Measure for Measure

After applying a second round of tough austerity measures as part of a homemade economic reform program backed by a $12 billion International Monetary Fund (IMF) loan, Egypt seems to be on the verge of securing a third installment of around $2 billion—the IMF appears to be satisfied with the progress made so far in the program.

“The program is off to a good start, with the government carrying out bold but necessary reforms while protecting the poor,” the IMF said in its staff report for the first re- view of Egypt’s economic reform program, which aims at restoring macroeconomic stability and paving the way for sustainable growth.

The fund predicted Egypt’s real GDP growth for fiscal year (FY) 2017/18 to record 4.5%, up from 3.5% in FY 2016/17.

In an online briefing held in tandem with the release of the staff report on September 26, IMF Mission Chief for Egypt, Middle East and Central Asia Department, Subir Lall, said, “The measures that have been taken by the authori- ties were bold, and we agree they were necessary to reverse the buildup of imbalances that were hindering higher growth and job creation.”


Takaful and Karama programs aim to provide social protection to the poor – File Photo

Egypt implemented a set of painful economic reforms, including free-floating the pound, introducing a value- added tax (VAT) and slashing energy subsidies to clinch the IMF’s Extended Fund Facility deal which was approved by the lender’s executive board in November. The fund has disbursed $4 billion; $2.75 billion in November and $1.25 billion in July after the first review.

“In terms of the third disbursement: that would follow after the second review of the program, which is expected to be completed by the IMF executive board by the end of December,” Lall added.

The fund highlighted some achievements in the reform program, notably the impact of the float.“With the float-ing of the Egyptian pound, the foreign exchange market normalized, and the parallel market for foreign currency disappeared,” it stated.

Praising measures adopted by the Central Bank of Egypt (CBE) to mitigate foreign currency shortages and restore exchange rate stability after sharp fluctuations, the fund said the regulator succeeded in “eliminating the parallel dollar market.”

The unification of the exchange rate and elimination of foreign currency shortages have attracted informal trade into formal channels, the IMF said, adding that this was reflected in strengthening the trade balance.

“The current account deficit in FY 2016/17 is expected to reach 5.8% of GDP, which is 0.6 percentage points of GDP more than in the program,” it said.To curb an increasing budget deficit, the government implemented the VAT, and a stamp duty on stock market transaction was imposed in May with the aim of increasing state revenues. Also, energy subsidies were cut as part of expenditure reform.


Citzens carrying the supply smart cards – File Photo

Thanks to efforts aimed to raise revenues and slash expenditures, overall budget deficit is projected to drop to 8.6% of GDP by the end of FY 2017/18, down from 10.5% a year earlier, and 12.5% in FY 2015/16, according to the IMF data.

The IMF stated that a significant progress has been made on structural reforms, appearing in energy subsidy reform, wage restraint and the new VAT, which have all contributed to “reducing the fiscal deficit and helped free up space for social spending to support the poor,” said David Lipton, first deputy managing director and acting chair of the IMF.

“Resources from the higher VAT and more efficient spending will slow the accumulation of public debt, which had been rising rapidly,” the fund stated.

Egypt is expected to see a leap in state revenues at the end of the IMF program as they are projected to skyrocket to LE 1.715 trillion ($972 billion) in fiscal year 2021/22, compared to a LE 752 billion in FY 2016/17. Estimates for the current fiscal year came at LE 979.4 billion,of which tax revenues are expected to bring in LE 607 billion.

Tax revenues, the biggest contributor in the revenue recovery, are predicted to nearly double to LE 1,183 tril- lion by FY 2021/22, up from LE 450 billion in the previous fiscal year, where property and income tax increased to approximately LE 262.8 billion from LE 257.1 billion in the previous forecasts.

The IMF staff also commended government efforts to increase employment and labor force participation for women and youth by allocating budget resources to in- crease access to and the quality of public nurseries to help women join the labor force.

Plans to improve the safety of public transportation are also in the pipeline, in addition to providing specialized training programs and job search schemes for youth.


Distributing Subsidized bread became more regulated through smart cards – File Photo

Parliament approval of measures aimed at improving the business climate such as less red tape in industrial licens- ing and easier access to financing for small and medium- sized enterprises was also welcomed by the IMF staff, asserting that “these measures should create more new jobs and help alleviate unemployment, which is particularly concentrated among women and young people.

”Economic and fiscal reform decisions taken by the Egyp- tian government have positively affected social protection as energy subsidies’ allocations to a better-targeted social safety net, the staff report read.

The government is targeting, this fiscal year, expand- ing its cash transfer programs and increasing semi-cash allowances for its food subsidies program, the IMF stated.
Egypt plans to increase the coverage of Takaful and Karama social programs from the current 1.5 million households to 1.7 million in FY 2017/18, the fund noted.

The IMF also praised actions taken to increase monthly al- lowances per ration card from LE 15 to LE 21 in 2016 and further to LE 50 in 2017 for around 69 million beneficiaries.

Among other positive indicators was the domestic debt which is predicted to register 68.6% of GDP in FY 2017/18, compared to 80.2% in estimations. In FY 2016/17, it slipped to 77.7% of GDP, down from to an initial view of 83.7%.

Immediate challenges

While the IMF staff affirmed that “the difficult steps have been taken,” and that the implemented fiscal and monetary reforms were vital, it stressed on the importance of further structural reforms, investment bank Pharos Holding said in a research note.
The IMF flagged high inflation and stronger fiscal pressures, including those from energy subsidies, as “two immediate challenges."

Inflation has spiked in Egypt — where half of the population is living near or below the poverty line — to the highest level in decades since November on the back of the pound’s flotation, VAT introduction and subsidy cuts.

Egypt’s annual inflation declined to 33.2% in August 2017 compared to the same period last year. Monthly inflation decreased 1.2% from 34.2% recorded in July 2017, ac- cording to monthly data from the Central Agency for Public Mobilization and Statistics.

“We expect inflation to continue on a disinflationary path given the appropriately strong and credible policy stance of the Central Bank of Egypt. This would lead inflation to decline to slightly above 10% by the end of the current fiscal year, so by June 2018, and then to single digits by 2019,” Lall said.

Consumer prices are seen to mark an average of 22.1% in FY 2017/18, up from a previous forecast of 13.3%, according to the IMF estimates. In the previous fiscal year, the prices recorded an average of 23.9% increase, up from 18.2% in their original expectations.

On the fuel subsidies, the report underlined the government’s ambitious plan to eliminate the subsidies by FY 2017/18, except for LPG, Pharos Holding’s economist Ramy Oraby said in the research note.

Moreover, the IMF staff revealed the government’s in- tention to apply an automatic price mechanism rather than ad-hoc adjustments to fuel product prices.

“We believe that the implementation of an automatic price mechanism, similar to the already applied mechanism in both the UAE and Qatar, is more sustainable as it minimizes the politicization of reform,” Oraby said, adding that the elimination of fuel subsidies under such a mechanism is expected to be gradual, which could suggest a longer than previously anticipated time-frame.

According to IMF data, curbing gross debt remains a challenge for the current fiscal year as it is predicted to reach 87.7% of GDP, which is down from 89.1% previous forecast of, while for FY 2016/17, the gross debt came at 98.4% of GDP, compared to 93.8% of GDP.

Beating the alarm, the external debt soared by more than double to 20.8% of GDP, compared to an initial fore- cast of 10.1% of GDP over FY 2016/17. The current fiscal year is not seeing any better in that regard because the IMF’s revised forecasts put the external debt at 19.1% of GDP, compared to 8.9% in their expectations.