Journal Issue

Country Focus: Egypt on the Move

International Monetary Fund. External Relations Dept.
Published Date:
August 2006
  • ShareShare
Show Summary Details

Wide-ranging reforms, supportive macroeconomic policies, and a favorable external environment have contributed to faster growth in Egypt in recent years. The government now has a full agenda of economic and structural reforms in the pipeline to tackle much-needed fiscal adjustment while pursuing ambitious growth and employment objectives.

Recent economic reforms have placed Egypt on a path toward a full market economy—welcome news after almost a generation of economic performance below expectations. During the 1980s and 1990s, occasional growth spurts and sporadic bursts of reform were followed by policy reversals and widening economic and financial imbalances. From 2000 to 2003, real incomes in Egypt stagnated, unemployment was high and rising, and the economy was in the doldrums.

With the appointment in 2004 of a pro-reform cabinet led by Prime Minister Ahmed Nazif (reappointed in December 2005), Egypt saw a sea change in the direction of economic policies, with reforms aimed at boosting private sector activity and modernizing the government. The new cabinet established its credentials swiftly by adopting a number of bold policies, including drastic cuts in import tariffs and income tax rates, and by announcing plans to restructure the financial sector and privatize most state enterprises.

Bolstered by a supportive global environment, economic performance since 2004 has been impressive. Real GDP growth has accelerated (to 5.7 percent in the second half of 2005), inflation has fallen sharply, real interest rates have turned positive, and investor confidence has surged. Egypt’s stock market was the top global performer in 2005, and, after suffering sizable losses in the first half of 2006, it rebounded by 20 percent in July.

Job creation is top priority

Egypt will need to achieve sustained growth of at least 6-7 percent to absorb its rapidly expanding labor force.


Data: Egyptian authorities.

Most of Egypt’s foreign-exchange-earning sectors—energy, tourism, Suez Canal traffic, and worker remittances—have performed strongly. The non-oil trade deficit began to widen in late 2005, but the balance of payments has been buttressed by large capital inflows, mostly non-debt-creating. International reserves have risen to $23 billion (7.5 months of imports), and external debt and external vulnerabilities are low.

Boosting growth, creating jobs

Despite Egypt’s strong performance, boosting growth and raising employment remain pressing economic issues. The country will need sustained output growth of at least 6-7 percent a year to absorb its rapidly expanding labor force (chart). Considering Egypt’s endowments—among them, energy resources, a favorable geographic location and related infrastructure assets, enduring tourist attractions, and a youthful population—such rates should be attainable.

The Nazif cabinet recognized early on, however, that if the country’s potential is be unleashed, the apparatus of government and the foundations of a market economy would need comprehensive rebuilding. And reforms would have to address the key impediments to faster growth: namely, a large fiscal deficit (9 percent of GDP) and high public debt (69.8 percent of GDP, net basis), deficiencies in financial intermediation, price distortions caused by subsidies, and bureaucratic red tape.

The government embarked on a well-sequenced reform program, ambitious in scope but balanced by a shrewd measure of political realism. To kick-start the reform momentum and boost confidence, the program featured a number of high-profile measures. At the same time, the authorities began working in earnest to strengthen capacities and build institutions.

Promoting private sector activity

Improving the business climate was a key priority. The authorities immediately reduced and streamlined customs tariffs, cut income tax rates in half, and simplified tax filing procedures. The government then launched a privatization program that, in two years, has involved the sale of 87 state assets worth $3.6 billion. In addition, the authorities recently signed a deal for $2.9 billion to sell a third mobile phone operator license.

The government has also taken steps to strengthen regulatory and supervisory standards in the insurance industry, capital markets, and banking sector; has established a ministerial committee to expedite the settlement of commercial disputes with the government; and is preparing legislation for special economic courts to improve the judicial framework underlying financial contracts. Having recognized the private sector’s role as the engine of employment growth and wealth creation, the government is steadily removing the state from the productive sectors of the economy.

Restructuring the financial sector

To strengthen the financial sector, the government has made restructuring a critical pillar of the reform agenda. Before 2004, financial sector indicators were deteriorating and credit to the private sector was declining. The authorities believed that sustainable private sector growth would not take hold without a healthy, efficient banking system.

Over 24 months, they sold off 10 joint-venture banks and 2 investment houses, restructured and offered for sale a large state bank (Bank of Alexandria), and restructured half of all private sector nonperforming loans using a central bank-led arbitration approach. Now, work is under way to restructure and recapitalize the remaining two state banks on a parallel track over the next two to three years.

Revamping macroeconomic policy

Since taking office, the Nazif cabinet has worked to strengthen its macroeconomic policy tools. During the second half of 2004, the Central Bank of Egypt made the transition to a unified, flexible exchange rate regime, abolished the surrender requirement, and launched an interbank foreign exchange market. Since a sharp appreciation in early 2005, the exchange rate of the Egyptian pound vis-à-vis the U.S. dollar has remained stable.

With IMF technical assistance, the central bank has since focused on modernizing monetary policy formulation, operations, and communications. It has expanded its tool kit, including establishing an interest rate corridor, and significantly enhanced communications with the public. Annual average consumer price inflation dropped from 16 percent in early 2005 to 4 percent in the first half of 2006. Consumer price inflation has edged up since May, but the central bank attributes this to transitory supply factors that pushed up certain food prices and to adjustments in some administered prices. The central bank now plans to adopt a full-fledged inflation targeting framework in the medium term. With this objective in mind, it is strengthening its analysis and policy formulation, and its autonomy is being increased.

Cognizant also of the need to tackle the country’s large fiscal deficit and rising public debt, the authorities began preparing the groundwork in 2004. With IMF technical support, the Ministry of Finance launched a broad range of fiscal reforms, including overhauling the tariff regime, rewriting the income tax law, improving revenue administration, and strengthening public finance management, particularly cash management.

Egypt also adopted a new budget classification in line with the latest IMF standard (Government Finance Statistics Manual, 2001). The reclassification of the fiscal accounts and some data revisions revealed a larger fiscal deficit in recent years (9 percent of GDP) than had been depicted earlier. Nevertheless, the integrity and transparency of the fiscal accounts have been significantly improved in line with the government’s policy of greater openness. Indeed, Egypt subscribed to the IMF’s Special Data Dissemination Standard and began publishing its annual Article IV staff reports on the country’s economy in 2005.

Tackling public debt

With net public debt close to 70 percent of GDP, fiscal consolidation must be at the top of Egypt’s macroeconomic policy agenda. Lowering debt will be essential to ensure macroeconomic stability, reduce uncertainty for investors, avoid debt overhang effects, and increase the authorities’ ability to cope with external shocks. It would also contribute to a better allocation of resources in the economy, since a large share of government spending has been unproductive, with fuel subsidies of 7 percent of GDP being the most egregious example.

To this end, and armed with a more comprehensive understanding of the country’s true fiscal position, the government recently mapped out a multiyear consolidation plan designed to reduce the deficit by more than 1 percent of GDP annually over the next four years, to 3-4 percent of GDP. It took its first major step in July by introducing an energy subsidy reduction package and also publicly signaled its intention to pursue deep reforms in sales and property taxes, government procurement, treasury management, and administrative modernization. The authorities are taking measures to target social assistance more directly at low-income households and are formulating a sweeping reform of the pension system.

Challenges ahead

Implementing the next phase of reforms will pose greater challenges in terms of policy trade-offs. The government will need to build a strong political and social consensus to achieve its objectives, especially with conflict in the region complicating matters. On the other hand, still-favorable global economic conditions, strong reform momentum, and bullish investor confidence may mean that the timing is ripe for tackling the toughest issues.

Nicole Laframboise

IMF Middle East and Central Asia Department

Copies of Arab Republic of Egypt: 2006 Article IV Consultation, IMF Country Report No. 06/253, are available for $15.00 each from IMF Publication Services. See page 256 for ordering details. The full text is also available on the IMF’s website (

Other Resources Citing This Publication