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Bullish on reform
Published in Al-Ahram Weekly on 19 - 07 - 2018

The International Monetary Fund (IMF) this week published its third periodic review of Egypt's economic reform programme, applauding government efforts which it said had “played a key role in stabilising conditions, with the external and fiscal deficit narrowing, inflation and unemployment declining and growth accelerating”. The reviews are a condition of the IMF's $12 billion loan to Egypt.
The report expects foreign direct investment (FDI) to reach $9.5 billion in the current fiscal year, up from $7.8 billion in 2017-2018.
Meanwhile, parliament this week approved a proposal allowing adult resident foreigners to apply for Egyptian citizenship if they maintain a five-year bank deposit of at least LE7 million in hard currency. Currently citizenship can be obtained, in theory at least, after 10 years residency. The changes, which come as part of the government's wider economic reform agenda, represent an attempt to encourage investors, boost foreign investment and increase foreign currency resources.
The IMF expects Egypt's economy to grow by 5.5 per cent in the 2018-2019 fiscal year on the back of a revival in tourism and increased natural gas production. The current account deficit is expected to fall to 2.6 per cent of GDP, a reduction on the four per cent the IMF had previously forecast.
Egypt's tourism revenues jumped 83.3 per cent to $2.2 billion in the first quarter of 2018; the number of tourists visiting during the same period rose by 37.1 per cent to 2.38 million.
Earlier this month the cabinet approved a $105 million exploration agreement with the oil companies Eni and Tharwa to search for oil and gas off the coast of North Sinai.
Eni now plans to begin drilling an exploratory well in the Nour Field off North Sinai before the end of August. The field is estimated to contain natural gas reserves of 90 trillion cubic feet, almost three times that of the supergiant Zohr Field. Egypt currently produces 5.2 billion cubic feet per day of natural gas, making it self-sufficient. It should begin to export gas by the fourth quarter of 2018.
Inflation is expected to rise to 14.4 per cent in the current fiscal year and drop to single digits by mid-2020. Last month inflation recorded its first rise since August 2017, reaching 14.4 per cent following a month-on-month increase of 3.5 per cent, up from 0.2 per cent in May.
The increase is mainly the result of June's cut in energy subsidies and rises in water prices and metro tickets, measures that have been praised by the IMF. According to the Central Agency for Public Mobilisation and Statistics (CAPMAS), transport costs soared by 34.2 per cent month-on-month and utilities rose by seven per cent.
Analysts believe July and August's numbers, when increased electricity prices begin to filter through, will be even higher, though inflation should start to level off gradually by the end of 2018.
While the IMF has warned against the risks of fuel-price hikes inflating commodity prices nationwide it continues to insist energy subsidy reform remains the key to fiscal consolidation. Further increases will be needed by June 2019 if the target of 100 per cent cost recovery is to be met.
The fuel subsidy bill is set to decline to 1.8 per cent of GDP in 2018-2019 from a projected 2.7 per cent in 2017-18. Electricity subsidies are expected to fall to 0.3 per cent of GDP this fiscal year, from a projected 0.7 per cent in 2017-18. The government's current strategy is to eliminate them entirely by 2020-21.
“Monetary policy should remain cautious to contain second-round effects from the recent increases in energy prices, and further policy changes should be guided by inflation expectations and demand pressures,” the IMF review said.
It emphasised the importance of a flexible exchange rate in maintaining a buffer against the risk of increased volatility in capital flows to emerging markets as global financing conditions continue to tighten.
Egypt's net international reserves (NIR) currently stand at $44.26 billion, equivalent to seven months of imports, and the government's ability to meet its foreign debt obligations, according to the review, is “adequate”.
The IMF estimates Egypt will face a financing gap of $1 billion this year which it could plug either by once again tapping international markets through a Eurobond issue or by delving into reserves. In May the government announced it planned to borrow between $6 and $7 billion on the international markets.
Finance Minister Mohamed Maait recently made statements indicating that Egypt was in talks with international lenders, including the World Bank, the African Development Bank, the French Development Agency and the Japan International Cooperation Agency, to secure long-term loan facilities of up to 30 years at interest rates of between one and two per cent.
Maait explained that the cost of borrowing by the government was expected to increase on the back of portfolio outflows from emerging markets as well as the US Federal Reserve's plan to continue raising US interest rates.
The IMF also said a more inclusive private sector-led growth model was needed to absorb new entries to the labour force. With this in mind, the government is in talks to borrow as much as $5 billion from the World Bank and other lenders to support development efforts in Sinai. Investment Minister Sahar Nasr began talks with the World Bank last month for a $1 billion loan for projects in the peninsula which the government estimates will cost LE275 billion over four years.
The third tranche of the $3 billion Egypt has already borrowed from the World Bank to support policy reforms was disbursed late last year.


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