IMF: Egypt’s economic reforms are starting to produce a turnaround

Egypt’s economy is starting to turn around after years of stagnation since the 2011 revolution, the International Monetary fund said in a report released Wednesday.

The report is the result of the Egypt’s first comprehensive consultation with the IMF since 2010. Egypt requested a US$4.8 billion IMF loan in August 2012, but the deal was repeatedly delayed. 

Despite a generally favorable review from the IMF, Finance Minister Hany Qadry told Reuters that Egypt has no concrete plans for a financing package from the funder.

The IMF credited reform measures implemented by the government for the improvement, but cautioned that Egypt’s economy is still vulnerable to regional, global and domestic shocks.

“The authorities have embarked on an economic reform program to raise growth, create jobs, and contain fiscal and external deficits and the loss of foreign exchange reserves,” said IMF mission chief for Egypt, Christopher Jarvis, in an interview with an IMF publication.

“Clearly, Egypt is facing risks: the region is in turmoil, domestic security remains an issue, and the global economic environment isn’t supportive,” he added.

The IMF also predicts that the budget deficit will fall below 8 percent of GDP by 2018/19, down from 13.8 percent in the 2013/14 financial year.

The IMF projected that GDP growth will reach 3.8 percent in the 2014/15 fiscal year, rising to 5 percent in the medium term. This puts IMF estimates below government projections of growth exceeding 4 percent in the current fiscal year.

“A turnaround in growth is clearly visible, helped by an improved sense of security, and a return to normalcy on the streets and in everyday life. Following four years of growth averaging 2 percent, the pace of economic activity is expected to double in 2014/15, and to further increase thereafter,” said Hazem Beblawi, who represents Egypt on the IMF executive board, in a statement accompanying the report.

The Fund and Egyptian authorities appear to be broadly in agreement about Egypt’s economic policies and prospects, with a few areas of dissent.

Egypt’s foreign reserves were one area of disagreement. According to IMF calculations, Egypt’s reserves fell from over US$35 billion at the eve of the 2011 revolution to US$14.9 billion at the end of December 2014, a sum which will fund just two and a half months of imports. The IMF recommended Egypt set a goal of four and a half months of import cover, to protect against external economic shocks, while the government prefers to aim for three and a half months. 

The IMF strongly urged Egypt to allow the pound to depreciate, suggesting it is over valued by 3 to 28 percent. Egypt’s Central Bank, the report says, is counting on a surge in foreign investment and tourism to remove any perception that the pound is over valued.

However, in the weeks since January 13, when the IMF staff research was completed, the Central Bank allowed the pound to depreciate by almost 5.5 percent.

Egypt and the IMF also disagreed on the likely prospects for the country’s current account, which tracks the the flow of goods, services and cash transfers in and out of the country. The IMF predicted it will remain at a deficit of 3.5 to 4.5 percent of GDP, while the government projects the deficit will not exceed 3 percent—again, because of anticipated tourism revenue and FDI.

Beblawi’s statement indicates that Egypt’s government is putting its hopes on the economic summit planned for March. “Investment promotion and job creation are key priorities. To this end, the March Conference in Sharm el-Sheikh will bring together investors to participate in projects that aim to reinvigorate the Egyptian economy,” he said.

A closer look at the numbers

The IMF praised Egypt’s government for reform measures, including efforts to curb spending on public sector wages and subsidies, and moves to expand the tax base. These measures, it added, are balanced by policies that protect the poor and vulnerable, such as Egypt’s social solidarity pension scheme.

Egypt has increased the public sector minimum wage, but also put a cap on public sector wages and introduced a tax on bonuses, which often make up the bulk of wage packets. Overall, the IMF says, Egypt is containing its wage bill. 

So far, data from the Finance Ministry shows that spending on wages in the first half of the financial year grew by 9.7 percent compared to the same period last year.

During the first half of the 2014/15 fiscal year, Egypt saw a 9.9 increase in tax revenue, but that was largely driven by consumption taxes. Taxes on goods and services went up by 33.8 percent to reach LE55.3 billion, while customs taxes were up 26.8 percent, and taxes and fees for cars rose by 45.2 percent.

If, as the IMF hopes, Egypt implements a planned Value Added Tax, consumption taxes could make up an ever higher share of revenue. A rise in consumption taxes is a strong signal of growth, pointing to increased consumer spending. However, these taxes have a disproportionate impact on the poor, who spend a greater share of their income on food and other consumer goods.

During the same period, taxes on income, capital gains and profits fell by 13 percent year-on-year to reach LE39.3 billion, driven by a 26.1 percent decline in taxes on corporate profits. This figure could turn around once petroleum settlements are made.

Until petroleum settlements are made, it is difficult to judge the success of subsidy reforms. As of the end of December, the government had spent LE33 billion on subsidies, compared to LE48 billion at the same time last year. 

Despite widespread praise for Egypt’s new smart-card based bread subsidy scheme, subsidies to grain importing agency GASC, which procures wheat for Egypt’s subsidized bread, rose by almost a third to reach LE14.6 billion during the same period.

Spending on social benefits was up by 17 percent to reach LE23 billion, but only LE3.3 billion of that went to social insurance pensions, with the rest constituting contributions to the general pension fund.


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