Pharos Holding For Financial Investments issued a report commenting on the International Monetary Fund's (IMF) fourth review of Egypt's economic reform programme, stating that the programme is broadly on right track. All of the June and December 2018 performance criteria and indicative targets were fully met, with the exception of June's target on public debt. "Egypt's macroeconomic situation has markedly improved, and has maintained macroeconomic stability thanks to the government's sound policy implementation,” according to Pharos. Pharos added that the external environment has shifted, and the tightening of global financial conditions is posing risks. "Outlook remains favourable, as well as Egypt's capacity to repay and to withstand shocks; provided further agreed policies are implemented as agreed," Pharos stated. Furthermore, Pharos looked at many files including the fuel subsidy reform and declared that it is advancing and should reach cost recovery by mid-June 2019. "The IMF recommends keeping the automatic fuel price indexation mechanism as it is critical to preserving cost-recovery levels once they are achieved. At current oil prices, fuel and gasoline are priced at 85-90% of cost-recovery," Pharos indicated. Pharos stated that the price indexation of other fuel products will be introduced in June 2019, and the first price adjustment by the committee will be held by the end of September 2019. The reform of electricity subsidies will continue as planned until full elimination by fiscal year (FY) 2020/21. "The continued strengthening of tourism and construction as well as the increasing production of natural gas are projected to raise the GDP to 5.5% in FY 2018/19,” Pharos continued. Moreover, the unemployment rate fell to single digits, reaching its lowest level since 2011. The current account deficit fell to 2.4% of the GDP (from 5.6% in FY 2017/18) supported by rising tourism revenues and strong remittances, and is expected to be at 2% in the medium-term. The budget surplus of 0.2% of the GDP, along with a strong growth in nominal GDP reduced government gross debt from 103% of the GDP to 93% in one year, and is expected at 74% by FY 2022/23. Inflation is expected to stabilise at 13-14% by end of FY 2018/19, before reaching single digits in 2020. Moreover, Pharos assured that Egypt has taken structural and institutional steps in enhancing the business climate, which is reflected in advancing eight positions in the World Bank's 2018 Ease of Doing Business ranking and 15 positions on World Economic Forum's 2018 Global Competitiveness Index. The reforms include access to industrial land with the new land allocation system. In terms of the monetary policy, the IMF supports the Central Bank of Egypt's (CBE) intention to maintain a restrictive monetary policy stance until the disinflation trend is firmly re-established. The CBE intends to gradually move to an interest-rate based monetary policy framework anchored to inflation in the medium term. The IMF's technical assistance helped draft the Banking Law which is currently sent to the cabinet and will clarify that the CBE's primary objective is price stability, limiting the CBE's lending to banks for short-term liquidity support, clarifying its role in crisis management, and granting it more operational and institutional autonomy. "General government debt remains high (projected at 86% of the GDP by the end of FY 2018/19), and its interest cost poses a burden on public finances at the risk of crowding out social spending. The IMF recommends maintaining a primary surplus of 2% of the GDP, which the 2018/19 budget is positively positioned to reach," according to Pharos. Finally, the IMF expects that Egypt has a strong potential to be an important natural gas producer and supplier to the region in the near future. The fifth IMF review on Egypt is scheduled for completion on or after 20 June 2019, paving the way for the disbursement of the sixth and final $2bn tranche of the $12 bn loan. The team conducting the review will visit in May 2019.
