A delegation from the International Monetary Fund (IMF) arrived in Cairo earlier this week for the first review of the government's economic reform measures before the disbursement of the second tranche of the $12 billion IMF extended fund facility. The assessment of the delegation, in town until 11 May according to the Ministry of Finance, should give the go-ahead for the disbursement of $1.25 billion, the remainder of the $4 billion earmarked for the first year of the three-year agreement. The delegation is meeting over the course of the visit with officials from the Central Bank of Egypt (CBE) and the Ministry of Finance. It will consider developments in economic activity in Egypt, along with the growth rate and employment as well as efforts to cut the budget deficit and public debt. It will also examine developments in the external sector and the balance of payments. Inflation will be prominent in discussions with the government. “There has to be a special focus on inflation,” IMF Managing Director Christine Lagarde said at a press conference during the annual IMF/World Bank spring meetings in Washington. Egypt's annual inflation rate was over 30 per cent in February and March this year, the highest level in 30 years. While acknowledging that inflation was worrisome, Minister of Finance Amr Al-Garhi said on television that while year-on-year inflation was high, month-on-month inflation had begun cooling down. He said that while it stood at more than 4.5 per cent in January, it fell to 2.7 per cent in February and two per cent in March. Prime Minister Sherif Ismail is also optimistic that inflation will drop by the end of the current fiscal year to around 22 per cent. Speaking at a conference in Ismailia where President Abdel-Fattah Al-Sisi was addressing a monthly meeting of young people, Ismail said that inflation would drop to around 15 per cent by next year. As the IMF's spring 2017 Regional Economic Outlook (REO) report released this week points out, rising inflation in Egypt reflects one-off causes such as cuts in energy subsidies, the implementation of a new value-added tax (VAT), rising food prices and the pass-through of the exchange rate depreciation. The report said that “ginflation is expected to moderate over the medium term supported by prudent fiscal and monetary policy.” “We believe that the utilisation of the interest rate instrument is the right instrument to be used in order to manage inflation down,” Jihad Azour, director of the World Bank's Middle East and Central Asia Department, told journalists at a press briefing during the spring meetings. Whether there will in fact be an increase in interest rates is something that the CBE has yet to decide after careful study of the causes behind the inflation, Al-Garhi said. The IMF delegation will examine the challenges facing the Egyptian economy and the reform measures that the government will adopt during the second phase of its economic reform programme, a Ministry of Finance press release said. The REO report outlines some of these challenges, many of which are not faced by Egypt alone but also by other oil-importing countries in the region. For example, the report points to the country's high level of public debt, exceeding 90 per cent of GDP. “Such large debt stocks not only undermine investor confidence, but they can also add to financial stability risks given the large holdings of debt by the banking sector and generally shallow financial markets,” the report said, adding that “the associated debt-service burden is significant, leaving less scope for social spending or public investment.” The government is targeting cutting public debt to 90 per cent of GDP by 2018-19, the Ministry of Finance said. The REO report stressed the need to push subsidy reforms through to completion, especially since oil prices are expected to increase globally. Lower oil prices have enabled governments worldwide to divert savings towards social spending. Fuel subsidy cuts is another topic up for discussion with the IMF delegation this week. Another cut to fuel subsidies is expected in the next fiscal year, a move that is expected to feed inflation. The government has agreed to remove all fuel subsidies by the end of its economic reform programme with the IMF. Some LE110 billion is earmarked for fuel subsidies in the budget for next year, much higher than the subsidies in the 2016-17 budget which were originally around LE35 billion. While in Cairo, the IMF delegation will look at all the different aspects of the proposed 2017-18 budget, which is currently being discussed in parliament. Egypt is targeting a GDP growth rate of 5.5 per cent by 2018-19, according to Ahmed Kouchouk, vice minister of finance for fiscal policy and institutional reform. This remains far from ideal, since the economy must grow by nine per cent annually to keep up with the population growth rate, President Al-Sisi pointed out at the conference in Ismailia. Nonetheless, he promised that things would improve. Acknowledging that times were tough for average citizens, the president called on people to be patient. Kouchouk said the government's reform programme aimed at capitalising on its improved ability to increase spending and improve education and healthcare services in the medium term. It also aimed to increase investment in infrastructure to improve public services, including social housing, poorer areas development and the poorest villages, roads, public transportation, water and sanitation services, he said. It aimed to broaden the coverage of social protection programmes, especially cash, bread and commodity subsidies, as well as the better targeting of the neediest. The IMF delegation will also discuss the structural reforms that the government has lined up to boost investment, increase exports and boost local manufacturing. As the REO report points out, across the region's oil-importing countries “growth rates are too low to reduce unemployment or provide a broad-based and resilient improvement in incomes. And fiscal constraints will prevent country authorities from boosting growth through public spending alone.” Therefore, it suggests there is “a strong need for structural reforms that promote private sector activity and boost productivity,” warning that the “worsening of security conditions or social tensions slowing the implementation of reforms could derail policy implementation and weaken economic activity.”
