Egypt's reform is praised by the IMF and US, but both stress the need for even more momentum reports Niveen Wahish The Egyptian government received two pats on the back for its progress attained in the field of economic reform. The first was in the form of a statement issued last week by an International Monetary Fund (IMF) delegation that had visited Egypt for discussions of the 2006 Article IV Consultation. Such discussions serve as an input for the preparation of the annual report on Egypt that is submitted to the IMF Executive Board. The second laudatory report was published by the US Embassy in Cairo's economic and political section. Entitled The Economic Trends Report for 2006 (ETR), the report is part of a series that is annually issued by the embassy. A statement by the IMF mission that had recently visited Egypt in order to assess its recent economic developments and future policies underscored the "accelerating of economic growth, low inflation, strong balance of payments and foreign reserves positions, and, more broadly, growing confidence in the direction and depth of economic policies." ETR for its part described the reform that has been initiated by the government as a "vigorous parcel... that traversed several years of malaise." The reforms that were undertaken recently in Egypt's trade and tax regimes were mentioned as one highlight of the government's performance. According to the IMF statement, banking sector reform and privatisation are also "moving ahead at a pace exceeding expectations". The ETR gave prominence to the cabinet reshuffle which took place in December 2005 under the premiership of Ahmed Nazif. It indicated that reform will continue, adding that this will necessitate the maintenance of confidence needed to prompt higher private investment and domestic demand. However, both reports cautioned that major challenges continue to stand in the way of positive economic performance. Not least of these is creating jobs and containing the budget deficit and public debt. "The pick up in economic growth has yet to translate into job creation," stressed ETR. Job-seekers who enter the labour market every year are assessed at around at 600,000 to 700,000. According to ETR, the backlog of individuals who failed to find jobs in previous years might actually have pushed up the effective rate of unemployment to as high as 20 per cent. "Under-employment and reliance on the informal economy are also major features of Egypt's economy," said the report. It added that the workforce in the informal sector has been estimated at 8.2 million individuals. GDP growth rates must subsequently rise to well above six per cent in order to absorb the resulting demand for jobs. The IMF mission report described the budget deficit and public debt as "still manageable (but)... relatively high, and cannot be sustained at current levels without compromising Egypt's economic potential." ETR indicated that the increased revenues from sources such as the Suez Canal, coupled with spending cutbacks are likely to narrow the deficit. But it also added that without additional measures, the budget deficit will remain at levels higher than those projected by the government for the fiscal year 2005/06. The report added that some international institutions are already estimating that the broad measure of the deficit will widen to 3.1 per cent of GDP in the fiscal year 2005/06. With the management of subsidies an important aspect of controlling the budget deficit, the report argued that "the true scope of subsidies will become more evident as the government continues to identify and disclose implicit subsidy costs in the budget." The 2005/06 budget projects LE35.4 billion for direct subsidies covering basic commodities and services, principally sugar, bread, and transportation. This is almost double the initial planned figure of LE15.6 billion for the fiscal year 2004/05. "The increase results from the inclusion of energy subsidies in the line items of the budget." said the ETR. The report added that "previously, energy subsidies were classified as expenses in the operating budgets of public sector energy companies." ETR also estimated that the subsidy bill will continue to rise well into the fiscal year 2006/07 as "the government proceeds with its stated intention of gradually incorporating all previously-undisclosed subsidies into the budget." On this point, the IMF statement said that the government agreed with the IMF team on the need for a comprehensive expenditure reduction programme. This would entail rationalising the size of government, increasing the productivity of expenditure, and improve the targeting of pro-poor spending. The IMF statement also drew attention to the fact that "the next phase of reforms would need to reduce the constraints on private sector activity arising from weaknesses in financial intermediation, absorption of a large share of national savings by the public sector, and bureaucratic barriers to business development." The ETR pointed out additional deficiencies such as the fact that access to credit by the private sector still constitutes a problem in Egypt's banking system. "A cautionary lending policy to the private sector is still prevalent in commercial banks," said the ETR, " [this is] in part due to the recent capital boost requirements and the safer investment channels found in government debt instruments, which have also been issued in greater volumes recently." With these tasks on hand, the Egyptian government, the IMF statement suggested, "will require building a strong political and social consensus." It also stressed that "the timing is appropriate," to make these reforms "given the unique combination of favourable economic conditions, the strong reform momentum, and growing investor confidence."
