Egyptian economy on track

The Executive Board of the International Monetary Foundation (IMF) has applauded steps taken by the Egyptian government to tackle impediments to higher growth and employment creation, and boost modernisation and private sector activity.

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By  Andrew White Published  July 16, 2006

The Executive Board of the International Monetary Foundation (IMF) has applauded steps taken by the Egyptian government to tackle impediments to higher growth and employment creation, and boost modernisation and private sector activity. Directors noted in particular the impressive decline in inflation, while the economic recovery further accelerated and had become more broad-based. This was supported by strong achievements in privatization and financial sector reform, which had greatly increased market confidence, according to the IMF assessment. The IMF also commended the authorities’ strong efforts to put in place structural reforms in the fiscal area that have improved the transparency and efficiency of budget preparation and control. However, directors also noted that “important challenges remain to enable Egypt to raise economic growth on a sustained basis and lower unemployment,” and pointed in particular to the “high government borrowing and debt levels, and the shallow financial intermediation and bureaucratic barriers to private sector activity.” The report summarized the findings of the IMF’s latest consultation with Egypt, a member country for over 60 years. The IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the managing director, as chairman of the board, summarizes the views of executive directors, and this summary is transmitted to the member country’s authorities. The IMF report expressed concern about Egypt's large fiscal deficit and therefore welcomed the authorities’ medium-term plan to reduce it by at least 1% of GDP per year. However, the IMF is keen to see “a more ambitious pace of adjustment to reverse more decisively the debt dynamics, secure macroeconomic stability over time, and increase investor confidence and the economy’s resilience to exogenous shocks.” Directors urged the authorities to swiftly implement measures to ensure the envisaged fiscal adjustment, noting in particular the urgent need to reduce fuel subsidies and target them better. The IMF also cautioned that any additional interest rate reductions should wait until liquidity growth decelerates further and low inflation becomes firmly entrenched, and noted that financing of the government should be strictly limited. They recommended accelerating the reforms needed to support central bank operational autonomy and strengthen policy formulation, with a view to moving to a formal inflation-targeting framework over the medium term. However, they cautioned that this would also require greater exchange rate flexibility. Directors also favoured allowing market forces to play a larger role in determining the exchange rate, which would in addition foster the development of risk management instruments. The report welcomed achievements in the area of financial sector reform, including the sale of many joint venture banks and the pending sale of Bank of Alexandria. The directors also encouraged the authorities “to develop a clear medium term plan for the privatization of the remaining major state banks.” Directors agreed with the authorities that a Financial Sector Assessment Program update in 2007 would be a useful tool to assess progress in the financial restructuring program and identify possible areas of weakness, and they were encouraged by the government’s stated intention to reduce barriers to private sector activity through a further liberalization of the trade regime, a reduction of red tape, and the improvement of the legal framework for business activities. In addition, they welcomed the resolution of a large amount of private sector non-performing loans and noted the improvements in capital market regulation and efforts to bring supervision in banking and insurance into compliance with international best practices. The IMF welcomed the establishment of the inter-ministerial committee to address weaknesses in statistics, notably the CPI and FDI data, and finally, they urged the authorities “to attach high priority to strengthening the legal and institutional framework for the production of economic statistics and to increase inter-agency cooperation.”

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