IMF Says Egypt Should Be Ready to Act If Inflation Heats Up

(Bloomberg) -- The International Monetary Fund lauded Egypt’s economic reform efforts but urged the central bank to be ready to take action if slowing inflation heats up.

The fund sounded its note of caution as its executive board signed off on the latest review of Egypt’s reform program. The seal of approval opened the door to another $2 billion tranche of the three-year, $12 billion loan the IMF extended to the government after it floated the pound in November 2016 and ordered a first round of energy subsidy cuts.

“By tightening monetary policy early in the year, the Central Bank of Egypt has managed to reverse high inflation, which was the main risk to macroeconomic stability,” the fund said. It said the economy was showing “welcome signs of stabilization,” including a recovery in economic growth rates and a rebound in foreign currency reserves that has brought them to record levels.

“The continuation of this disinflationary trend could open the door to a gradual easing of interest rates, but the CBE should remain vigilant and be prepared to tighten the monetary stance if demand pressures reemerge,” the fund’s board said.

IMF Says Egypt Should Be Ready to Act If Inflation Heats Up

The easing of currency controls helped to end a crippling dollar shortage that had stunted business activity and eroded net international reserves by more than half their December 2010 levels. While that helped to secure the IMF loan, it also sent prices soaring, with inflation rising to more than 30 percent, further pressuring a nation where about half of the 95 million residents live on or near the poverty line.

In tandem with the flotation, the government also cut energy subsidies and raised taxes to curb the budget deficit, which is set to narrow to 9.5 percent of gross domestic product during the current fiscal year from 10.9 percent a year earlier. The IMF praised those steps too, and said a continued reform of the subsidies was “critical” for achieving the reform program’s goals.

“Making further progress on moving away from product subsidies to better-targeted cash transfers would strengthen the social safety net,” the fund said.

It also applauded the central bank’s decision to make it more expensive for foreign investors to use a mechanism that guarantees profit repatriation.

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