureau) to improve contract enforcement and creditor protection and facilitate bank lending to smaller enterprises.
Energy pricing reforms:
- Diesel prices hiked in mid-2004; further retail price adjustments in mid-2006.
- In late 2007, launched a three-year program to phase out most industrial energy subsidies.
- Prices for most energy products remain far below international prices, risking misallocation of investment, encouraging high energy consumption with environmental costs, and diverting public funds from areas like education or infrastructure.

Reducing the budget deficit is key to raising national saving to finance higher investment, supporting monetary policy in containing inflation and speculative inflows, and reducing net public debt.
The government aims to reduce the deficit gradually to 3 percent of GDP by 2010/11, which would put public debt on a firmly declining path.
Achieving fiscal targets will require:
- Continued retrenchment in the wage bill.
- Reform of sales and property taxes.
- More efficient cash management and public spending.
- Lower subsidies.
The favorable external environment and continued strong growth provide an opportunity for early action, which would also contribute to a strong and swift investor response.
Authorities should continue to strengthen social safety nets to help the poorest segments of society benefit from opportunities offered by a growing economy.

IMF Survey: Egypt: Reforms Trigger Economic Growth