Transcript of Press Briefing on Egypt’s Economic Reform Program Review with Subir Lall IMF Mission Chief for Egypt, Middle East, Central Asia

IMF News, September 27, 2017

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Address long-standing challenges: an over-valued exchange rate and foreign exchange shortages; large budget deficits leading to rising public debt; low growth and high unemployment.
Program aims: restore investor confidence; reduce inflation to single digits by the end of the program; rebuild international reserves; strengthen public finances; and encourage private-sector-led growth.
Social protection objective: use part of fiscal savings to strengthen social safety nets to shield the most vulnerable.

Liberalization of the foreign exchange market and floatation of the currency to alleviate foreign exchange shortages and restore competitiveness.
Fiscal consolidation including introduction of a value-added tax (VAT) and expenditure measures (wage restraint, energy subsidy reforms).
Structural reforms: measures to improve the business environment (investment law, bankruptcy law, licensing law), and provisions to encourage lending to small and medium enterprises.
Expansion of cash transfers through Takaful and Karama programs to reach more households.

Fiscal year 2016/17:
- IMF forecasted GDP growth of about 3.5 percent; actual growth came in at 4.2 percent.
- Quarterly profile: 3.5 percent in the first quarter of the fiscal year and 5 percent in the final quarter.
Growth drivers: manufacturing, construction, retail trade, transport, and communication — indicating broad-based growth.

Parallel market eliminated; foreign exchange shortages have disappeared; FX can be acquired at the market rate.
Exchange rate depreciated after the floatation and has since stabilized.
Real effective exchange rate depreciation measured at about 27 percent, 26.8 percent.
Sharp increase in foreign exchange reserves reflecting capital inflows, higher exports, and lower imports.
New monetary policy framework: exchange rates act as shock absorbers; movements in reserves and exchange rates absorb external shocks without transmission to the domestic economy.

VAT introduction significantly improves prospects for revenue collection.
Wage restraint and energy subsidy reforms have helped alter budget expenditure paths and contributed to arresting the rise in public debt.
Fiscal savings used to expand social spending targeted at the less well-off.
Energy subsidies are described as highly regressive; continued reform toward full cost recovery planned by end of the program (current cost recovery described as in the mid-50s).

Inflation pressures rose due to exchange rate depreciation, VAT introduction, and energy subsidy reforms.
Central Bank of Egypt tightened monetary policy to prevent second-round effects.
Recent monthly data (August):
- Headline inflation rose 1.1 percent month-on-month, after 3.2 percent in the previous month.
- Core inflation rose 0.3 percent in August — first time core monthly inflation fell below 0.5 percent since July 2016.
IMF outlook on inflation:
- Expected to decline to slightly above 10 percent by the end of the current fiscal year (by June 2018).
- Expected to reach single digits by 2019.
Monetary stance to be reviewed against incoming data and authorities’ assessments; exchange rate is not a policy target in the floating regime.

Second review expected to be completed by the IMF Executive Board by the end of December (before the new year).
Third disbursement:
- Will follow the second review.
- Amount: an additional amount equivalent to USD2 billion.
One June performance criterion was missed due to exogenous factors (exchange rate depreciation larger than expected affecting fuel prices and fiscal consolidation); policy actions were judged appropriate despite the miss.
Authorities’ commitments and near-term priorities are detailed in their memorandum of economic and financial policies.

Reforms highlighted to improve investment climate:
- Investment law, bankruptcy law modernization, licensing law to reduce time to set up businesses from over 600 days to around 30 days.
- Measures to encourage lending to small and medium enterprises.
Emphasis: private investment is critical to raise potential growth and create jobs, especially given demographic trends and low female labor force participation.

IMF mission expects to visit Cairo in the last quarter of the year to review developments and discuss policy mix for the next review.
Continued monitoring of inflation data and other indicators to determine monetary stance and progress on program objectives.

Stabilization measures are starting to gain a foothold; benefits are expected to materialize over time.
Mechanisms through which households should benefit:
- Lower inflation leading to improved purchasing power.
- Declining public debt reducing interest payments and freeing fiscal space for social spending and infrastructure investment.
- Structural reforms improving investment and job creation prospects.
IMF view: the program is ambitious and calibrated; payoffs are expected to become evident over the three-year program horizon, with stronger effects in the remainder of the program.

Transcript of Press Briefing on Egypt’s Economic Reform Program Review, Washington, D.C., September 27, 2017