Press Release No. 06/283

Press Release: IMF Mission Reviews Economic Developments and Policies in the Arab Republic of Egypt

December 18, 2006

The following statement was released today in Cairo by an International Monetary Fund (IMF) staff Mission:

"A staff mission of the International Monetary Fund (IMF) led by Mr. Klaus Enders visited Egypt during December 4-14, 2006 to take stock of the recent economic developments and the policy stance since the conclusion of the last Article IV Consultations in July 2006. A fuller review is planned for mid-2007 in the context of the IMF's annual consultation with Egypt.

"Since the last discussions, economic growth has gathered additional momentum and investment has picked up. The foreign exchange position has remained healthy and financial sector reforms are proceeding at a steady pace. A number of important privatization projects, including the Bank of Alexandria, were concluded, and FDI flows in recent months have exceeded expectations. Underpinning these developments is the continued confidence in the depth and breadth of the structural reforms underway in Egypt.

"The key macroeconomic challenge is the recent pick up in inflation. The rising inflation since April 2006 is partly attributed to a host of supply factors, notably the impact of the Avian flu and adjustments in administered prices, particularly fuel prices in July. Apart from supply factors, the higher inflation also reflects demand pressures arising from robust economic activity. The mission shares the authorities' assessment that some of the factors driving inflation are transitory and will dissipate over time; others are more durable and require a policy response. In his regard, the recent tightening of monetary policy by the Central Bank of Egypt (CBE) has been timely and appropriate. Going forward, the mission welcomes the CBE's intention to remain vigilant and act as appropriate to contain inflation expectations, restrain liquidity growth, and ensure market confidence.

"The mission concurs with the authorities that maintaining price stability over time and laying the ground for sustained growth require also a tightening of fiscal policy. The government has already begun implementing a medium-term fiscal consolidation and reform program to reduce the budget deficit by at least 1 percent of GDP annually for five years through a mix of revenue and expenditure measures. The full and timely implementation of this program should put the public debt/GDP ratio on a sustainable path and at the same time enhance the efficiency of public spending. Given the current favorable economic environment, the mission is of the view that a more ambitious fiscal consolidation path is feasible without compromising economic growth.

"The mission agrees with the authorities that private investment is key to lifting the growth trajectory and creating jobs. Macroeconomic stability will contribute to an investment-friendly environment, and the recent tax and customs reforms will enhance incentives to invest. But ease of entry and exit, clear rules and regulations, the absence of red tape and bureaucratic constraints, and strong supervisory and legal frameworks are also essential. Continued reforms in these areas will complement the efficiency gains arising from the ongoing financial sector reforms and privatization."