Egypt Moving Forward: Key Challenges and Opportunities
IMF News, July 17, 2018
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- Published: July 17, 2018
1. Take advantage of the rapidly growing population
- Over the next five years, around 3.5 million young Egyptians are projected to join the labor force.
- Challenge: Absorbing these new entrants into the labor market.
- Opportunity: Faster growth if Egypt can support the emergence of a strong and vibrant private sector to productively employ this emerging generation of workers.
- Observations on the private sector:
- Over the past several decades, the private sector in Egypt has been less dynamic and outward-oriented than in peer countries, with a small share of firms able to compete outside the domestic market.
- Structural reforms initiated under the authorities’ program to foster greater private sector development and export-led growth:
- Improve the efficiency of land allocation.
- Strengthen competition and public procurement.
- Improve transparency of state-owned enterprises.
- Tackle corruption.
2. Modernize the economy
- Context and potential:
- With nearly 100 million people and a geographic location that provides excellent access to important foreign markets, Egypt has immense potential.
- Economic development constrained by the legacy of inward-oriented economic policies, weak governance, and a large role for the state in economic activity that has resulted in significant misallocation of resources.
- Policy focus as the economy stabilizes:
- Ensure the best allocation of resources to generate higher growth.
- Remove price distortions that impede markets from functioning efficiently.
- Energy subsidies as a key distortion:
- Energy subsidies keep fuel costs well below the market price, encouraging inefficient use of energy and overinvestment in capital intensive industries to take advantage of low fuel costs.
- Energy subsidies are costly and inequitable, tending to benefit the well-off who are disproportionately large energy consumers.
- Expected effects of correct energy pricing:
- Improve economic efficiency so that investment is not channeled to capital intensive and heavy energy-use sectors.
- Redirect investment into job-creating sectors that benefit small and medium-sized businesses, take advantage of Egypt’s strengths, and help integrate the country into global supply chains.
- Free up resources for health and education—critical to long-term economic growth and societal progress.
3. Provide a modern social safety net to protect the vulnerable
- Fiscal and social challenge:
- As Egypt modernizes and makes the economy more competitive, it will also need to continue to bring down public debt to a level consistent with long-term sustainability.
- The challenge is to ensure that the most vulnerable segments of society are protected during this process, and that fiscal resources are safeguarded for spending on health and education.
- Shift in social protection:
- Move away from a social protection system based on energy subsidies toward better-targeted and more effective social safety nets.
- 2018/19 budget measures and social programs:
- The 2018/19 budget will continue to replace poorly-targeted energy subsidies with programs that directly support the poorest households through expanded cash transfer and food subsidy programs.
- Authorities have strengthened programs like food smart cards, and more than doubled the amount of assistance provided through these cards.
- The government has also strengthened social solidarity pensions, and the Takaful and Karama cash transfer programs.
- Takaful: an income support program for families with children.
- Karama: a social inclusion program for persons who cannot work, specifically the elderly and people with disabilities.
- Supporting reforms:
- Reforms to improve the efficiency of government spending and tax collection to ensure that pro-poor spending and investments in health and education are protected.
- Faster creation of private sector job opportunities and the integration of women into the labor force as part of the authorities' inclusive growth strategy is expected to steadily improve living standards, including for lower-skilled workers.
International Monetary Fund — Egypt Moving Forward: Key Challenges and Opportunities