The International Monetary Fund (IMF) this week released its staff report on the second review of Egypt's economic reform programme. Egypt is receiving three-year funding of $12 billion from the IMF's Extended Fund Facility (EFF). Half that sum has already been disbursed, and the EFF ends in fiscal year 2018-19. The outlook for the Egyptian economy according to the report is largely positive, and it commended the government for its taking ownership of the reform programme and for “their strong track record in policy implementation since the start of the programme and political support at the highest level”. The IMF undertakes a review twice a year to monitor government commitment to reform before disbursing a new tranche of funding. The third review is due in March 2018. The report is broadly optimistic. It says growth will gain momentum in 2017-18, driven by factors including a recovery in consumption and private investment. It projects growth to strengthen to 4.8 per cent in 2017-18 and to around six per cent in the medium term. In 2016-17, Egypt's GDP expanded by 4.2 per cent, above the programme projection of 3.5 per cent, the report says. Prior to the agreement with the IMF Egypt had an annual financing gap of around $10 billion. Now, the report says, “the financing gap for the next 12 months is about $3 billion after fund disbursements, and is expected to be met with bilateral, gross reserves, and commercial financing.” Meanwhile, the financing gap for the remaining period is “smaller and can be filled from the same sources”. Another positive development is a decline in inflation. Inflation shot up sharply beyond IMF expectations after the government began implementing its reforms in 2016. Inflation is now expected to continue to decline as second-round effects from the depreciation of the pound and fuel-price and VAT-rate hikes appear to be contained, the report says. It forecasts inflation to decline to around 12 per cent by June and to single digits in 2020. Inflation peaked at 35 per cent in July last year after the third round of cuts to energy subsidies since 2014. The IMF advises the Central Bank of Egypt (CBE) to consider gradual monetary easing “only if key macroeconomic indicators consistently point to the absence of demand pressures and the second-round effects of devaluation and the increases in energy prices and the VAT” continue. The CBE has raised interest rates by seven per cent since November 2016 in an effort to contain inflation. The government debt ratio is projected to decline markedly in response to fiscal consolidation and high nominal GDP growth, the report says. It says measures taken by the government aim to reduce general government debt from 103 per cent of GDP in 2016-17 to 87 per cent in 2018-19. “Beyond the programme period, the authorities intend to maintain primary surpluses of about two per cent of GDP to bring debt further down to about 72 per cent of GDP by 2021-22,” it says. While acknowledging these positive developments, the IMF staff report notes that the scope of growth-enhancing reforms needs to be broadened, and the government needs to create the fiscal space for further spending, especially on upgrading infrastructure, health and education and building a sustainable social safety net. It suggests that the needed resources could be achieved by tax-policy reforms and better tax administration. Egypt could raise tax revenue by about four per cent of GDP, the staff report says. Egypt's tax revenue is currently below 13 per cent of GDP, low by international standards. “The current tax system is complex with multiple tax rates and tariffs, creating an uneven playing field,” the report says. It suggests broadening the VAT base by reducing exemptions, increasing the progressivity of the personal income tax, and strengthening compliance through administrative reforms, especially for professionals such as lawyers, doctors and accountants. It also recommends several measures to improve corporate income-tax performance, including reviewing tax-incentive schemes for foreign direct investment and free economic zones. It also calls for the modernisation of the tax and customs administration to improve the collection process. On energy subsidies, the report points out that the fuel-subsidies bill has decreased from a peak of 5.9 per cent of GDP in 2013-14 to 3.3 per cent in 2016-17. It is expected to decline further to 2.4 per cent of GDP in 2017-18. The authorities plan to eliminate all fuel subsidies (excluding on gas cylinders) by the end of the programme, the report says. “The price-to-cost ratios are estimated at 59 per cent for gasoline and diesel, and 64 per cent for other products as of the end of June 2017,” it says. The authorities have committed to implement the next fuel price increase by December 2018, according to the report. Besides the macroeconomic indicators, the report says more needs to be done to attract investment, support exports, and encourage the private sector. “Egypt needs to reform regulatory frameworks to address market inefficiencies, enhance competition, remove non-tariff barriers, improve access to finance and land, strengthen governance, transparency, and accountability of state-owned enterprises, and address bottlenecks in the labour market,” it says. Strengthening competition and addressing corruption are key to achieving greater economic efficiency, the report says. Despite the general optimism, the staff report warns of significant risks such as the “premature easing of monetary policy, pre-election pressures to increase spending, and a slowdown in the reform momentum that could damage confidence, hurt private investment and growth, undermine fiscal goals and adversely affect inflation expectations”. On the external side, a sustained increase in global oil prices could “significantly undermine fiscal consolidation goals and weaken the current account”, it says. Furthermore, an unexpected reversal of global financial conditions could dampen the foreign appetite for Egyptian government securities. Foreign investment in Egyptian treasuries has reached some $19 billion.
