Egypt has successfully completed its three-year loan arrangement under the International Monetary Fund (IMF)’s Extended Fund Facility and achieved its main objectives.
In November 2016, the executive board of the IMF approved a three-year arrangement under the Extended Fund Facility (EFF) as financial assistance for Egypt in the amount of $12 billion, which is the equivalent of 422 per cent of Egypt’s drawing quota.
The amount of the loan was phased over the duration of the programme according to five reviews. In July 2019, Egypt completed successfully the three-year review and achieved the programme’s main objectives. The completion of the fifth and final review of Egypt’s economic reform programme brought total disbursements to $12 billion.
Egypt’s economy has improved significantly since 2016, supported by the government’s commitment to implementing the reforms. It is essential to shed light on the reasons behind this impressive success, backed by international and domestic public opinion and the good governance of governmental institutions as well as coordinated and well-sequenced economic policies among Egypt’s ministries with the support of parliament.
Bold decisions in implementing the main objectives of the programme were taken, including floating the exchange rate, reducing the budget deficit, reforming energy subsidies, increasing the employment rate and boosting labour-force participation for women and youth. These were in addition to strengthening social-protection measures to shield the most vulnerable who have been affected by the short-term consequences of the economic reforms.
Over the past three years, Egypt has showed sound economic progress in each review conducted by the IMF, garnering the fruits of reforms in correcting external and fiscal imbalances, achieving the highest level of growth at 5.7 per cent since fiscal year 2007/2008, and decreasing the unemployment rate to 7.5 per cent, the lowest in 20 years. In addition, inflation rates have started dipping markedly to a record 6.7 per cent, and they remain anchored by the medium-term objective of bringing inflation down to single digits.
Furthermore, the Egyptian pound has regained its strength, boosted by an increasing trend in growing the foreign reserves. The confidence of investors and international institutions has been recovered in the light of the reform measures, which have contributed to the improvement of macroeconomic indicators and increases in the flow of domestic and foreign investments.
Meanwhile, the government and parliament have worked together effectively on issuing the legislation required for boosting the competitiveness of the economy and enhancing the investment climate through a new investment law, a law on industrial land allocation, and a law on small and medium-sized enterprises (SMEs) that will help create incentives for the informal economy and spur the channels of entrepreneurship in the near future. There have also been reforms of competition policy, tax administration, public procurement and on state-owned enterprises.
In the light of the above, it is important to highlight the main reasons behind the success of the economic reform programme, which has depended mainly on political stability, the support of public opinion and good governance.
HISTORY OF REFORM: Before November 2016, and in the midst of political instabilities and a weakened economic situation, the government played a prominent role in conducting negotiations with the IMF missions to Egypt.
The success of these negotiations stemmed mainly from the political stability that was maintained through the presidency of Abdel-Fattah Al-Sisi. Strong political will and commitment were shown towards implementing decisive economic reforms, as well as the transparency needed in sharing adequate information about economic indicators and structural deficiencies along with establishing well-planned reforms.
Several IMF missions conducted meetings with government officials to address the sources of the significant imbalances in the economy, building a clear picture of the real economic situation in terms of setting the priorities for reforms and assessing capabilities for their implementation within a specific timeframe.
After accomplishing consecutive successful negotiations, the IMF approved the loan to Egypt on 11 November 2016. At that time, the IMF loan was considered a certificate of trust, which indicated that the reforms would develop the country. This certificate of trust also increased Egypt’s credit rating and attracted foreign investors in the medium and longer terms.
From the political economy perspective, there were multiple challenges facing the government in implementing the planned reforms, but these challenges have been managed wisely through creating channels of economic awareness and engaging the public, in particular the youth, in decision-making. Various National Youth Conferences have been held with a view to establishing platforms for fruitful discussion and the sharing of views, not only on the domestic level but also on the regional and international levels.
The decision to remove the subsidies and impose new taxes were considered critical challenges. In the context of the political economy of energy subsidies and imposing taxes, as well as other fiscal consolidation measures, governments are often reluctant to take such decisions in order to avoid the danger of popular backlashes without providing radical solutions for social inequalities. Subsidies may also be used as political tools for attracting votes and popular support. But they are a short-term remedy for chronic deficiencies in the distribution of incomes between segments of society.
On the back of the transparency of the government in Egypt, it was critical to proceed in implementing radical reforms in order to strengthen the resilience and competitiveness of the economy. Egypt’s commitment to implementing the economic reform programme has proven in front of international and domestic public opinion the credibility and transparency of its government, supported by the good governance of institutions as well as political stability.
When compared with other countries in the region, it ha sbeen realised that the economic reform programme in Egypt has progressed more and has achieved more remarkable achievements in a short period of time. Political instability, the danger of backlashes and social unrest are often considered the main reasons behind hindering the progress of economic reforms in other countries in the region.
To counter such dangers, the government has worked on fostering three main axes in parallel: first, to preserve political stability through deepening democracy and countering terrorism; second, to promote the awareness of international and public opinion through creating channels of transparency in sharing information and discussion; and third, to consolidate the good governance of governmental institutions through strengthening structural reforms aligned with well-coordinated policies among ministries.
It is essential to emphasise that the implementation of economic policies alone is not enough to ensure their success. Hence, there is a critical need to supplement the implementation of such policies with structural and institutional reforms as well as with the engagement of public opinion in order to guarantee macroeconomic stabilisation and maximise the gains of the economic reforms in the long run.
The writer is a member of the Faculty of Economics and Political Science at Cairo University.
*A version of this article appears in print in the 10 October, 2019 edition of Al-Ahram Weekly.