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IMF Calls On Egypt To Unwind Fiscal Stimulus

Friday, February 26, 2010

Finding that Egypt's economy has been resilient to the global economic crisis, the International Monetary Fund has said that economic stimulus should be slowly withdrawn and fiscal space lost to the crisis reclaimed.

The IMF’s report on the Egyptian economy observed that: “Sustained and wide-ranging reforms since 2004 have reduced fiscal, monetary, and external vulnerabilities, and improved the investment climate. These bolstered the economy’s durability and provided breathing space for appropriate policy responses.”

With economic growth falling to 4.7% in 2008/09 the IMF went on to observe that: “Prompt fiscal and monetary responses helped cushion the impact of the post-Lehman slowdown. Additional infrastructure expenditures—some off-budget—provided a targeted and temporary stimulus.”

“As the recovery gains strength, the focus of policies can shift back toward fiscal consolidation and other growth-oriented reforms," the IMF’s report continued.

The IMF Executive Board has welcomed the current budget as appropriately supportive, but has noted that the deficit is likely to drift out to reach 8.4% of GDP – in line with government estimates – by the end of FY2009/10.

Looking toward the medium-term, the Board welcomed the Egyptian authorities’ objective of reducing the fiscal deficit to around 3% by FY2014/15, as "critical to achieving private sector-led growth and reducing vulnerabilities".

“Reducing the overall deficit by about 5% of GDP over the next five years is feasible, based on the experience of other countries, and would lead to a further 15% decline in the debt-to-GDP ratio. Such adjustment will be crucial to maintain investor confidence, preserve macroeconomic stability, and create scope for future countercyclical fiscal policy. Anchoring the strategy in reforms to increase the low tax revenue-to-GDP ratio and the efficiency of public spending will help durably address Egypt’s main fiscal vulnerabilities. Priorities include adopting as early as possible a full-fledged VAT, complementing energy subsidy reform with better-targeted transfers to the most needy, and containing the fiscal cost of the pension and health reforms,” the Board said.

The IMF also encouraged the Egyptian authorities to continue to strengthen tax compliance and reduce the cost of subsidy abuse.