The International Monetary Fund on Tuesday welcomed Egypt's economic reforms, saying the Arab world's most populous nation has made a good start at reining in public spending, boosting investor confidence, and addressing the surging inflation generated by the new policies.
In its first review since Egypt secured a $12 billion, three-year bailout loan in November, the IMF said Egypt's performance has been on track, allowing it to release a new $1.25 billion disbursement. That brings the total payout so far to $4 billion.
The Washington-based lender of last resort says energy subsidy reform, wage restraint, and a new value-added tax have all contributed to reducing the fiscal deficit and helped free up space for social spending to support the poor.
Fighting inflation remains a priority, however, because it has taken a heavy toll on Egypt's vast disadvantaged population and could lead to instability if it generates a backlash.
"Macroeconomic stability is still fragile and the reform agenda is difficult, but the authorities have demonstrated a strong resolve to contain the risks," the IMF said in the report.
Egypt fell short on fiscal balance and fuel subsidy cuts in June, but was granted a waiver because that was due to higher costs of imported food and fuel products caused by a larger-than-expected depreciation of the pound.
"The waiver was approved in view of the important measures taken in June to contain fuel subsidies and the planned stronger fiscal adjustment in the next two years, which will keep the program objectives on track," the IMF said.
Egypt floated its currency in November to meet a key IMF demand to support reforms of an economy that has been struggling since the 2011 uprising that toppled longtime autocrat Hosni Mubarak.
The Egyptian pound lost over half its value, while other austerity measures included the cutting of fuel and energy subsidies. Previous Egyptian governments had been reluctant to touch the subsidies, fearing that any cuts could spark street protests.
Inflation has hovered around 30 percent in recent months, but a heavy crackdown on dissent and a ban on unauthorized protests have left few outlets for expressing public anger. The IMF forecasts inflation falling to an average 22 percent over the fiscal year that began July 1.
The economy remains at risk from possible instability and security threats, the IMF said.
Tourism has been slow to recover from the downing of a Russian airliner in 2015, which killed all 224 people onboard and was claimed by the Islamic State group. Since then, security concerns and flight bans have hindered the sector's recovery.
"Lower growth in trade partners would weaken demand for Egyptian output, but removal of flight bans would give a boost to tourism," the IMF said, adding that a "worsening of domestic security conditions could undermine market confidence and the business climate."