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Applauding the reforms
Published in Al-Ahram Weekly on 19 - 10 - 2017

The Egyptian economy is forecast to grow by 4.5 per cent in the current fiscal year, according to a new World Bank report.
The growth will be driven by “resilient private consumption, albeit partially diluted by high inflation over the short term”, says the October 2017 edition of the bank's Egypt Economic Outlook report. Improved investment and tourism as well as increased exports will contribute positively to growth, the report says. And the coming online of new gas fields is set to improve fiscal and external balances.
However, the World Bank figures fall short of government forecasts for growth of between five and 5.25 per cent announced by Finance Minister Amr Al-Garhi.
Egypt is expecting $10 billion worth of foreign direct investment in the current fiscal year, Al-Garhi said during meetings on the fringe of the International Monetary Fund/World Bank annual meetings in Washington last week.
This compares to slightly less than $9 billion last year. “We are seeing great interest from investors,” he said during a meeting with investment bank JP Morgan. Legislative reforms to improve the investment climate and attract more investments were underway, he added.
The reforms were also praised by the World Bank. “If properly implemented, the recently adopted industrial licensing law and further improvement in the regulatory framework are expected to improve the business climate and foster growth over the medium term,” its report said.
The government is set on course to reduce the budget deficit annually by one to 1.5 per cent to reach a deficit of four to five per cent by 2022, Al-Garhi said, indicating that reducing the deficit and public debt would allow more resources for investment.
Egypt's budget deficit reached 10.9 per cent of GDP in fiscal year 2016-17 as opposed to 12.5 per cent the year before.
The World Bank report forecasts that the budget deficit is set to decrease to 8.8 per cent of GDP in the current fiscal year, “supported by energy subsidies reforms and increase in tax revenues”.
source: IMF
Egypt's tax revenue reached around LE89 billion (around $5 billion) in the first quarter of the current fiscal year, compared to LE57 billion (around $3 billion) in the same period last year. The new value-added tax (VAT) alone brought in more than 50 per cent of that sum.
As for the fuel subsidy cuts, Egypt has hiked fuel prices three times since 2014, and a fourth cut is expected before the end of the current fiscal year.
The government would decide the timing of such cuts, Jihad Azour, IMF director of the Middle East and Central Asia Department, recently told a press briefing in Washington. The IMF provided guidance and support, but decisions were made by governments, he added.
However, “energy price reforms should be completed to free up resources for productive spending,” he added, in reference to the reforms needed by the region and not only in Egypt.
Egypt embarked on an IMF-backed reform programme in November 2016 that has included the floating of the Egyptian pound, cuts in fuel subsidies, and the introduction of VAT.
The IMF-supported reforms in Egypt have contributed to monetary and financial stability, as well as increased investor trust, Azour said. They have also led to gradually ending the exchange of the Egyptian pound on the black market.
Egypt's economy was among the economies examined in the IMF's economic outlook for the Middle East and Central Asia as part of its World Economic Outlook report.
Azour said that Egypt's reform programme was multi-year and that reforms take time, especially structural reforms intended to improve the business environment and encourage the private sector.
The World Bank has warned that changes in policy direction or delays in the reforms could jeopardise the restoration of macroeconomic balances. “Any slowdown or reversal in fiscal reform efforts or slowdown in growth could undermine debt sustainability,” the World Bank said.
Egypt's total government debt to GDP ratio was 102.8 per cent at the end of the 2015-16 fiscal year, and it is expected to increase further with the sharp depreciation in the currency and increased foreign borrowing.
Former finance minister Ahmed Galal in his weekly column in the daily Al-Masry Al-Youm lamented the increase in total public debt to 136 per cent of GDP at the end of March. 94.7 per cent of this is domestic debt, while 41.2 per cent is external. In absolute terms, domestic debt had risen to LE3 trillion and foreign debt to $73.8 billion, Galal said.
“It is true that countries differ in their ability to attract and absorb external indebtedness, but research indicates many negative consequences if public debt exceeds 90 per cent of national income,” Galal wrote, adding that having exceeded that benchmark there must be caution in Egypt's acquiring more loans and wisdom in dealing with the problem.
Galal's words came a time when Al-Garhi was saying in Washington that Egypt intended to go to the international markets with a $3 to $4 billion Eurobond sale in the first quarter of 2018. Egypt sold $7 billion worth of Eurobonds in 2017.
“We have a plan to reduce the debt-to-GDP levels,” Al-Garhi said, according to a Finance Ministry statement. There was a plan to tackle external debt as well, he said, noting that the issue had been presented to the cabinet.
High inflation was another issue highlighted by the World Bank report. If persistent, this could lead to monetary tightening which would accordingly challenge economic growth.
However, Egypt's key inflation indicators eased in September as the local market absorbed the impact of the June 2017 fuel subsidy cuts and energy price hikes. Annual urban consumer price inflation fell slightly to 31.6 per cent year-on-year in September from 31.9 per cent in August.
Another challenge are regional and domestic security risks, which could negatively impact the recovery of foreign investments, tourism, and remittances, among main hard currency earners, the World Bank report said.
Geopolitical risks and spill-overs from conflicts were a deep concern in all the Middle East, North Africa, Afghanistan, and Pakistan (MENAP) region, according to the IMF's World Economic Outlook report.
It expects that Egypt and the group of oil-importing countries in the region will see growth accelerating supported by “stronger domestic demand, structural reforms, and the current upswing in the global economy,” Azour commented.
However, the IMF lamented that growth would likely “remain below what is needed to effectively tackle the high level of unemployment in the region and raise standards of living.” According to Azour, growth needs to be “made stronger, more inclusive, and job-rich to improve living standards and ease social tensions.”
While the focus should continue to be on containing high fiscal deficits and/or public debt, he said, “it needs to protect priority social and growth-enhancing spending.”

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