Press Release No. 14/538

Press Release: IMF Staff Concludes 2014 Article IV Mission to Egypt

November 25, 2014

An International Monetary Fund (IMF) mission led by Mr. Chris Jarvis visited Cairo from November 11 to 25 to hold discussions for the 2014 Article IV consultation. Discussions focused on economic and financial developments, the outlook, and the authorities’ economic policies and reform plans.

At the conclusion of the mission, Mr. Jarvis issued the following statement:

“This is a moment of opportunity for Egypt. The economy has begun to recover after four years of slow activity. Equally important, there is growing national consensus on the need for economic reform.

“Egypt faces many challenges. During the prolonged political transition, growth fell and unemployment and poverty increased to high levels. Budget deficits grew and external pressures led to a fall in foreign exchange reserves.

“The authorities recognize these challenges and have set appropriate economic objectives, including raising growth and steadily reducing inflation. The government is seeking to reduce the budget deficit to 8–8½ percent of GDP and the budget sector debt to 80–85 percent of GDP by 2018/19, while at the same time increasing spending on health, education, and research & development as mandated by the constitution, as well as on infrastructure. Structural reforms planned by the authorities focus on improving the business climate, promoting investments and financial sector development, while addressing poverty and social gaps. The authorities are also seeking to improve Egypt’s external position, though additional external financing will still be needed through the medium term.

“The authorities have already begun to take the action needed to achieve their objectives. They have begun bold subsidy and tax reforms, are pursuing a disciplined monetary policy, expanding social policies, and have initiated wide-ranging regulatory and administrative reform efforts to improve the business environment and boost investment.

“Policies implemented so far, along with a return of confidence, are starting to produce a turnaround in economic activity and investment. We now project that growth will reach 3.8 percent in FY 2014/15.

“Against the background of regulated price adjustments, mainly the increase in energy prices in July 2014, headline inflation rose to 11.8 percent in October. Swift interest rate action by the Central Bank of Egypt (CBE) has helped contain the second-round impact of those increases, which were associated with subsidies reform, as reflected in core inflation which fell to 8.5 percent. This has helped anchor inflation expectations.

“While there has been a notable movement of the nominal exchange rate over the past two years, a more flexible exchange rate policy focused on achieving a market-clearing rate and avoiding real appreciation would improve the availability of foreign exchange, strengthen competitiveness, support exports and tourism, and attract foreign direct investment. This would foster growth and jobs and reduce financing needs.

“The banking system has been resilient in the face of economic stagnation in recent years. The CBE has appropriately reinforced the supervisory framework by strengthening regulations, further developing on-site and off-site supervision, and advancing implementation of Basel II and III. We welcome the CBE’s commitment to increase the timeliness and scope of disclosure of banking sector data.

“Key fiscal reform measures include containing expenditures and increasing revenues. For 2014/15, the mission estimates that the budget deficit will reach about 11 percent of GDP, as measures yielding about 2½ percent of GDP have already been approved. Policy measures on which work is already underway, including reducing untargeted energy subsidies, controlling the wage bill, the VAT and mining laws, and improving the efficiency of public financial management, will be important. In 2015/16, it will be important to keep expenditure in check, including through continued subsidies reform to reduce the budget deficit below 10 percent of GDP.

“The fiscal consolidation, as designed, is expected to minimize the drag on growth and protect the poor. More public spending on education, health, and research & development and stronger social protection policies should improve quality and availability of public services, support long-term growth, and help the poor and other vulnerable people achieve a better life. We welcome the launch of innovative cash transfer schemes and the recent reform of food ration cards, as well as the government’s commitment to take further steps to improve targeting and increase benefits.

“Energy sector reforms and sizable investments will be critical to reduce energy supply bottlenecks and raise potential growth. The megaprojects offer prospects for jobs and growth but should be carefully designed and monitored to limit potential fiscal risks, for example if they entail additional public investment or large contingent liabilities.

“Egypt is vulnerable to adverse global economic developments and regional security risks. For the reform effort to succeed it will need to be pursued steadfastly. The measures already taken by the authorities demonstrate their commitment to reform. However, building buffers, especially by raising international reserves and preparing contingency plans for the budget in case risks materialize, would be useful to address unforeseen shocks.

“During its visit, the team met with government and central bank officials, members of the banking sector, and the diplomatic community. The team would like to thank the authorities for the high quality and openness of the discussions and for their hospitality.”