The government breathed a sigh of relief this week as a delegation from the International Monetary Fund (IMF) announced that the country had cleared the first review of the extended fund facility (EFF) loan made to Egypt by the fund. The delegation has been in Cairo for the past two weeks meeting with officials to make sure the government and Central Bank of Egypt (CBE) are implementing the three-year reform programme they committed themselves to in November 2016 in order to access the $12 billion loan. Passing the IMF review is important in order to receive a second tranche of $1.25 billion, completing $4 billion earmarked for the first year of the agreement. The staff level approval of progress has yet to be approved by the IMF's executive board. While in town, the delegation witnessed major events, including parliamentary approval of the long-awaited investment law as well as a briefing by minister of finance Amr Al-Garhi to parliament on the proposed budget for 2017-18. While some elements of the new budget are alarming to some, the delegation said they meant the government was on the right track. The budget for the upcoming fiscal year proposes continued measures to trim spending by the government and narrow the budget deficit. Fuel subsidies are set to be narrowed to 33 per cent of the total subsidies bill, compared to 64 per cent in the 2011-12 fiscal year, Al-Garhi told parliament last week. Subsidies on electricity will drop to nine per cent. Energy subsidies are expected to cost the state LE140 billion, with LE110 billion going to petroleum products and the rest to electricity. Already a price list of expected petrol and natural gas prices is circulating on social media, claiming that prices are set to increase by 25 to 30 per cent. Cutting fuel subsidies is a cornerstone of the government's agreement with the IMF, and they are scheduled to be totally phased out by the end of the three-year agreement. Further cuts in energy subsidies are expected to fuel inflation, which reached around 32 per cent this year. The government is targeting to cut the budget deficit to nine per cent of GDP from a projected 10 per cent this year and to 12.5 per cent in the 2015-16 fiscal year. “The Ministry of Finance has drafted a very strong budget. If enacted by parliament, it will place public debt on a clearly declining path to sustainable levels,” Chris Jarvis, head of the IMF team that carried out the review, said in a press release. He said the IMF welcomed plans to continue reforming energy subsidies over the next three years and to raise the rate of the new value-added tax (VAT). This tax, which first went into effect in the autumn of 2016, is set to increase by one per cent to 14 per cent in the new fiscal year. The implementation of the new VAT has been one of the main causes of the inflation, along with the floatation of the pound and the cuts in fuel subsidies carried out in November 2016. The IMF delegation was also happy with progress on structural reforms, including the passing of the new industrial licensing and investment laws. “Both acts will help unlock Egypt's growth potential, attract investors, increase exports and industrial production, as well as create adequate and well-paid jobs to absorb the rapidly growing labour force,” Jarvis said. Egypt's unemployment rate stands at 12 per cent, according to statistics released this week by the Central Agency for Public Mobilisation and Statistics (CAPMAS). According to Al-Garhi, the government is working on reducing unemployment to below 10 per cent in the medium term. The government is targeting GDP growth of 4.6 per cent in the 2017-18 fiscal year and six per cent in the medium term, Al-Garhi told parliament. This could be possible thanks to a number of factors driving growth, including increases in natural gas production with a number of important discoveries to start production soon. The government also delivered ambitious promises on social spending, saying that savings from cuts in fuel subsidies would enable more funds to be earmarked for social welfare. According to the proposed budget, food subsidies will increase by around 30 per cent to around LE64 billion. The government announced last week that it was giving citizens with ration cards LE14 over an already existing LE21 per month to buy basic commodities. The number of beneficiaries will reach 71 million. Beneficiaries of the bread subsidy programme will also increase to around 77 million. These measures are meant to ease the burden of the reforms on the most vulnerable by providing basic needs at reasonable prices. “We are very pleased with the strengthened social protection measures in the programme,” Jarvis said. “This agreement is a vote of confidence by the IMF staff in the continued implementation of the Egyptian authorities' programme. It is also testimony to the great efforts the government and the Central Bank of Egypt have been making to reform the economy,” the IMF press release said. Soon after the IMF delegation announced its preliminary findings, credit rating agency Standard and Poor's (S&P) affirmed its “B/B-” long- and short-term foreign and local currency sovereign credit ratings for Egypt, with a stable outlook. According to Reuters, the stable outlook “balances risks arising from Egypt's large external and fiscal deficits, against financing support from the IMF programme.” S&P said ratings on Egypt remained constrained by wide fiscal deficits, high public debt, low-income levels, and institutional and social fragility. Nonetheless, it foresees fiscal consolidation over 2017-2020 and expects the deficit to average 8.6 per cent in 2017-2020. The IMF delegation also commended the CBE for “maintaining a floating exchange rate regime and sustaining adequate official reserves,” Jarvis said. It expressed its confidence that the CBE had the tools to reduce inflation to single digits over the medium term. “The authorities see reducing inflation as a key priority for safeguarding the welfare of people across Egypt,” Jarvis said. Total spending in the new budget is estimated at LE1.2 trillion, with revenues at LE834 billion, leaving a deficit of around nine per cent. The increase in revenues is primarily due to tax revenues reaching 14.7 per cent of GDP, compared to 13.4 per cent forecast for the current fiscal year. The government intends to increase tax revenue to close to 18 per cent of GDP by 2021-22.
