Rising prices and unemployment are what regional economies, including Egypt, need to worry most about, International Monetary Fund (IMF) experts say, Niveen Wahish reports "New developments in the region and the global economy will pressure the fiscal accounts," is how Ratna Sahay, deputy director of IMF's Middle East and Central Asia Department, summarised one of the main challenges facing oil importing regional economies, including Egypt. These developments include the fact that oil and food prices have gone up dramatically. Sahay showed that the IMF Food Price Index rose by 30 per cent in the last two quarters of last year. Grain alone went up by 60 per cent on the Index, while oil prices have already surpassed IMF forecasts of $78 per barrel and are trading around $90 per barrel. According to Sahay, these rising prices, coupled with regional social tensions in Tunisia and across the Arab world, will mean that spending on subsidies and social welfare will expand. The problem is augmented by the fact that price shocks eventually feed into inflation. "Average inflation will go by one to two per cent in the region," she said pointing out that food prices alone rose by 16 per cent at the end of last year. Sahay was addressing a seminar organised by the Egyptian Centre for Economic Studies. She was in Egypt as part of the IMF mission for the annual consultations prior to issuing the Article IV report. The rising prices represent a "dilemma" for monetary policy, as Sahay put it. "If there are supply shocks and inflation goes up, the monetary policy should accommodate those shocks and should not be tightened." Then again, she said that "if monetary policy is not tightened inflation will be part of expectations and will seep through to all prices. Tightening monetary policy takes place by raising short-term interest rates which increases the cost of borrowing." To tackle this dilemma, Alan MacArthur, IMF mission chief for Egypt, also speaking during the seminar, stressed the benefit of providing a clear anchor of inflation to help guide inflation expectations. "Inflation above 10 per cent has been shown to have an effect on growth," he said, "because it creates uncertainty for investors, it makes it more expensive to export and cheaper to import, and it has an impact on the poor because it means higher food prices affecting the poor where it hurts most." Likewise, reducing the deficit is a key signal for investors. MacArthur suggested the government can help reduce deficit by working on increasing its tax revenues. Compared to other countries, Egypt tax revenues are low and there is scope for increasing revenue generation, he said. That can be achieved, he added, as the government implements its plans to convert the sales tax to a value added tax. Additionally, the government can narrow the budget deficit by reducing expenditures and tackling spending inefficiencies. Fuel subsidies take up a quarter of all spending, representing six per cent of GDP. Reducing fuel subsidies, MacArthur said, will provide space for additional targeted support for the poor. But reducing subsidies may be difficult in light of the escalating prices. In fact, additional subsidies may be needed. Sahay accepted such additional spending "as long as it is a temporary measure" to ease stress felt by most vulnerable until reforms bear results. "In the meantime, [policy-makers] should work towards a more permanent solution." Another major challenge, according to Sahay, is that of job creation. She said that in 2008, 2.3 million jobs were needed. And new entrants into the job market between 2008 and 2020 will need an additional 7.1 million new jobs. "Seven per cent growth is needed to provide for the existing unemployment, but 10 per cent is needed to meet new unemployment needs," she pointed out. Currently IMF growth prospects are 5.8 per cent for the current year and six per cent next year. With this in mind, she said that Egypt should focus on growth that is labour intensive in sectors such as services, construction and small and medium enterprises. Egypt can do it provided it takes the right measures addressing the skills mismatch through education and training. It also needs to deal with the labour market rigidities. She said that, for example, it is more costly for a firm to let go of an employee in Egypt than elsewhere since firms have to pay 132 weeks of salary compared to 53 weeks in other oil importing countries.
