- Egypt's public debt remains high in comparison with many other emerging market countries and reducing the fiscal deficit and public debt should be a key objective for the country. This was the view of a recent International Monetary Fund (IMF) mission visiting Cairo.
"While much of the debt is denominated in local currency, the maturity structure is short, creating an annual rollover requirement of 20 percent of GDP. To address this vulnerability and help spur private sector-led growth, the government has announced its intention to reduce the deficit to about 3 percent of GDP by 2014/15," the IMF noted.
The IMF also noted that Egypt had made significant progress in wide-ranging structural reforms that accelerated after 2004, saying reforms also reduced fiscal, monetary and external vulnerabilities, leaving some room to manoeuvre on macroeconomic policies in the event of negative shocks.
"Egypt weathered the global financial crisis relatively well and financial market pressures eased after the initial outflow. Equity prices plateaued in recent months, after having recovered over half of the losses since the April 2008 peak," the IMF mission found.
"Egypt's sovereign spreads tightened during 2009 and, in early 2010, remain well below their pre-Lehman levels. The temporary financial outflow was met mostly with a drawdown in the central bank's foreign currency deposits with commercial banks, reversing the build-up in 2006/07 and limiting the impact on the Egyptian pound and real economy," the IMF statement added.
The IMF further stated that the real economy held up relatively well in the face of weaker external demand, although the current account moved into deficit of 2.4 percent of GDP in 2008/09, as service receipts and remittances declined, and investment and activity softened in exposed sectors.
It further noted that growth still reached 4.7 percent in 2008/09, saying resilient domestic consumption demand, and production in the construction, communications, and trade sectors, helped sustain growth and the pick-up to nearly 5 percent in the first half of 2009/10.
"The government reacted quickly to the crisis by providing a sizable fiscal stimulus in the second half of 2008/09 based mainly on accelerating investment projects. Key fiscal reforms such as introducing the property tax, broadening the Value Added Tax (VAT), and phasing out energy subsidies were postponed," the assessment said.
The 2009/10 budget was said to continue to support economic activity and target a wider deficit of 8.4 percent of GDP, "largely reflecting a substantial projected cyclical fall in revenue (particularly from trade and Suez Canal traffic), as well as the impact of wage increases adopted before the crisis and higher post-crisis debt service costs," further noted the IMF.
As Egypt's recovery gains strength, the IMF further underscored the importance of shifting policies back toward fiscal consolidation and other reforms, adding that the Fund supported the Egyptian authorities' objective of reducing the fiscal deficit to about 3 percent by 2014/15, in light of the still high public debt and large financing requirement.
The IMF further encouraged Cairo authorities to make a substantive step to reduce the fiscal deficit at an early stage - to lessen vulnerability, boost confidence in the fiscal adjustment strategy, and speed the response of private investment.
The Fund also saw further reductions in inflation toward partner country levels as a key objective for the coming years, saying that continued short-term capital inflows could challenge monetary policy making, and encouraged continued increases in exchange rate flexibility.
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