and Reza Baqir The shared vision of transforming Egypt into a modern, fast-growing and prosperous economy is within reach. Reforms that create shared opportunity for Egypt's greatest asset – its young and growing population – can help translate this vision into reality and ensure that the aspirations of all Egyptians are fulfilled. With the economy stabilising successfully, now is the time to unleash Egypt's true economic potential. What led Egypt's growth performance over several decades to be lower than that of many of its peers? Output was constrained by a growth model characterised by economic self-reliance and an expansive welfare system based on blanket subsidies. This resulted in a preference for directed industrial policy and an unusually significant role for the state in employment and in investment that was excessively focused on inward-oriented and energy-intensive industries. As a result, Egypt was unable to take full advantage of the opportunities from globalisation and private sector-led growth that have lifted living standards rapidly and broadly in many peer economies. This long-standing overall policy framework, accompanied by rigid exchange rates and fuel prices, led to a loss of external competitiveness and gave rise to large budget and trade deficits in recent years. The resulting increases in public debt and declining international reserves were unsustainable and needed to be reversed. In response, the Egyptian authorities initiated an economic reform programme that is now gathering momentum. This programme is being supported by an IMF arrangement that provides policy advise and financing to ease the required adjustment. The key elements of the programme have included the floating of the exchange rate in 2016, necessary to reverse the loss of competitiveness of Egypt's exports and to address acute foreign-exchange shortages. The float eliminated the parallel market and created incentives for domestic production and exports and away from imports. There has also been a reduction in fuel subsidies and the introduction of a Value Added Tax (VAT) to reduce pressures on the budget. This has freed up resources the better to provide social assistance to those who need it the most, while fuel subsidies benefit the rich more than the poor. The programme has also included decisive monetary policy actions by the Central Bank of Egypt (CBE), including higher interest rates, to limit the unavoidable rise in inflation from these adjustments. There have been reforms to improve the business climate and provide critical support to encourage private-sector investment, including the introduction of new investment and industrial licencing laws. These bold measures are translating into a recovery in economic growth, lower budget and current account deficits, and gradually easing inflation. GDP growth rose to 5.2 per cent for the most recent quarter for which data is available, and inflation has dropped from its peak of 33 per cent in July to 22 per cent in December 2017. GDP growth is projected at nearly five per cent for 2017/18 as a whole and to rise further to 5.5 per cent in 2018/19; public debt is expected to decline from more than 100 per cent of GDP in 2016/17 to 87 per cent in 2018/19; and inflation is expected to decline further to around 13 per cent by the end of 2018. Now is the time to build on this solid foundation with reforms that will support the creation of more and better-paying jobs for all, and particularly for young people and women. These jobs can only be created by the private sector with a modernised role for the state in the economy. The state should not compete with the private sector in the production of goods and services, but instead should drive and facilitate reforms. It should provide a stable, transparent and non-intrusive regulatory environment and deliver social protection to those who need it the most. How can Egypt transform itself into a regional investment and growth leader? The key reforms needed for such a transformation include: - A modernised regulatory framework that creates a level playing field in all sectors, encourages fair competition, and does not favour one set of market participants over others; - Greater integration with global trade, including by removing trade barriers, to allow Egypt to take advantage of global demand and incentivise its private sector to innovate and compete; - Improved access to finance and land on transparent and market-determined terms that will facilitate investment by the most productive entrepreneurs and firms; - Greater transparency and accountability of state-owned enterprises that will ensure that public resources are used efficiently and do not crowd out the private sector; - Strengthened governance and reduction in the perceptions of corruption that will encourage private investment and job creation; - Labour market reforms that will help prepare Egypt's young population, and more of its women, for well-paying jobs and with the requisite skills and training; - And fiscal reforms that generate resources to protect the most vulnerable, so that no one is left behind as growth takes off. With economic stabilisation taking hold, this is the moment to act to unlock the potential of the Egyptian economy and its people to create a prosperous and dynamic economy that benefits all for generations to come. Subir Lall is assistant director in the Middle East and Central Asia Department and IMF mission chief for Egypt. Reza Baqir is IMF senior resident representative in Egypt.
