CAIRO: While Egypt’s performance in 2006/07 was impressive – with high growth levels – there continues to be an underlying need to tackle constraints on business development, says the International Monetary Fund (IMF).
According to the IMF, the Egyptian economy continues to grow rapidly and unemployment rates are declining. Gross Domestic Product (GDP) growth in 2006/07 soared to 7.1 percent thanks to economic reforms and “solid macroeconomic management. Moreover, growth in labor-intensive sectors – such as agriculture and manufacturing – has accelerated, adding some 2.4 million jobs and reducing unemployment from 10.5 percent to 9 percent.
To sustain the momentum, however, is a challenge. In order to maintain the level of job creation investment needs to rise to around 26 percent of GDP, the report continued. Accordingly, constraints on business development, such as inadequate infrastructure, limited access to bank credit by small and medium-sized enterprises (SMEs), red tape, poor public service delivery, and the lack of skilled labor, need to be tackled by reform.
IMF s annual mission preparing for Article IV consultations visited Cairo this month, and prepared the report assessing Egypt’s performance for 2006/07. Article IV consultations are regularly carried out in member countries of the IMF. Each member agrees to regular reviews of economic conditions as a means of independently assessing economic policies.
In the report, the IMF commended Egypt on its privatization agenda, which helped promote a dynamic private sector driven economy. “The privatization of several public enterprises, including public banks and joint ventures, and unused land has helped strengthen the role of the private sector, said the IMF. “The reduction of average import tariffs from nine to seven percent will benefit consumers and foster exports, and the overhaul of tax administration procedures and practices has started to make tax administration more efficient and taxpayer friendly.
The IMF called on the government to give more attention to the microeconomic side of reform and speed up the trickle-down effect so that citizens can feel the impact of macroeconomic reform.
Doha Abdel-Hamid, visiting professor of public policy evaluations at Carleton University, Canada, pointed out that Egypt’s reform was coupled with “reform fatigue, resulting from the fact that “parts of the public are disappointed with the pace at which reform benefits accrue to all strata of society.
“The general public may not understand economic jargon found in reports, but they want jobs, reduced inflation, not having to pay bribes and being treated with dignity at government offices, she said in a statement to the press commenting on the report.
There are, she added, conflicting goals that the government is trying to achieve. “These require astute handling, such as the need to reduce inflation while increasing growth; reducing the budget deficit while expanding the government employee wage bill, to reduce corruption and increase governance.
On a thorny note, the IMF recommended that the government further reduce energy subsidies, as Egypt’s current “under-pricing of fuel burdened the budget and encouraged high levels of energy consumption and used up public funds that could be directed towards infrastructure or education.
“Fuel subsidies recorded in the budget amount to five to six percent of GDP; however, valuation of domestic oil and gas production at world market prices would put the implicit subsidies substantially higher still.
With continued gradual subsidy reduction, the IMF said, inflation may persist in the six to eight percent range for the next few years provided broad money growth is contained at around 15 percent.
The government aims to contain budget deficit at seven percent of GDP in 2007/08, and then reduce it gradually to three percent of GDP by 2010/11. That, in its turn the IMF stressed, would put public debt on a firmly declining path, raise national savings, and support monetary policy in containing inflation.
To adequately achieve the short and medium-term fiscal targets, the government needs to continue reduction of expenditure in the wage bill, reform of sales and property taxes, as well as improvements in the efficiency of cash management and public spending.
The IMF also supports plans to move forward with financial sector privatization. “Over the last two years, privatization has put about half of the banking sector into private hands, [enabling] the government to restructure public banks and pay off nonperforming loans (NPLs) owed by state enterprises, while also fostering resolution of private sector NPLs.
It encouraged officials to continue improving bank and non-bank (insurance) supervision and move forward with the banking recapitalization program. “Complementary regulatory and judicial reforms – such as setting up specialized economic courts, promoting out-of-court arbitrage and enhancing the role of the private sector-led credit bureau – will also help improve contract enforcement and creditor protection, thereby addressing key obstacles to bank lending to SMEs.
