IMF advises Egypt to ease grip on currency exchange rate to bolster economic growth

The actions of Egypt’s central bank to bolster the Egyptian pound against the US dollar have created black markets in foreign currency and harmed investment, economists say.

Efforts by the Egyptian central bank to bolster the local currency against the US dollar have created black markets in foreign currency and harmed investment, economists say. Asmaa Waguih / Reuters

Egypt should ease its grip on its currency exchange rate to boost economic growth even as reforms including a reduction in energy subsidies strengthen its outlook, according to the IMF.

Its report, issued late on Thursday after the fund concluded its annual review, preceded the Egyptian president Abdel Fattah El Sisi yesterday swearing in a new cabinet as he tries to rebuild an economy battered by years of political unrest.

The IMF also highlighted recent positive developments.

They include the opening of the Suez Canal extension last month, a massive offshore gas find, a return to international bond markets, a dip in inflation and economic growth rebounding to 4.2 per cent in the 2014-15 financial year.

However, the actions of Egypt’s central bank to bolster the Egyptian pound against the US dollar have created black markets in foreign currency and harmed investment, according to economists.

“A gradual move towards a more flexible exchange-rate policy focused on achieving a market-clearing rate would serve Egypt’s interests,” said Chris Jarvis, the IMF’s mission chief in Egypt.

“It would improve the availability of foreign exchange, strengthen competitiveness, support exports and tourism, and attract foreign direct investment.

“[This] should also foster growth and jobs, and reduce financing needs.”

Of the challenges facing Egypt’s economy, Mr Jarvis said that “unemployment remains high, notably among the youth. The fiscal deficit is still large and domestic public debt high. Reserves are about three months of imports, and foreign exchange is in short supply”.

Egypt continues to run large fiscal and current-account deficits. Arabian Gulf states (including the UAE) and the Arab Monetary Fund have provided Egypt with a mix of grants and loans to help shore up the pound and finance the country’s fiscal deficits.

Egypt’s current-account deficit reached $38.8 billion on June 30. Its debt-to-GDP ratio rose to 93.8 per cent that day from 73.7 per cent before the popular uprising in 2011.

Mr Jarvis praised the Egyptian authorities for acting to curb energy subsidies in an effort to reduce Egypt’s perennial budget deficit.

“The authorities succeeded in significantly reducing the underlying budget deficit despite a decline in foreign grants, thanks to a wide-ranging set of reforms including energy subsidy reforms, progress in containing the wage bill and increasing tax revenue,” he said.

Core consumer price inflation fell to 5.6 per cent last month, down from a peak of 12 per cent in 2013. However, persistent high inflation has hurt living standards.

But the oil price's collapse from $110 per barrel last year to about $47 per barrel presently has reduced inflation for oil-importing countries such as Egypt.

Lower inflation is likely to encourage Egypt’s central bank to cut interest rates, economists said.

Mr El Sisi has appointed the former oil minister, Sherif Ismail, as prime minister.

As the energy chief, Mr Ismail oversaw the implementation of cuts to energy subsidies and led negotiations with energy companies, including Dana Gas, that Egypt owes significant arrears.

Members of Egypt’s previous cabinet last week submitted their resignation after the agriculture minister at the time, Salah El Din Mahmoud Helal, was arrested on allegations that he had accepted bribes for land licenses.

Follow The National's Business section on Twitter