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RIDING THE CURVE
Excerpts from “Arab Republic of Egypt – 2007 Article IV Consultation: Preliminary Conclusions of the IMF Mission”
Published by the International Monetary Fund (IMF), September 2007
Analysis by Réhab El-Bakry
Egypt’s economy has had a tremendous run over the past three years, with strong growth in trade and investment, and even a rare balance of payment surplus. The government is touting its accomplishments. Even more impressive, is that the International Monetary Fund (IMF), which regularly reviews the fiscal and economic policies of member countries, seems largely to concur. Its latest annual review of Egypt’s fiscal and economic policies is unusually upbeat.
“Egypt’s economy delivered another impressive performance in 2006-07, with high growth generated by reforms and solid macroeconomic management. The Egyptian economy continues to grow rapidly and unemployment is declining. Real GDP growth in 2006-07 is estimated at 7.1 percent, continuing last year’s performance. [...] The growth spurt since end-2004 has added 2.4 million jobs as of end of March 2007, reducing unemployment from 10.5 percent to 9 percent.”
Sweeping economic reforms have been undertaken since the Nazif government first came to office in July 2004. Recognizing the challenge of a steadily increasing population, high unemployment, lackluster industrial production and a negative balance of trade, the government has carried out sweeping reforms aimed at improving the economy. The IMF recognizes the effectiveness of these measures in improving the performance of the Egyptian economy.
“Exports also rose sharply, along with worker remittances, Suez canal receipts and tourism revenues. With record levels of FDI, the balance of payment recorded a surplus of $5.3 billion in 2006-07, bringing official reserves to $30 billion by end-August 2007, equivalent to more than six months of imports of goods and services.”
Inflation has risen on the back of economic growth, peaking at 12.8 percent in March 2007 before gradually receding to reach 8 percent in July. Local economists claim the increase was largely the result of the avian flu and an adjustment in fuel prices in 2006. In response, the government tightened its command on macroeconomic policies to reduce inflation pressure.
“Monetary policy was tightened once spillover effects of administered price increases became visible in late 2006. Policy interest rates were raised twice. [...] The 2006-07 central government deficit is estimated at 7.5 percent of GDP, below the 9 percent average of recent years largely due to structural improvements including ongoing reforms in the tax area, fuel price adjustments, wage restraint and windfall receipts from a telecom license sale.”
The sale of state assets has also contributed to the dramatic improvements to the budget. Among the biggest revenue generators were the sale of the third mobile operator license, the auction of a strategically located plot on the North Coast, and the privatization of one of four of the country’s largest public sector banks. The government has managed to diversify its FDI, securing sizeable investment in the non-oil sectors.
“The diversified sources of foreign capital (from Europe, the [Gulf Cooperation Council] GCC countries, and North America) and the still-low share of speculative funds limit the risk of a sudden reversal of capital flows. […] The banking system would be vulnerable mainly to a deterioration of domestic credit quality and much less to exchange and interest rate movements. To date, Egypt has weathered the recent turbulence in global financial markets rather well, some pullback in the stock and fixed income markets notwithstanding.”
According to the report, for Egypt’s economy to continue to grow, certain areas will continue to demand attention. The government must address constraints to business including haphazard infrastructural development, insufficient access to financing for small and medium-sized enterprises (SMEs), bureaucracy, poor public service delivery and inadequate skilled labor to meet the demands of the market.
“Continued efforts are also needed to reduce the underpricing of energy, which remains an important distortion that risks attracting investments into sectors where Egypt may not have a long-run comparative advantage, encouraging levels of energy consumption that impose high environmental cost and use up vast public funds that could be more productively spent.”
Egypt’s fuel subsidies account for between 5 and 6 percent of GDP. In August, the government announced that it would phase out energy subsidies for industry over six years. Not only will this reduce the burden on the national budget, it also works towards Egypt’s international agenda to remove investment incentives that distort the market.
“A strong outlook for 2007-08 and continued favorable external conditions provide a conducive setting for the implantation the reform agenda. Real GDP is expected to expand by about 7 percent, led by strong growth in investment and consumption. Inflation is projected in the 6-9 percent range.”
While Egypt’s current reform policies promise sustained growth, there are some risks on the international and domestic fronts. On the international level, changes in the global economy, which have so far seemed distant, might catch up, especially the tightening global credit market. Domestically, if the benefits of reforms are unable to trickle down to reach the lower socio-economic strata, public resistance to reform and social unrest are likely to grow.
The full text of this report is available on the IMF website at: www.imf.org
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