Half way there: Egypt's economic reform program and the IMF loan

Niveen Wahish , Friday 11 May 2018

An IMF delegation was in Cairo this week to review Egypt’s economic reform programme, with inclusive growth and job creation high on the agenda

Egypt's Finance Minister Amr El-Garhy attends a news conference in Cairo, Egypt (Photo: Reuters)

It has been a year-and-a-half since Egypt signed its Extended Fund Facility (EFF) with the International Monetary Fund (IMF) under which it receives $12 billion over a three-year period.

This week a delegation from the IMF was in Cairo for the third review of the government’s commitment to reform before disbursing the fourth tranche of the funding.

So far Egypt has received $6 billion, and it is set to receive $2 billion more if the review is positive.

Egypt has passed previous reviews with flying colours. “Macroeconomic stability and market confidence have been restored, growth has resumed, inflation has fallen, and the public debt ratio is expected to fall for the first time in nearly a decade,” said IMF Deputy Managing Director David Lipton this week at a conference organised by the IMF and the Central Bank of Egypt (CBE) on “Inclusive Growth and Job Creation”.

In 2016, Lipton said, Egypt had been “at risk of instability”. However, his message now was that the government must encourage the private sector to invest more, export more and create more jobs.

Approximately 700,000 people come onto the job market annually, in addition to a backlog of unemployed, underemployed, and underpaid individuals. Egypt’s unemployment rate is currently 11 per cent, down from 13 per cent in 2016.

“By 2028, Egypt’s working age population will increase by 20 per cent. That works out at a labour force of 80 million just 10 years from now. Creating jobs for all those people has to be Egypt’s biggest economic challenge,” Lipton said.

He added that if Egypt can bring unemployment and labour-force participation to the level of many other emerging market countries, these people’s absorption into the economy could boost growth into the range of six to eight per cent.

Egypt’s growth is expected to come to 5.2 per cent in the current fiscal year. It is aiming at a 5.8 per cent of GDP in the 2018-19 budget.

Since the programme with the IMF began, the government has focused on fiscal consolidation, which has included spending cuts and tax increases. It has also liberalised the foreign-exchange market and tightened monetary policy.

According to Minister of Finance Amr Al-Garhi, the Finance Ministry is working on a plan to reduce the deficit from 107-108 per cent of GDP in 2016-17 to 80 per cent by 2020. The plan also includes achieving a primary surplus of two per cent of GDP.

Lipton stressed that many countries had in the past achieved stabilisation, but only a small number had gone on to create sustained growth. “Egypt now is at the point where it has a chance to do so. That will require broadening and deepening the reform agenda,” he said.

The government sees eye-to-eye with the IMF on this, according to Al-Garhi, who said that “improving living standards, creating more suitable job opportunities, and reducing the unemployment rate… are among the top priorities of the government.”

Egypt can also look to the experience of other countries, Lipton said. Mexico, he said, had increased jobs by drawing people out of informality and into the mainstream economy through labour reforms that allowed more flexible hiring arrangements.

This is something Mohamed Al-Bahi, a board member of the Federation of Egyptian Industries, would like to see in Egypt’s new labour law, which is still in the making.

According to Al-Bahi, the new law should allow for easier hiring and firing. “No business owner would want to fire an employee if they are useful,” he explained, adding that the current law prevented business owners from offering more job opportunities.

Al-Bahi praised the reforms made so far on the fiscal and monetary fronts. Together with the set of legislation that is being issued, they would make a huge difference to investors’ willingness to tap the Egyptian market, he said.

He pointed out that the new legislation governing investment, bankruptcy, and industrial licensing, together with the new labour law currently in the pipeline, would make a major difference to investors. However, he stressed that what matters on the ground is proper implementation.

Al-Bahi’s request was part of Lipton’s suggestion for greater regulator certainty and a business climate where the rules of the game are transparent and respected for small as well as large companies.

Eman Negm, a senior economist with Cairo-based investment bank Prime Holding, agreed with Al-Bahi on the role of the new laws in encouraging investment. She believes that what is needed now is an expansionary monetary policy to stimulate the economy.

Among the elements investors are waiting for is an interest rate cut by the CBE. Since the beginning of 2018, the CBE has cut overnight deposit and lending rates twice to reach 16.75 per cent and 17.75 per cent, respectively, by the end of March 2018.

The CBE’s Monetary Policy Committee meets on 17 May to decide again on interest rates. Negm said the CBE might keep rates unchanged in the next meeting because though inflation had been dropping, the rate of decrease has been slower.

However, she noted that this could be the last chance to cut rates before another inflationary wave hits the economy on the back of the anticipated fuel subsidy cuts as the 2018-19 budget is put in place.

Inflation reached a high of 33 per cent in July 2017. It began cooling over the past couple of months, falling to around 13 per cent in March, the lowest level since May 2016.

Negm noted that the government was aware that the only way to achieve its growth targets was through exports and investment in the light of the fact that consumption could be hit by inflation and government spending needed to be rationalised to cut the budget deficit.

She was not worried about government spending crowding out the private sector. “The government stepped in to support the economy at a time when the private sector was shying away,” she said. “Now the government wants to pull out,” she said, pointing to its intention to reduce its ownership in 23 state-owned companies.

Lipton had pointed out that one of the things needed to encourage the growth of a healthy private sector “is a less heavy footprint of the public sector in the economy… to relieve entrepreneurs from the un-winnable match of competing with the public sector.”

Another way to grow the role of the private sector, he suggested, was the reduction of non-tariff barriers and protections for domestic industries, so that Egyptian companies can become part of the global supply chain.

Time is of essence for the success of these suggestions. According to Lipton, the global environment is now promising, with global growth at 3.9 per cent this year and the next.

“That favourable external environment provides a good window of opportunity for Egypt to undertake reforms, a window that may not be open for too long,” he said.

*A version of this article appears in print in the 11 May 2018 edition of Al-Ahram Weekly with headline: Half way there 

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