Egypt’s reform plans is starting to pay off for the $300bn economy and is helping restore investors’ confidence after years of turmoil, Subir Lall IMF chief mission told an online conference on Tuesday.
The country is expected to receive a third instalment of around $2bn of its $12bn IMF credit programme after a second review at the end of this year.
According to Lall, Egypt has made a “good start” to its IMF-backed reform programme despite seeking waivers for missing some targets in June and a deeper-than-expected currency depreciation, but inflation remains the main risk for stability.
Egypt clinched a deal with the IMF for a three-year, $12bn loan programme in November last year, which is tied to ambitious economic reforms, such as spending cuts and tax hikes to help revive an economy where subsidies accounted for a quarter of state spending.
The IMF has already approved $4bn in loan instalments, most recently releasing $1.25bn.
The country’s inflation is expected to fall to “slightly above” 10% by the end of fiscal year 2017/18 and to single digits by 2019, Lall said in the online briefing.
Inflation reached three-decade highs in July after fuel price hikes under the IMF deal. It has since dipped, though high costs have hit many Egyptians hard in the import-dependent state. Since the Egyptian pound flotation last year, the currency has roughly halved in value.
“Egypt’s reform programme is off to a good start. The transition to a flexible exchange rate went smoothly. The parallel market has virtually disappeared, and central bank reserves have increased significantly,” the IMF said in a separate review of the programme released on Tuesday.
“Market confidence is returning, and capital flows are increasing. These augur well for future growth. The authorities’ immediate priority is to reduce inflation, which poses a risk to macroeconomic stability,” the review said.
It said it had agreed to a request for a waiver after Egypt missed primary fiscal balance and fuel subsidy bill requirements for the end of June. The waiver was granted in part because of strong proposed fiscal adjustments in the next two years.
“If entrenched, high and persistent inflation could pose a threat to macroeconomic stability. It may also impede credibility of the new monetary policy framework,” it said.
The IMF said the country’s current account deficit was seen narrowing to 4.6% of GDP in the fiscal year of 2017/18 and to 3.8% in 2018/19. It said its primary fiscal deficit was seen at 1.8% of GDP, exceeding the programme target of 1%.