What were the key objectives of the program for Egypt?
Prior to the reform program, Egypt implemented inconsistent macroeconomic policies which, by 2016, had led to a build-up of significant imbalances. Large budget deficits, loose monetary policy, and a fixed exchange rate had resulted in a drastic reduction in foreign exchange reserves, high inflation, and unsustainably high levels of public debt. Growth had fallen and unemployment increased, especially among women and youth.
The program’s immediate priority was to address these issues, restore macroeconomic stability, and avoid a crisis. For example, moving to a flexible exchange rate restored equilibrium in the foreign exchange market, and eliminated the shortage of foreign exchange. In addition, the government launched an ambitious three-year plan to rein in the budget deficit which, at over 10 percent of GDP, was among the highest in the region. They also tightened monetary policy by raising interest rates. These were critical measures to reduce public debt as a share of GDP and limit inflation.
Another important component of the authorities’ program was to address extensive fuel subsidies, which were a significant drain on the budget. These subsidies made fuel in Egypt one of the cheapest in the world, encouraging excessive consumption and benefiting the well-off far more than the poor because those with means consumed more. Phasing out fuel subsidies created more room in the budget for better-targeted social spending, as well as more investment in health, education, and public infrastructure.
Tell us about the social spending elements of the program.
Moving to a modern social spending system required scaling up the cash transfer programs to those most in need. Takaful and Karama (Solidarity and Dignity), for example, expanded from about 200,000 households to 2.3 million households, or 10 million people who were carefully identified as those who needed social assistance. These programs were the most effective way to ensure that the poor did not bear the costs of these economic adjustments. Social policy centered around Takaful and Karama were critical to ensuring public support for the broader reforms Egypt needed to undertake to stabilize the economy and to lay the foundation for higher and more inclusive growth.
What were the main achievements of the program?
The program achieved its key objective of macroeconomic stability, which is a precondition to attract investment, raise growth, and create jobs. Current account deficits have fallen and foreign exchange reserves are at all-time high levels. Growth has recovered from around 4 percent to 5.5 percent now, and is expected to reach 6 percent by next year, while unemployment has fallen below 9 percent to its lowest level in over a decade. Public debt has begun to decline and inflation has fallen steadily—on track to reach single-digits by next year. This sets the stage for broader reforms, such as improving the business climate, which can lead to higher private sector-led investment and job creation.
Another achievement is tied to the fundamental drivers of growth and prosperity. For example, the fuel subsidy reform gets the prices right, because when prices start reflecting costs, the economy improves by allocating resources more efficiently. Getting relative prices to reflect costs steers more private investment into sectors that create more jobs, rather than capital-intensive sectors that produce relatively fewer jobs but take advantage of fuel subsidies. Other changes, including increasing competitiveness, reforming public procurement, and increasing transparency of state-owned enterprises will help improve the effectiveness and efficiency of government. These efforts will also modernize the economy so that Egypt can become a bigger player in the global trading system—with the opportunity to take advantage of global and not just domestic growth.
With the IMF program coming to an end, how should Egypt move forward?
We see two priorities moving forward. First, to cement the hard-won gains in stabilizing the economy. And second, to accelerate reforms to unleash the economy’s potential, making the private sector the engine of growth.
In practice, this means ensuring that the current cushion of foreign exchange reserves is preserved by maintaining a flexible exchange rate. Inflation should remain on the decline, along with public debt, which would create more room for investment in health, education and public infrastructure. The broader goal of these reforms is to ensure that the economy becomes increasingly market-oriented, where the role of the state becomes more of a facilitator rather than as a driver of growth. Indeed, Egypt needs at least 700,000 new jobs annually to absorb its young and growing population, and that can only come from the private sector.