After Finalizing IMF Loan, Egypt’s Reforms Target Industrialization, Exports


Monday, May 20, 2019 / 5:00 PM / AL-MONITOR / Header Image Credit: Middle East Monitor 


The Egyptian authorities and an International Monetary Fund (IMF) mission reached a staff-level agreement over the completion of the fifth and final review of the Extended Fund Facility (EFF). An IMF team led by Subir Lall, IMF assistant director for the Middle East and Central Asia, visited Egypt on May 5-16, for the final review of Egypt’s economic reform program supported by a three-year EFF. By July, Egypt is expected to get the last tranche worth $2 billion of the IMF’s $12 billion loan program signed in November 2016.

Egyptian Deputy Finance Minister Ahmed Kouchouk said in a press statement May 7 that the government would provide the IMF mission with the latest developments regarding the country’s financial performance, growth and balance of payments indicators in the coming two weeks.

“The mission is focusing on Egypt’s plan to launch structural reforms, targeting the industrial and export sectors. However, the IMF’s review will not result in fresh decisions that are severe for citizens as all requirements have been fully fulfilled since the beginning of the agreement,” Rashad Abdo, head of the Egyptian Forum for Economic and Strategic Studies, told Al-Monitor.

Abdo cited that Egypt has taken a raft of measures aimed at financial reforms, i.e., reining in the state budget and current account deficits over the past three years.

The IMF Country Report No. 19/98 issued in April stated that Egypt’s “progress on structural reforms has been mixed, but the program objectives remain achievable.” It added, “Sustained efforts are needed to advance critical reforms in competition, industrial land allocation, transparency and governance of state-owned enterprises, and public procurement."

In this regard, Abdo said both Egypt and the IMF agree on the need to enhance the role of the private sector. However, he warned of a sudden withdrawal of the public sector. Egypt has announced its plan to sell stakes in state-owned companies via initial public offerings to minimize the role of the public sector, according to the loan agreement with the IMF.

Paris-based bank BNP Paribas said the recent structural changes in Egypt’s economy “do not favor a significant rebound in activity based on productive investment and job creations.”

“The public sector accounts for about 40% of the official economy and a quarter of formal employment. For historical reasons, the public sector plays a very key role in the economy, and recent reforms have not changed this substantially,” BNP Paribas stated in a report issued in April titled “Egypt: From Macroeconomic Stabilisation to Sustainable Growth.”

Most international banks, like BNP Paribas, have economic research units for issuing reports on countries, commodities, world stocks, and so on. These research units are mainly interested in addressing foreign investors who have been buying into Egypt’s sovereign debt instruments over the past three years.

However, Abdo believes the full withdrawal of the public sector will leave the private sector alone on the local market. “Without market controls, the private sector will monopolize the market and prices will shoot up. The BNP Paribas report is based on theoretical arguments,” he said, citing that the public sector is like a balance of power on the local market.

Assessing the country’s economic reforms after nearly three years, Abdo said, “Egypt has achieved political and legislative stability that has contributed to the improvement of the investment environment and tourism recovery.”

He noted that following the currency float in November 2016, Egyptian merchants focused only on exports at the expense of the local market, taking advantage of higher earnings from a depreciated pound versus the greenback.

“To boost exports, there must be production surpluses like in China, where its currency is depreciated for making its products cheaper to world importers,” he said.

According to Abdo, building up a local manufacturing base for both the domestic and foreign markets is a must. “Therefore, all obstacles — i.e., importing machinery, equipment and intermediate goods — facing industrialization should be ironed out. Industrialization for creating production surpluses is a must in the long term,” he added. “Industrialization will create jobs and maintain sustained economic growth in the long run."

The industrial sector accounts for 30% of manpower in Egypt, or 2.5 million people in roughly 38,000 manufacturing firms. It contributes 17.7% of gross domestic product (GDP), according to the official State Information Service.

Egypt’s non-oil manufacturing sector accounts for 16% of GDP, Amr Taha, the executive director of the state-run Industrial Modernization Center, was quoted as saying by Dotmsr news portal on April 17.

Prime Minister Mustafa Madbouly told a Cabinet meeting May 12 that the sustainability of development rates would rely on enhancing the local industry. “Boosting the industrial sector is a guarantee to keep the economy on track and ensure there would be no decline in growth objectives,” the premier was quoted as saying by Youm7 news portal on May 12.

Moreover, Madbouly said March 8 that his government plans to increase exports by 221.8% from $24.8 billion at present to $55 billion in the coming years.

Egypt’s Planning Minister Hala al-Saeed told the parliament April 16 that the government is targeting the completion of 13 industrial complexes across the country and issuing 12,000 new industrial licenses in the fiscal year 2019-20, which will begin on July 1.

She said the government would continue the structural transformation of economic growth resources with increased reliance on investment and exports, increasing the contribution of both sectors to 42% and 38% of GDP growth, respectively.

Egypt’s exports rose to $14.3 billion in the first half of the fiscal year 2018-19 (July-December 2018), up from $12.1 billion in the same period a year earlier, the Central Bank of Egypt stated April 1.

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