IMF Urges Egypt to Watch Inflation After New Subsidy Cuts

(Bloomberg) -- The International Monetary Fund urged Egypt to maintain a tight monetary policy as a new round of subsidy cuts rekindled inflation worries.

The Washington-based lender praised Egypt’s implementation of economic reforms as “instrumental in achieving macroeconomic stabilization, with external and fiscal deficits narrowing, inflation and unemployment declining, and growth accelerating.”

At the same time, the central bank “should retain its restrictive stance to counter second-round effects of fuel and electricity price increases,” the IMF added in a statement following its latest review of the country’s reform program.

The assessment came days after the central bank held the benchmark interest rate. Inflation in May was down to about 11 percent after peaking last year at over 30 percent following the November 2016 flotation of the pound. The bank predicted average annual headline inflation would remain within its target range of 13 percent (+/-3 percentage points.)

Investor Confidence

The IMF has been broadly supportive of Egypt’s reform initiative, and in 2016 awarded the government a $12 billion loan seen as key to shoring up investor confidence.

The subsidy cuts -- a key part of the change launched in 2016 -- have hit hard in the nation of 96 million people, about half of whom live in poverty. But officials have said the measures are necessary to contain the budget deficit and achieve the kind of growth levels necessary to drive the economy forward.

The Emirates NBD Purchase Managers’ Index, published on Tuesday, came in at 49.4 in June, up from 49.2 in May, on slightly higher non-oil business activity. The figure, however, remained below the 50-mark that reflects growth.

The IMF projected Egypt’s economic expansion at 5.5 percent in the fiscal year that began July 1, and revised inflation expectations down to 13.1 percent for the end of that year, from 15.2 percent previously.

While external risks have increased in the past few months, Egypt’s “healthy level of foreign reserves” and its exchange rate flexibility leaves the country “well positioned to manage any acceleration in outflows,” it said.

©2018 Bloomberg L.P.