Egypt has made a “good start” to its International Monetary Fund-backed reform programme despite seeking waivers for missing some targets in June and a deeper-than-expected currency depreciation, but inflation remains the main risk for stability, the IMF said Tuesday.
Egypt agreed a three-year, $12 billion IMF loan programme in November last year that is tied to ambitious economic reforms such as spending cuts and tax hikes to help revive an economy where subsidies accounted for a quarter of state spending.
The IMF has already approved $4 billion in loan instalments, most recently releasing $1.25 billion.
Inflation reached three-decade highs in July after fuel price hikes under the IMF deal.
It has since dipped, though high costs have hit many Egyptians hard in the import-dependent state.
Since the Egyptian pound was floated last year, the currency has roughly halved in value.
“Egypt’s reform program is off to a good start. The transition to a flexible exchange rate went smoothly. The parallel market has virtually disappeared and central bank reserves have increased significantly,” the IMF said in a review of the programme.
“Market confidence is returning and capital flows are increasing. These augur well for future growth. The authorities’ immediate priority is to reduce inflation, which poses a risk to macroeconomic stability.”
It said it had agreed to a request for a waiver after Egypt missed primary fiscal balance and fuel subsidy bill requirements for end-June. The waiver was granted in part because of planned strong fiscal adjustments in the next two years.
“If entrenched, high and persistent inflation could pose a threat to macroeconomic stability. It may also impede credibility of the new monetary policy framework,” it said.
The IMF said the country’s current account deficit was seen narrowing to 4.6 percent of GDP in 2017/18 fiscal year and to 3.8 percent in 2018/19.
It said it primary fiscal deficit seen at 1.8 percent of GDP, exceeding the programme target of 1 percent.