The executive board of the International Monetary Fund (IMF) approved the first audit conducted by the IMF’s mission to the Egyptian economy and recommended the release of the second instalment of the Egyptian loan.
However, the results of the preliminary review that was published by the IMF through its website revealed a decline in its estimates of most of the indicators of the Egyptian economy. The IMF has lowered its expectations for growth and raised its estimates of inflation and foreign debt, which raises concern about the steps of economic reform approved by it.
Egypt is making progress, but macroeconomic stability remains fragile: senior deputy director general of the IMF
Egypt agreed with the IMF last November on an economic reform programme, under which it obtained a loan of $12bn in three years. Egypt disbursed the first instalment of $2.75bn, in addition to the second instalment of $1.25bn.
The programme proposed by Egypt included reforms in monetary and fiscal policies, which aimed at controlling the budget deficit, raising subsidies on energy, and liberalising the exchange rate.
Meanwhile, IMF’s managing director Christine Lagarde issued a statement on Friday night, where she congratulated the people and the government on their successful implementation of the ambitious national economic reform programme.
However, David Lepton, the senior deputy director-general of the IMF, said Egypt’s macroeconomic stability is still fragile, adding that implementing the reform agenda was difficult, but the authorities are determined to contain the risks.
The IMF revised its forecasts for Egyptian economic indicators after a first review by the IMF mission headed by Chris Jarvis in Cairo last May, compared to the expectations contained in the agreement signed between Egypt and IMF in November.
The IMF expects the growth rate in the next fiscal year to fall to 4.5% after the review—compared to 4.8% at the time of the preparation of the programme document last November, while the government expects a growth rate of 4.6%, according to the financial statement for the budget 2017-2018.
The IMF reduced its forecast for total government debt to 87.7% of the GDP compared to 89.1% in the previous estimates at the time of preparation of the programme, but raised its external debt forecast to 28.7% against 26.9% in the next fiscal year.
According to research by the Egyptian Initiative for Personal Rights (EIPR), the increase in expectations for the government’s external debt to weakness is due to expectations of maintaining and strengthening reserves and repaying short-term debt due this year after the Central Bank of Egypt (CBE) has adopted short- and medium-term borrowing in recent years.
According to CBE data, foreign exchange reserves jumped by $12.3 bn during the first eight months after the floating of the pound (between November 2016 and June 2017) by 64.4% to reach $31.3bn, approaching levels recorded before the 25 January Revolution of $36bn.
The IMF raised its forecast for the current fiscal year’s fiscal support ratio to 3.1% of GDP compared to 1.4% in previous estimates.
The EIPR sees that the increase in the percentage of energy support is due to differences in the IMF’s expectations of the exchange rate of the pound against the dollar in the preparation of the reform programme from what is currently reached, which fell to a level more than expected, and with the revision increased their expectations to support energy. Egypt relies on imports to provide a large part of its fuel needs either for direct consumption or through pumping it into power plants.
Nevertheless, the head of the IMF mission in Cairo Chris Jarvis, admitted at a press conference last January to announce the details of the agreement with Egypt that the exchange rate in Egypt was more than the IMF had expected.
These expectations come despite the government’s increase in the prices of petroleum and electricity to all segments of consumption during the past few weeks.
The IMF raised its inflation estimate to 22.1% in the fiscal year 2017-2018, down from a previous estimate of 13.3% for the same period.
The CBE aims to reduce the annual inflation rate to about 13% in the last quarter (Q4) of 2018.
The indicators that witnessed a positive change included a significant decline in the funding gap during the current fiscal year and the increase in the value of the GDP in Egyptian pounds.
The pros and cons of the first review of the IMF
After the IMF’s executive board discussed the status of the Egyptian economy, David Lipton made some positive and negative statements.
The positive statements include:
1) The reform programme of Egypt has made a good start. The transition to the flexible exchange rate has been moved without obstacles. The phenomenon of the parallel market has almost completely ceased and the problem of non-availability of foreign currency, the CBE reserves recorded a significant increase.
2) Reform of energy subsidies, wage control, and the introduction of new value added tax have contributed to reducing the fiscal deficit.
3) There has been significant progress in the process of structural reforms. A law on the licensing of industrial enterprises and a new Investment Law have been passed, and the House of Representatives is currently considering the new Bankruptcy Law, all of which are necessary to boost the business climate, attract investment, and encourage growth.
The negative remarks include:
1) Reducing inflation is an immediate priority for the authorities, posing a threat to macroeconomic stability and harming the poor. The CBE’s annual core inflation rate was 31.95% in June.
2) Macroeconomic stability remains fragile, and the reform agenda is not without difficulty.
The IMF surprised everyone at the end of the statement when it revised a whole range of macroeconomic indicators to the worst as follows.
These figures indicate that the IMF did not understand the nature of the Egyptian economy at the beginning of the programme, which raises doubts about the feasibility of its solutions to the Egyptian government and its desired results, which the IMF has often insisted on.
Head of the IMF mission answers the question: “when will inflation decline in Egypt?”
Chris Jarvis, the mission chief for Egypt and an adviser at the IMF’s Middle East and Central Asia department, said that the low exchange rate of the pound is the main reason for the high inflation rate in Egypt, stressing that the economic reform programme aims at reducing it.
“The Egyptian government’s current task is to make sure that the local currency’s low price does not lead to the increase of inflation permanently,” said Jarvis in a clip posted on IMF’s Twitter page.
Egypt has experienced a surge in price after the flotation of the pound in November 2016—and the inflation rate exceeded 30%, the highest increase in about three decades.
However, the monthly inflation rate has declined in recent months, and the annual growth rate remained stable in June at 30.9%, the same level reached in May.
On the other hand, investment banks expect that the inflation rate will increase again during the summer months, due to the rise of fuel and electricity prices, and the application of the value-added tax (VAT).
Jarvis said that the CBE is fully aware of the inflation’s risks and it takes the appropriate measures to ensure inflation falls again.
He added that the inflation rate is expected to experience a significant change in 2017, and will further decline in the summer.
Jarvis pointed out that the Egyptian economy’s conditions have become much better compared to the last year.
He noted that Egypt does not suffer a shortage of hard currency anymore, exports started to increase and the public budget improved. “The conditions of citizens will improve, and the government will be able to provide necessary services.”
Increase of fuel prices will have a positive impact on the budget: IMF
Jarvis said that IMF strongly supports the Egyptian government’s economic reform programme, pointing out that recent economic measures including rise of fuel and electricity prices, and apply of VAT will have a positive impact on the budget.
The Middle East News Agency (MENA) quoted Jarvis saying that rising fuel and electricity prices came as a part of Egypt’s strategy to reduce energy subsidies, which allows the government to allocate more funds for education and social protection programmes. He noted that one of the main problems of subsidies system in Egypt that they do not reach those who deserve them most.
Head of IMF said in a statement on Thursday that “the executive board of the IMF’s approval of the first review of Egypt’s economic reform programme reflects the fund’s strong support to Egypt’s efforts, which the IMF believe will have the desired results.
Lagarde added that the Egyptian government and the CBE have taken the accurate measures to curb inflation, reduce the budget deficit, and put the economy on the right path.
Jarvis mentioned that the Egyptian government has taken important steps in the social solidarity field, especially the Takaful and Karama (Solidarity and Dignity) programme, and increasing basic commodities subsidies which benefit the low-income classes.
In recent weeks, the government has raised the prices of petroleum and electricity products on all consumption segments starting from July, as well as increasing the VAT to 14% rather 13% starting from this month.
The government announced on Sunday a huge package of extraordinary measures to compensate citizens for the effects of the inflationary wave resulting from the economic reforms. These measures include exceptional allowances for state employees in addition to the usual annual allowance, and increase of pensions of 15% with a minimum of EGP 150, as well as the cutting of income taxes.
The CBE’s Monetary Policy Committee (MPC) has decided to raise the interest rate by 2%, in a move many analysts did not expect. The bank said that this increase is temporary and aims to control inflation and maintain the purchasing power of the pound.
Commenting on the interest rate hike, Jarvis said that raising interest rates could play an important role in reducing inflation. However, he predicted that this move can affect short-term investment, but it can achieve stability on the long term that could contribute to reducing the inflation and have a positive impact on investment.
