Sustained reforms have reduced fiscal and monetary vulnerabilities

Daily Star staff

BEIRUT: The International Mo­ne­tary Fund (IMF) said Egypt had weathered the impact of the global financial crisis ...

Sustained reforms have reduced fiscal and monetary vulnerabilities Daily Star staff BEIRUT: The International Mo­ne­tary Fund (IMF) said Egypt had weathered the impact of the global financial crisis relatively well. Financial contagion was contained by limited direct exposure to affected products and low levels of financial integration, but Egypt has been more susceptible to the real spillovers of the global slowdown,” said the IMF concluding statement. However, sustained reforms since 2004 have reduced fiscal and monetary vulnerabilities, leaving some room to maneuver on the macroeconomic policy response. The IMF added that fiscal and monetary-policy actions helped cushion the impact of the global slowdown on economic activity in Egypt. The government undertook a package of additional (mainly infrastructure) expenditures to help support economic activity. “This is likely to be achieved within the 2008/09 budget defi­cit target of 6.9 percent of GDP, on account of revenue measures adopted before the crisis and careful budget execution in a difficult external environment. The central bank of Egypt eased monetary policy appropriately, cutting policy rates four times by a cumulative 250 basis points since early 2009,” the IMF said. Economic performance during 2008/09 was favorable. Real GDP growth is expected to be 4-4.5 percent, below the 7 percent it has averaged in recent years, but still healthy given the global environment. Inflation fell from its August 2008 peak (24 percent) to below 10 percent in June 2009 as world food prices moderated. It added that the current account will shift into a deficit of about 2 percent of GDP, driven by weaker exports, remittances, Suez Canal traffic, and tourism receipts. “Following the sharp reversal of portfolio flows in August-October, the financial situation has largely stabilized and, in recent months, the stock market has begun to recover ground lost in late 2008 and early 2009. Reserve coverage remains comfortable at six-and-a-half months of imports of goods and services,” the IMF said. “But, the economic environment will remain difficult in the year ahead. Global growth is not expected to return to positive territory until 2010, and downside risks remain. Against this background, discussions focused on the near-term macroeconomic policy response, without losing sight of Egypt’s medium-term reform objectives.” It indicated that economic activity in Egypt is expected to continue to soften in 2009/10, with real GDP growth likely remaining below potential at around 4 percent. Private consumption is expected to be resilient, while some unwinding of the accumulation of inventories witnessed during 2008/09 could provide a small drag on growth. Near-term macroeconomic policies should continue to soften in 2009/10, with real GDP growth likely remaining below potential at around 4 percent. Private consumption is expected to be resilient, while some unwinding of the accumulation of inventories witnessed during 2008/09 could provide a small drag on growth. Near-term macroeconomic policies should continue to be geared toward supporting growth, while reducing inflation and maintaining a sustainable external position. In an uncertain global environment, the risks to the outlook remain tilted to the downside. On Egypt’s fiscal policy, the IMF report said: “The expansionary stance of the 2009/10 budget aims to ease downward pressure on economic activity. The deficit is targeted to widen to 8.4 percent of GDP, largely as a result of an expected cyclical deterioration in revenues.” Given the remaining fiscal vulnerabilities and limited scope for additional stimulus, contingency plans in case of additional budget pressures should focus on postponing non-priorities while protecting social spending. On the other hand, any revenue over-performance should be used to reduce the deficit.” – The Daily Star