Full text of IMF's Lagarde speech at Egypt Economic Development Conference

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Friday - 13 March 2015

Good afternoon—masa’a el-kheir,

I would like to thank President Al-Sisi for inviting me here today. Clearly this is an important time for Egypt—a moment of opportunity—and I am very pleased to take part in this conference that was first initiated by the late King Abdullah of Saudi Arabia (bless his soul).

Umm Kulthūm, Egypt’s iconic singer and “Star of the East” [Kawkab Al-Sharq] once said: “wa ma nay’lu al mata’alibi bettamanni” – aspirations cannot be attained through wishful thinking, but through toil and perseverance.

This is true of Egypt today. The country needs to deliver on the aspirations of its people for stronger growth, better health and education systems, and higher standards of living. Over the coming five years, there will be more than 600,000 new entrants to the labor market per year. Creating good jobs for Egypt’s youth is an economic, a social, and a human priority. This will go hand-in-hand with restoring economic stability by shrinking the fiscal deficit and reducing external vulnerabilities.

Is it possible to meet these goals at the same time? Yes, it is—with the right policies. And some of them are already in the Government’s plans.

The key now is to implement these policies—to design them right, and to make them hold.

With this in mind, let me share a few thoughts on three topics:

(i) The reform process that is already underway;
(ii) Policies to restore confidence and attract investment;
(iii) Inclusiveness as a factor of sustainable growth.

1. The reform process already underway

Let me start with the good news. The journey to higher growth has already begun.

Over the past few months, there have been promising strides on the reform front. First and foremost was the energy subsidy reform which began in mid-2014—a longstanding item on the reform agenda.

Both the government and you, President Al-Sisi, personally did a lot to prepare the country for this measure. Popular buy-in was achieved through an appropriate dialogue on the need for this reform. At the same time, part of the savings were used to finance a targeted cash transfer for poor families.

Beginning this process was a major achievement. Continuing it will be equally important, and completing it for good, the ultimate goal.

There have also been important measures in the area of taxation, including increases in excises on tobacco and alcohol and now plans for VAT.

This is important because non-oil tax revenue is only at about 10 percent of GDP—very low for a modern economy like Egypt’s.

Following through on the VAT will be instrumental. Nobody likes higher taxes—we all understand that. Yet, as U.S. Justice Oliver Wendell Holmes said: “Taxes are the price we pay for a civilized society”—and we might add: for a state that can provide the services the Egyptian people aspire to and deserve!

Finally, there are the planned increases in investment, some already being put into effect, through the Suez Canal project. The fact that this was financed mainly by ordinary members of the Egyptian society is a testimony to people’s confidence and desire to turn things around in the economy.

Large projects like Suez, when conducted efficiently, can support growth and job creation, and that is good. But they are not the only way to go.

Other, smaller sized projects are equally—if not more—important.

The funding of these projects cannot always rely on the public purse. This is where private investment, domestic and foreign, can play a role. Yet investment only goes where there is confidence and policy certainty.

2. Policies to restore confidence—staying the course of reforms

This takes me to my second topic—what will restore confidence in Egypt’s economic prospects?

Clearly, staying the course on the reform agenda is a first order priority.

But there are other policies which can improve confidence, create jobs, and support Egypt’s financial independence. Let me give a few examples.

The first area is the business environment. Egypt ranks quite low on several competitiveness indicators—it has a rank of 119 out of 142 in the World Economic Forum’s Competitiveness Index.

Egypt can do better. With the right policies, and the right level of ambition, Egypt could crack the top 50 in global competitiveness.

The new investment law is an important step in the right direction.

But Egypt can go further in dismantling inefficient regulations. For example, according to the World Bank, it takes on average over 60 days to register property and over 1000 days to enforce a contract. It will be essential to build an environment where investment can succeed, and where good, productive jobs are created.

A second area is openness to trade. Egypt’s non-oil exports were only 5 percent of GDP last year. This represents a huge missed opportunity to create jobs in export industries, and Egypt surely has the potential.

Exchange rate flexibility can also play a role—an exchange rate which balances demand and supply of foreign currency, and can support both growth and Egypt’s financial position.

A third area is the financial sector. At present, only 10 percent of Egyptians have a bank account. Making financial services more available and extending more credit to small job-creating businesses could significantly help the economy. There has already been some progress with the recent adoption of a micro-finance law which could help develop the financial sector.

Business environment, trade liberalization, a strong financial sector—these are areas where action can generate tangible results in terms of increased investment and higher growth.

Yet, as international experience has demonstrated, the occasional episode of high growth cannot be an objective per se. Growth should be sustainable. And to be sustainable, it needs to be inclusive.

3. Inclusive growth for sustainable growth

Which brings be to my last point—can Egyptian growth be inclusive in order to be sustainable?

What do I mean by inclusive growth? It means growth that offers opportunity to all—women, youth, unemployed, disabled. It means that the benefits of growth are widely shared and felt by the people. To achieve it, Egypt must nurture its social infrastructure, not just the physical infrastructure. How?

Let’s look at youth and women—two groups that need to be better integrated in the economy.

Today one in three young Egyptians below 25 years of age is unemployed—almost three times the overall unemployment rate!

And at just 22 percent, women’s labor force participation rate is only a third that of men (73 percent). This large difference can be explained by large wage gaps between women and men, high costs of commuting, and inflexible work schedules.

There are many examples of countries that do well because women contribute a large share of economic growth. This is inclusive, and it also makes good economic sense.

There is also a role for social spending—both increasing it and improving its quality. Education is of paramount importance. Jobs cannot be created if graduates are not equipped with the skills needed in the modern labor market.
If implemented efficiently, more spending on health and education could support higher and more inclusive growth, while preserving fiscal sustainability.

Better education could also help narrow wage gaps that discourage women from working in the private sector. And of course, there is also a link to physical infrastructure. Better public transport would make it possible for women to travel safely to jobs further away from where they live.

These and other efforts will be essential for Egypt to unleash the enormous potential from its biggest asset—its people.

Conclusion

Let me conclude.

This is a moment of opportunity. With the right policies, Egypt’s government can deliver on the hopes and aspirations of the Egyptian people.

Steadfast implementation of reforms can help restore economic stability, instill confidence, and spur jobs and growth. For its part, the IMF remains committed to helping Egypt achieve better living standards.

I started my remarks with a quote from an Egyptian musical icon. Let me end with another quote from an Egyptian literary icon—Naguib Mahfouz.

He said, “You can tell whether a man is clever by his answers. You can tell whether a man is wise by his questions.”

Today we all here in Sharm el Sheik are asking a wise question: how to help in delivering on Egypt’s aspirations? Let’s make sure to find a wise answer.

Shukran—thank you.