The International Monetary Fund (IMF) has adjusted its projection for Egypt’s growth in financial year 2017/18 to 4.8 percent instead of the previously projected 4.5 percent, to reach 6 percent in the medium term, affirming that the country’s economic outlook is “favorable”.
With regard to inflation, the IMF projects that it will decline to 12 percent in June 2018, and to reach single digits by 2020, according to the Egypt country report released by the IMF on Tuesday.
The report highlights Egypt’s economic outlook as favourable, though various risks may yet constrain growth, including corruption, increases in oil prices, or any reversals or slowdowns of reforms.
Egypt’s reforms and outlook in the eyes of the IMF
The IMF believes that Egypt’s economic outlook remains favourable, provided prudent macroeconomic policies are maintained, and the scope of growth-enhancing reforms is broadened, according to the report.
The report pinpoints some factors that could curb Egypt’s current account deficit to around 4.5 percent of GDP in 2017/18, and to about 3.5 percent of GDP by 2021/22, such as improved external competitiveness, reforms of the business environment, and tourism recovery.
Moreover, the IMF forecasts primary fiscal surplus to register at 0.2 percent of GDP in 2017/2018, as a result of the impact of the VAT increase, lower wages, and fuel subsidies cuts. In light of this, the report indicates that the government’s target to improve the primary balance by a cumulative 5.5 percent of GDP is attainable, and general government debt is projected to decline by about 17 percent of GDP by the end of the programme.
On the other hand, the IMF prioritises setting public debt on a downward path, which it believes is the fiscal anchor of Egypt’s reform programme. ِAccording to the report, Egypt has limited fiscal space, as a result of the country’s sizeable stock of debt and high gross financing needs.
Consequently, the authorities’ fiscal consolidation path aims to improve the primary balance by about
4 percent of GDP over the next two years, which if accompanied by achieving a strong growth in nominal GDP, will reduce general government debt from 103 percent of GDP in FY 2016/17 to 87 percent of GDP in FY 2018/19, and to about 72 percent of GDP by 2021/22.
With regards to the current account (CA) deficit, the report indicates that it remained stable at about 6 percent of GDP in 2016/17. Despite the fact that the liberalisation of the exchange rate strengthened inflows from tourism, remittances, and the non-oil merchandise trade, dollar GDP declined in line with the depreciation of the pound, resulting in a higher CA ratio.
Furthermore, since June, the Egyptian pound has appreciated by 2 percent against the dollar. The Central Bank of Egypt (CBE) has not intervened in the foreign exchange (FX) market directly. However, the CBE has supplied FX at market exchange rates to state-owned enterprises (SOEs) and portfolio investors through the repatriation mechanism.
The report indicates that there is no evidence of foreign exchange shortages in the market, but the repatriation mechanism has diverted FX liquidity from the interbank market and prevented the appreciation of the currency in response to portfolio inflows.
Inflation to drop to 12% in June
The IMF also predicts Egypt’s inflation which peaked at 35 percent in July, 2017 to drop to around 12 percent by June 2018 and to single digits by 2019, a sign of passing-through price shocks that followed the pound flotation, energy subsidy cuts and raising the rate of value added tax (VAT).
While the current account deficit remained unchanged at about 6 percent of GDP in 2016/17, the fund said it is predicted to shrink to about about 4.5 percent of GDP in 2017/18 and to about 3.5 percent of GDP by 2021/22, boosted by improved external competitiveness, reforms of the business environment, and a further recovery in tourism.
Listing the positive impacts of the exchange rate liberalisation on the economy, the IMF said the long-awaited step demolished the currency parallel market, and attracted more capital inflows increased and pushed the international reserves to the highest rates since the January 2 Revolution in 2011, to be sufficient for five months of imports of goods and services.
The fund expects primary fiscal deficit to turn into a surplus of 0.2 percent of GDP in the current financial year, after narrowing from 3.5 percent of GDP in 2015/16 to 1.8 percent of GDP in 2016/17.
To maintain economic reform momentum, in the medium term, the IMF recommended that policy priorities should target raising potential output and promoting inclusive growth to create jobs for Egypt’s young and growing population.
“This will require the private sector to become the primary engine of growth and the state to provide a stable macroeconomic environment, a friendly business climate and efficient delivery of public goods. Strengthening social protection will also be important to shield the most vulnerable,” the fund added.
For the fund, enhancing competition in input and product markets; supporting greater trade integration and the removal of non-tariff barriers; improving access to finance and land; strengthening governance, transparency, and accountability of state owned enterprises; and strengthening the labor market are key required reforms.
“The authorities’ strong ownership of the program and their continued progress in stabilizing the Egyptian economy,” was commended by the IMF’s executive directors, who also hailed “the ongoing recovery in GDP growth, gradual moderation of inflation, significant fiscal adjustment, resilience of the banking system, and strengthening of market confidence.”
On the other hand, the directors warned of some risks, urging the authorities to maintain steadfast implementation of policies to solidify macroeconomic stability and advance structural reforms to unlock Egypt’s growth potential.
Also welcoming the authorities’ medium term objective of raising inclusive growth and increasing employment, the IMF directors said a more efficient allocation of resources in the economy through market driven mechanisms is required to achieve this goal.
The measures taken by the Egyptian authorities to improve business climate, reduce corruption and streamline the role of the state in the economy were also welcomed by the IMF’s directors, who called for deepening these reforms.
The need to strengthen competition, improve the governance and transparency of state-owned enterprises, reduce barriers to trade, improve access to finance and land, and facilitate better integration of women and young people in the labor market, were also among the fund’s recommendations.
“Careful sequencing and effective communication of the reform agenda will be crucial for success,” the IMF’s directors said in their report. The Central Bank of Egypt (CBE) was also hailed by the fund for maintaining a prudent monetary policy stance. The fund’s directors called on the CBE to remain vigilant, welcoming the intention to consider a gradual easing of policy interest rates only once demand pressures and inflation expectations remain contained.
Ongoing commitment from the authorities to a floating exchange rate regime was also endorsed, as well as the CBE’s intention to refrain from interventions in the interbank market except to potentially mitigate disorderly conditions.
Stressing the need to reduce the fiscal deficit and public debt, the fund’s directors welcomed the authorities’ commitment to achieve primary surpluses of about 2 percent of GDP in the medium term. They also urged the authorities to fully implement the automatic fuel price adjustment mechanism as soon as possible and to slash most fuel subsidies by the end of the fund’s supported programme.
At the same time, the fund called for enhancing the social safety net to protect the vulnerable, and recommended greater reliance on targeted cash transfer programmes rather than product subsidies.
To increase spending on infrastructure, human capital, and the social safety net, a fiscal space is needed, the IMF’s directors said, stressing the need to implement tax policy reforms to widen the tax base and modernise tax and customs administration. They also asserted the importance of strengthening public finance management, and curbing government debt originating from outside the budget sector.