A one-on-one with Alex Segura-Ubiergo, IMF Egypt senior resident representative, on how the IMF perceives the country’s economic future.
Replies were edited for length and clarity
How does the IMF view the impact of global economic conditions on Egypt’s economy?
Global conditions continue to present important challenges for Egypt, especially through the negative impact of the reduction of maritime traffic through the Red Sea, which is reducing Suez Canal receipts. In addition, the risks of escalation in the regional conflict can also weigh on investor sentiment.
These risks are, however, mitigated by a possible improvement in sentiment toward emerging markets if policy rates in advanced economies come down from recent peaks as inflationary pressures abate. This could support capital inflows and improve the overall sentiment toward Egypt.
What are the key challenges facing Egypt in achieving sustainable growth?
There are two key challenges: preserving macroeconomic stability and making decisive progress on structural reforms. Over the last six months, there has been positive progress in consolidating public finances, reducing inflation, and reintroducing a well-functioning foreign exchange rate system. The key is now to stay the course of these important reforms to consolidate the gains recently achieved on the macro front.
On the structural front, the key priority would be to accelerate progress on the structural reform agenda, especially through reforms to attract private investment to generate higher domestic employment and growth. Special focus is needed to level the playing field for the private sector and streamline administrative procedures to improve the business environment.
In this regard, the privatization program can play an important role to generate public resources for the Treasury and to attract investment into specific sectors that could become more dynamic and efficient, boosting private sector participation in the economy through new private sector ideas and innovation.
What is the IMF’s assessment of the effectiveness of Egypt’s current monetary and fiscal policies?
The IMF welcomes the authorities’ recent efforts to strengthen monetary and fiscal policy. The CBE has taken decisive steps to combat inflation, through the increase in [interest] policy rates, the unification of the exchange rate, and the introduction of controls to limit and reduce over time Central Bank lending to the government, including public agencies.
The Ministry of Finance has also taken important steps to meet fiscal targets and ensure that debt sustainability is preserved. In addition, the authorities’ efforts to contain spending on large infrastructure projects from autonomous agencies are also helping to restore macroeconomic stability.
Going forward, the Central Bank is committed to improving its operations through the adoption of a full-fledged inflation-targeting regime. Concerning fiscal policy, we see four priorities: (i) pursuing reforms to mobilize more tax revenues, especially through reforms that limit the use of exemptions; (ii) efforts to improve domestic debt management to contain the weight of the interest bill on the budget; (iii) reductions in subsidies to contain fiscal risks associated with public sector energy companies; and (iv) steps to expand the social safety net, both in terms of the percentage of vulnerable families covered and the size of the benefit received.
You have mentioned the need to create a “level playing field” that avoids “unfair competition.” What role, if any, should the state have in the economy?
The state is ultimately a regulator in a free-market economy that works to create an environment that is conducive to growth and development. Hence, a sound legal and regulatory framework to promote fair competition and good governance practices should be a key priority. The state can also emphasize social protection to help vulnerable groups. The provision of public goods and services is another core function of the state that includes security and defense services, as well as public infrastructure.
The [government’s] State Ownership Policy (SOP) published in December 2022 adopts OECD guidelines on corporate governance of state-owned enterprises and acknowledges the importance of separating the role of the state as the owner of several assets and companies and its role as a regulator of economic activity.
These guidelines will help ensure a level playing field between state-owned and private companies and promote greater efficiency, transparency, and accountability in the operation of state-owned companies.
How does the IMF support Egypt in addressing social issues such as unemployment and poverty?
Macroeconomic stabilization is a prerequisite to addressing social issues. Adopting prudent fiscal and monetary policies will contribute in the first instance to achieving this objective. On the monetary policy side, bringing down inflation is critical to contain the erosion of the purchasing power of poor and middle-class families. Moreover, preserving a well-functioning flexible exchange rate regime is a necessary condition for restoring private sector confidence.
On the fiscal side, creating the fiscal space needed to support the most vulnerable groups is a key component of the program. Reallocation of untargeted subsidies, such as fuel subsidies, to more targeted social programs like Takaful & Karama is one of the measures prioritized in the authorities’ economic reform program.
The Central Bank targets lower inflation, but structural reforms mean removing subsidies on almost all basic services. How can Egypt balance these competing goals?
International experience suggests that generalized subsidies tend to be costly, inefficient, and inequitable. The reduction of these subsidies (especially energy subsidies) can help generate fiscal space that can then be used to provide other forms of targeted assistance to some segments of the population that are most in need of support. While the gradual reduction of some of these subsidies can generate some inflationary pressures in the short term, the Central Bank has the tools and instruments necessary to contain inflation from all sources, including the possible short-term impact of the reduction of subsidies. In our view, the gradual approach taken by the authorities and the commitment to provide compensatory measures can help manage these concerns.
The IMF review notes that “a data-driven approach by the Central Bank is needed to lower inflation and inflation expectations.” What is the CBE’s current approach to tackling inflation, and how do you suggest it should improve the process?
The CBE is adopting a data-driven approach in addressing inflation and we support the continuation of this approach. The CBE has also been working on increasing its reliance on inflation models to inform the decisions of the Monetary Policy Committee.
This is a positive step to modernize CBE operations and will help the Central Bank achieve its primary objective of maintaining price stability.
What lessons can Egypt learn from other countries that have successfully implemented similar economic reforms?
When we discuss lessons, each country has different experiences. We are hopeful that in the future Egypt will be able to showcase its lessons as a country that has decided to be successful in the implementation of structural reforms. One key lesson is to be consistent in the reform approach.
It is not enough to take a few steps in the direction of macroeconomic stability, the key is to consolidate recent gains and avoid policy reversals. Another lesson from international experience is to transition quickly from the emphasis on short-term macroeconomic policies (i.e. stable public finances, low inflation, and a well-functioning exchange rate) to broader structural reforms to make the private sector the main engine of growth.
Several countries have been successful in this regard, and we think that Egypt can also be part of this group. Egypt has tremendous potential thanks to the large size of its domestic market, strategic geographic position, political stability, and its unparalleled cultural and historical heritage.
This Q&A first appeared in October’s print edition of Business Monthly.