CAIRO: The International Monetary Fund (IMF) released its latest evaluation of the Egyptian economy, the Country Report for 2010. While praising Egypt’s “resilience to the economic crisis, the report cautioned against allowing election pressures to weaken the agenda of economic reform.
Impending parliamentary election this November and a presidential election in September 2011 are at risk of stunting Egypt’s growth rates of 7 percent and higher from 2005 through 2008. In order to combat unemployment and poverty, policies to support economic growth, which include the sensitive issue of curtailing subsidies, the report advises disciplined adherence to the structural reform agenda.
In a statement released with the report, the IMF’s Executive Director for Egypt, Shakour Shaalan, said, “As the global recovery takes firm hold, the authorities intend to resume fiscal consolidation measures that were interrupted by the onset of the crisis. For the remainder of this year and in 2010/11, options are being explored such as rationalizing the consumption of subsidized butane, and bolstering tax administration to contain evasion.
However, some experts have expressed pessimism at the government’s determination to pursue controversial reforms, such as involving butane, widely used household cooking fuel, in the face of recent domestic protests.
Magdy Sobhy, economics expert at the Al-Ahram Center for Political and Strategic Studies, said he believes the government will hesitate to continue reforms.
“There have already been calls for the government to exempt farmers from the fine on cultivating rice, he explained, a decision initiated last year in an attempt to reduce the rice cultivation due to its heavy water use, despite wide unpopularity given the favorable prices of the grain on the world market.
Sobhy pointed out that after the global economic crisis stalled the reform process, reinitiating it during back-to-back election cycles may be more of a risk than the ruling National Democratic Party is willing to take, especially with recent restiveness among groups seeking political and labor rights.
In his opinion, reforms may therefore focus on appeasing citizens rather than bolstering growth rates: “They are again considering raising the minimum wage in Egypt, Sobhy explained, adding that it has remained at the same level since the early 1980s, LE 35 a month or about $7, despite failed negotiations to raise it two years ago to LE 600 a month.
On paper, Egypt’s ability to implement widespread fiscal, banking, tax and subsidy reform over the past several years have attracted commendations from ratings agencies as well as groups like the IMF and piqued the interest of investors.
In its report, the IMF noted the fiscal policies of the Central Bank of Egypt (CBE) caused both headline and core inflation to decline to 12.8 and 6.9 percent respectively in February 2010 after headline inflation peaked in August 2008 to 23.7 percent.
Yet Sobhy pointed out that for many Egyptians, prices remain painfully high.
The report also noted that financial sector reforms have successfully completed their first phase, and that “authorities have now embarked on the Phase II agenda to further modernize prudential oversight and facilitate intermediation and increase access to credit . a comprehensive restructuring has forged a solid foundation for the Egyptian banking system.
Listing the resolution of nonperforming loans, the enforcement of risk and performance reporting, and the gradual but growing use of mortgage finance, the report appeared most enthusiastic about the reform of Egypt’s once opaque financial sector.
Further optimism pertaining to infrastructure development, facilitated by a proposed program by the Ministry of Finance to encourage public private partnerships with significant potential to attract foreign investment, also encouraged the authors of the report.
The necessity of private sector involvement in the vast infrastructural needs of Egypt as a country and Africa as a continent were the primary focus of an address delivered by the CEO of the International Finance Corporation (IFC), Lars Thunell, during his visit to Cairo this week.
Thunell extolled the efficacy of alliances with the private sector, saying, “[The] IFC is working with governments to structure investment opportunities that balance the interests of private investors with the needs of the community for long-lasting economic and social benefits.
Yet Sobhy expressed doubts at the willingness of Egyptian citizens to trust their government to safeguard their interests, particularly when high GDP growth has not necessarily improved the quality of life for ordinary people. He pointed out that, “The Minister of Investment himself has said that the theory of ‘trickle down’ doesn’t work particularly well in Egypt.
Balancing the recommendations of groups such as the IMF with widespread dissatisfaction will remain the primary challenge as elections approach.