IMF: Egypt beginning to recover, needs further reforms

The International Monetary Fund (IMF) says Egypt’s economy is showing signs of bouncing back after years of slow growth in the wake of the 2011 revolution. The fund credited the current administration with setting “appropriate economic objectives” and initiating tax and subsidy reforms, but cautioned that further reforms are necessary.

“The economy has begun to recover after four years of slow activity. Equally important, there is growing national consensus on the need for economic reform,” said IMF mission chief Chris Jarvis in a press statement issued late Tuesday.

The statement came at the end of an IMF mission to Egypt from November 11-25.

The International Monetary Fund is largely positive about the direction Egypt’s economy is heading.

In an October report, the IMF forecast a 3.5 percent growth rate for Egypt, but it has now raised its projection. 

“Policies implemented so far, along with a return of confidence, are starting to produce a turnaround in economic activity and investment. We now project that growth will reach 3.8 percent in FY 2014/15,” said Jarvis.

This figure is in line with current government predictions, but below the 4.1 percent growth rate the IMF predicted in April.

The IMF estimates that Egypt’s budget deficit will reach 11 percent of GDP during the current financial year—a smaller gap than the 12.8 percent recorded in 2013/14, but greater than the 10 percent the government has pledged to achieve this year.

Jarvis predicts the government will continue to rely on foreign funding to finance its budget “through the medium term.”

The Fund praised Egypt for fiscal reforms designed to decrease spending and raise government revenue, including ongoing attempts by the government to reduce energy subsidies [], control the state wage bill, and introduce a Value Added Tax and mining law.

“The authorities have already begun to take the action needed to achieve their objectives. They have begun bold subsidy and tax reforms, are pursuing a disciplined monetary policy, expanding social policies, and have initiated wide-ranging regulatory and administrative reform efforts to improve the business environment and boost investment,” he said.

However, the IMF cautions that Egypt’s economy remains vulnerable to global developments and regional security risks. 

“Building buffers, especially by raising international reserves and preparing contingency plans for the budget in case risks materialize, would be useful to address unforeseen shocks,” said Jarvis.

At the end of October, Egypt’s foreign reserves stood at $16.9 billion, just above the amount needed to finance three months of imports, which financial institutions regard as a critical threshold. Reserves stood at $18.6 billion in October 2013, and at around $36 billion before the 2011 revolution.

The IMF also advised Egypt against holding the pound at a fixed exchange rate. After falling to record lows in May 2014, the official exchange rate has remained virtually unchanged, holding steady for months at around 7.14 to the dollar. Meanwhile, the gap between official and black market rates has grown.

“A more flexible exchange rate policy focused on achieving a market-clearing rate and avoiding real appreciation would improve the availability of foreign exchange, strengthen competitiveness, support exports and tourism, and attract foreign direct investment,” said Jarvis. “This would foster growth and jobs and reduce financing needs.”

The IMF also cautioned the government against over-reaching and taking on too much risk with ambitious national projects. “The megaprojects offer prospects for jobs and growth but should be carefully designed and monitored to limit potential fiscal risks,” said Jarvis.

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