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What next for the economy?
Published in Ahram Online on 16 - 10 - 2019

A few days ago, the International Monetary Fund (IMF) released its report on the fifth and final review of Egypt's economic reform programme supported by a $12 billion loan arrangement under its Extended Fund Facility (EFF). The three-year programme has seen Egypt implementing many bold economic reforms.
Jihad Azour, director of the Middle East and Central Asia Department at the IMF, spoke to Al-Ahram Weekly about maintaining the reform momentum and ensuring that all Egyptians see improvements in their living standards.

What is your assessment of the performance of the Egyptian economy after completing the IMF programme, and what are your recommendations for the coming period?
Egypt's macroeconomic situation has improved significantly since 2016. Macroeconomic stability has been restored from a near-crisis situation, with growth recovering to around 5.5 per cent, inflation and unemployment declining, fiscal and current account deficits narrowing, public debt declining, and foreign currency reserves reaching an all-time high. At the same time, social protection has been strengthened to cushion the impact of the adjustment on low-income households.
Going forward, it is important to preserve these gains and ensure that inflation remains contained, public debt continues to decline steadily over the medium term, and the savings from fuel-subsidy reform are used in part to further strengthen the social safety net. Exchange-rate flexibility also remains essential to act as a shock-absorber for the economy and to help maintain the competitiveness of Egyptian exports.
Looking ahead, the sustained implementation of structural reforms to modernise the economy is critical to unleash Egypt's growth potential, increase investment and exports, create more high-quality jobs and lower unemployment, and thereby raise the living standards of all Egyptians while ensuring that the vulnerable segments of the population are protected.

Has Egypt implemented all its commitments under the agreement with the IMF? Are there policies that are still pending?
The successful completion of the programme reflects the authorities' strong ownership and commitment to implementing the necessary policies, many of which required difficult but courageous decisions. As noted, significant progress was made during the past three years in achieving macroeconomic stabilisation and initiating reforms to support private investment, make growth more inclusive, and create jobs for all segments of the population.
But after the programme has ended further efforts are needed to keep the Egyptian economy improving and modernising. In particular, reforms should focus on transforming Egypt into a fast-growing and prosperous country, where living standards continue to improve sustainably for all Egyptians.

After the economic reforms that were sometimes hard for many people, how can the government increase social-protection measures to achieve more equality and help improve the living standards of the middle class that carried much of the burden of the reform programme?
Social protection has been a cornerstone of the government's reform programme. Measures to ease the burden of adjustment on the poor and vulnerable have included the introduction of cash-transfer allowances offered through food smart cards, the expansion of social-solidarity pensions to include medical coverage, and the increased coverage of the Takaful (Solidarity) and Karama (Dignity) welfare programmes.
The economic recovery and the reduction in inflation are also paying off by providing more jobs, with the unemployment rate at its lowest level in over a decade. Structural reforms that will make Egypt more attractive to international and domestic investors, support private entrepreneurship, and reduce corruption would help raise the living standards of all Egyptians, including the middle class.

Is Egypt still suffering from a funding gap? What are the best sources for financing this in the short and medium terms?
Egypt is expected to maintain primary budget surpluses in the short and medium term, which means that excluding interest payments government revenue exceeds expenditure. These surpluses are important to keep public debt on a downward path, which will in turn bring down interest expenditures to free up fiscal space for other priority spending such as on health, education, and social protection.
Egypt's favourable macroeconomic performance, underpinned by a strong policy framework, has improved investor sentiment, allowing Egypt to access international bond-market financing at relatively favourable rates. As inflation declines, domestic interest rates are also expected to come down, which would help the government to borrow more cheaply domestically as well. The authorities reform programme, which was supported by the IMF, has played a catalytic role in this process. As interest rates decline, private investment could be expected to pick up.

How can Egypt deal with high debt levels without loading future generations with more burdens?
Debt burden is often measured by debt-to-GDP ratios, which for Egypt remain somewhat elevated despite the significant progress achieved in the last two years. In addition to further reducing budget deficits, raising the economy's growth rate is essential to improving the debt-servicing capacity and reducing the debt-to-GDP ratio. This needs to be supported by a continued reform momentum to strengthen confidence in the Egyptian economy and spur investment and exports, which will benefit current and future generations.

Egypt is expanding its infrastructure projects. At the same time, the volume of private investments is decreasing. How can we encourage the private sector to participate more?
More inclusive growth, with the private sector taking the lead in job creation and investment, is critical to absorbing the sizable new entrants to the labour force expected over the next decade. Encouraging private-sector-led growth requires maintaining macroeconomic stability while continuously improving the business environment to make it more conducive to private investment.
The authorities have launched important reforms to improve competition, make public procurement more transparent and accessible to all businesses, and improve the management of state-owned enterprises. Sustained implementation of these reforms will be essential to ensure that statutory changes achieve meaningful results in the business climate. Fighting corruption and reducing the role of the state in the economy would help create room for the private sector to grow and thrive.

Do Egypt's macroeconomic indicators show the country heading towards economic growth and development, and when will people begin to feel an improvement in their standards of living and income?
The Egyptian authorities' economic reform programme has already shown promising results. Growth is now around 5.5 per cent, one of the highest in the region, and it is expected to rise further as ongoing structural reforms are broadened and deepened. Higher growth led by the private sector would create more jobs, which, as experience in other countries has shown, is the most successful way to sustainably improve the living standards of all people by increasing their disposable incomes.
Higher growth and lower public debt also create further room for more public investment in health and education to increase human capital and income-generating potential. Moreover, this will mean that households need to spend less on healthcare and education from their own incomes.

*A version of this article appears in print in the 17 October, 2019 edition of Al-Ahram Weekly.

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