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A Transcript of Press Conference Call on the Publication of the Arab Republic of Egypt: 2014 Article IV Consultation-Staff Report

Wednesday, February 11, 2015 Washington, D.C.

Speakers: Christopher Jarvis, IMF Mission Chief for Egypt, Middle East and Central Asia Department Randa Elnagar, Communications Officer, Communications Department

MS. ELNAGAR: Good morning, everyone. I am Randa Elnagar from the IMF Communications Department. This is the Press Conference Call on the release of the IMF 2014 Article IV Staff Report on Egypt which is available on since 7:00 a.m. today.

With me here is Mr. Chris Jarvis, the IMF Mission Chief for Egypt. Chris will give some introductory remarks and then he will take your questions.

MR. JARVIS: Good morning. Well, afternoon in Cairo, perhaps. This is an important moment for us, and I think for Egypt too. It's the first Article IV Consultation report since the Arab Spring. We have tried in this report to give an objective assessment of what's happening in Egypt's economy and of economic policies. I'll just being by giving a few messages, what I see as some of the main messages of our report, and then we'll be happy to take questions.

First, one thing that I'd like to emphasize is that the most important economic priority for Egypt is jobs. Egypt needs to find a way of creating good jobs for its people while at the same time reducing its budget deficit and maintain foreign exchange reserves. The obvious question that arises is can these be done at the same time, and the answer is yes.

There are economic policy solutions, especially subsidy reform and exchange rate flexibility which will support growth and create jobs while also helping Egypt's finances. Some, notably subsidies reform, will also support better income distribution, especially if accompanied by steps to help the most vulnerable people, like cash transfers.

How can the IMF help Egypt at the moment? Well, we hope that this consultation process has been helpful in itself. We've had a very good dialogue with the Ministry of Finance, with the Central Bank, and with others in the government.

Going forward, we can give advice and technical support based on our experience with other countries that have overcome similar problems to those that Egypt faces. If Egypt asks for financial support we can offer that together with the credibility that comes from having an IMF program. But I should stress that this is a choice for Egypt. We will help in any way that can be useful. It doesn't have to be through an IMF supported program.

Just to say something briefly about the economic outlook for Egypt. We think this is good. Certainly, the growth picture is better than it has been in recent years. We see growth at close to 4 percent this year. We're projecting 3.8 percent. We think that this could rise to 5 percent in the future if the government follows through with its plans.

Finally, a word on the risks facing the Egyptian economy, Egypt is vulnerable to many external risks, from lower growth in its main trading partners to a fold-off in remittances or external support due to lower oil prices. But the biggest risk is that the government falters in its resolve to tackle economic problems.

The upside of this is that it's within the control of the authorities. If they stick to their plans we see good prospects for Egypt. Thank you very much.

MS. ELNAGAR: We can take questions now.

QUESTIONER: Hi. Thank you very much for holding this call. Can you tell us, based on your assessment of the economy, as you said in your report, if Egypt was to ask for a loan package at this time would you be willing to give one?

MR. JARVIS: We have said many times that we're ready to support Egypt in any way that would be useful. That's something that the Managing Director has said as well. We don't have a request for a program at the moment, so I don't want to speculate about what the contents might be of a program that hasn't been requested. But I, would once again, reiterate that we are ready to support Egypt if we are asked to do so.

QUESTIONER: Do you feel that President Sisi has taken the suitable number of reforms to secure a loan package if necessary?

MR. JARVIS: I think the government has done some really important things. I would single out, especially, the subsidies reform that was done at the beginning of the fiscal year, so in mid-calendar year 2014. I thought that was a major step, and one that also both the government and President Sisi personally did a lot to prepare the country for, and explain the necessity of that.

I also think that there were some important tax measures taken in 2014 by the Ministry of Finance, including the income tax or capital gains tax. We welcomed those. We thought they were important measures which really helped with revenue.

That isn't the end of the story though. There are a lot of things that the government is planning that will be important they follow through on, including introduction of the VAT which we see as tremendously useful in helping Egypt's revenue picture, also, a change in the composition of spending.

I know that the government is making efforts to contain both the wage and subsidies bill, and also find ways of increasing health and education spending, and transfers to help vulnerable people in a way that is efficient and effective in delivering services and improving peoples live. We'll be watching that very closely over the next few months to see how that goes.

These are the kind of policies which are going to help Egypt with or without an IMF program. They're the kind of things that we would look at in discussions with Egypt. I guess the most important thing is the government's own commitment, and the Central Bank's own commitment to improving the situation in Egypt. That's what I would focus on at the moment rather than thinking about what might be the kind of things that would be in an IMF program.

QUESTIONER: Thanks. I wanted to ask, first of all, about the reforms that you have mentioned. Do you think that Egypt would face any obstacles that would stumble the reform process in the near future?

MR. JARVIS: That's a very good question because over the years many governments have tried to reform. We do see good prospects for what this government is trying to do. Let me give a couple of examples of reforms which I think may be difficult, but which are also important.

One of them is introduction to the value added tax. I was struck when I first started working on Egypt and looked at some very old reports from the IMF on Egypt. Successive governments or different governments have been trying to introduce a value added tax for 20 years. I think the fact that that hasn't happened so far shows that it's a difficult thing to do.

It's not always clear to us what the source of obstacles is, but, obviously, there are obstacles to introducing this kind of fiscal reforms. We've been working very hard with the government to overcome some of the technical difficulties associated with that. Our fiscal experts who've helped countries introduce and administer VATs in different countries have had very close coordination with the Ministry of Finance to try to do that. That's one area.

The second area, I would say, is improving the business climate. We're following very closely the plans for a new investment law and other measures to improve the business environment. Egypt's starting from quite a bad place in that. It's ranked 119th in the World Bank's doing business indicators, and 112th in the World Economic Forum's competitiveness index. I hope I've got those numbers the right way round. It's one and the other.

That shows that there's both scope for doing better, but there's also, clearly, obstacles to that kind of improvement. It will be very important that the government sticks with its reforms, and tries to introduce reforms to the business climate in ways that are inclusive. That is that generate opportunities, including for small businesses, or for people who haven't yet started businesses yet but would like to.

It's also important that they focus on reforms which will help create jobs. Because one of the problems of Egypt, even a decade ago, was that growth was relatively high, but unemployment was still hi. So it'll be important to focus on reforms -- that improve employment as well.

QUESTIONER: Second question please, I want to ask you if there are any future plans for cooperation between Egypt and the IMF, at least technically as you have said, or an imminent mission that's going to visit Egypt shortly? Thank you.

MR. JARVIS: There's an agenda of technical assistance work that's underway, and I think that missions will be visiting Egypt at different points to do that. I don't have a precise timetable for you.

We also, in more or less, continuous contact with the Ministry of Finance and the Central Bank on things like evaluating the effects of what's going on in the global economy on Egypt. So there's a continuous dialogue. I don't have dates for what would be the next mission from the Middle Eastern/Central Asian department yet.

One other thing I would say is that we're following closely the preparations for the March conference. The IMF's been invited to that, and we will be happy to accept that invitation. We'll be coming to the conference. That will be another opportunity to exchange views very soon in person with the authorities.

QUESTIONER: I wanted to ask about the mega projects, the Suez Canal project. Have you had the opportunity to look at them, and is there a tool -- a warning regarding how they connect into government spending? And my other question is related to the exchange rate. The pound has weakened against the dollar. You hinted or spoken about the exchange flexibility. Do you think the pound should fall even more?

MR. JARVIS: Let me take the first one first. On the mega projects, we think the mega projects offer prospects for jobs and growth, but they should be carefully designed and monitored to limit potential fiscal risks. For example, if they entail additional public investment or large contingent liabilities.

In looking at individual project proposals, I should emphasize that it is not really the job of the IMF to evaluate individual projects. What we tend to do is to think about what might be the general macroeconomic effect of different projects, and based on that what kind of criteria we think that the government should think about when it, itself, evaluates projects.

I would say there are a couple of things on that. The first is capacity in the short term to create employment and also export proceeds given Egypt's external vulnerabilities. The second is the capacity to increase potential growth over the medium term. Now, the Suez Canal project, which is the most developed one so far, scores pretty well on those ground. Especially in terms of increasing export capacity, in this case exports of services, also, raising the potential growth because it's developing an important area of the economy.

I should also say that in terms of the way that the Suez Canal project was financed the very fast and large subscription to that by often ordinary members of Egyptian public was testimony to peoples' confidence, both in that particular project, and I think also and a desire to turn things around in the economy in Egypt. So that was quite impressive.

I think there is a recognition in Egypt, though, that that's not something that can be repeated on a very large scaled with the mega projects. That they will need to look, in particular, for private sector finance of private sector projects, obviously. That is to say that the government can't take on too many either actual or contingent fiscal liabilities in this process.

So it's going to be a delicate balancing act, and it will be particularly important to involve the private sector where possible. I think the government understands that, certainly in our conversations with the Ministry of Finance. He has demonstrated a very clear understanding of both the risks and the opportunities of the mega projects.

On your question on the exchange rate, we welcome the recent move in the official exchange rate. Our general view is that a more flexible exchange rate policy focused on achieving a market clearing rate and avoiding real appreciation would improve the availability of foreign exchange, strength competitiveness, support exports and tourism, and attract foreign direct investment. This would foster growth and jobs, and reduce financing needs.

I would say if there is one thing that we particularly focused on in the report is the need to avoid real appreciation in the future. It would be quite risky for Egypt to be consistently running an inflation rate that exceeded that of its trading partners without adjusting the exchange rate. So I see this move as a welcome step in the right direction, and some recognition by the Central Bank that it's important to avoid a substantial real appreciation of the exchange rate.

MS. ELNAGAR: If there are no other questions the transcript for the conference call that will be posted on later in the day. Thank you very much.

MR. JARVIS: Thank you.