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Oxford Business Group: Egypt Year in Review 2016

IMF loan, depreciation and many other events happened in Egypt's economic year 2016.
28.12.16 | Interesting article at Oxford Business Group

Funding approval

On the back of the government making progress on economic reforms, including allowing the Egyptian pound to trade freely, in mid-November the IMF approved a $12bn bailout package.

Aimed at reducing external imbalances, bringing down public debt and boosting growth, the IMF deal initially provides $2.75bn – with the remainder to be released in tranches over the course of three years, contingent on five reviews of the government’s reform drive.

Getting with the programme

The conditions for disbursement stipulated by the IMF included changes to the tax system and subsidy reductions, as well as the currency float.

At the end of August the Egyptian parliament approved a value-added tax (VAT) of 13%, which will be increased to 14% at the start of the next financial year. The introduction of VAT should help broaden the tax base and bolster government revenues.

In the same month the government trimmed petrol subsidies and revealed plans to increase fuel prices to 65% of their cost during FY 2016/17.

The country’s ballooning subsidy bill has drained financial resources needed for developing infrastructure, health and education, while also distorting economic incentives.

Currency depreciation

Following the anticipated currency float in November, the Egyptian pound lost half its value against the dollar. Despite fears that a weaker pound could drive inflation even higher, Egyptian stocks jumped following the announcement. Many stakeholders also point to the fact that the devaluation will increase the competitiveness of the country’s exports and make it an even more affordable tourism destination.

The move should also help trim the current account deficit – something that remains a risk factor for economic stability. Egypt’s current debt is hovering around 100% of GDP, according to the IMF, with the budget deficit coming in at around 12.2% of GDP in FY 2015/16. The government aims to reduce this to below 10% of GDP by the end of FY 2017/18.