Cairo

THE International Monetary Fund said it expects Egypt to keep its monetary policy tight to ward off against another spike in inflation, adding that while the nation has made significant gains in implementing its economic programme, it remains vulnerable to a broader aversion to emerging markets.

The warning in the fund's fourth review of Egypt's economic programme comes as the government plans further cuts in energy subsidies by the end of the current fiscal year in June. The measures, in tandem with seasonal factors such as the holy month of Ramadan in May and the Eid holiday, are expected to result in a fresh spike in consumer prices.

The IMF, which provided Egypt with a US$12 billion lifeline in 2016 that helped restore investor confidence in the the Arab world's most populous nation, projected an average annual inflation rate of 12.8 per cent for fiscal 2019-20. It also raised its projection for the the current fiscal year to an average 15.8 per cent compared with 14.4 per cent outlined in its third review.

"Monetary policy will remain anchored to the CBE's medium-term objective of guiding inflation down to single digits," the IMF said in the report released on Saturday. "While the pick-up in inflation in recent months was driven primarily by supply-side factors (energy and food prices), the monetary policy stance is expected to remain restrictive to contain possible second-round effects."

Annual headline inflation accelerated to 14.4 per cent in February - a rise that the central bank said it would monitor even as it held the benchmark rate unchanged in its last meeting after an earlier 100-basis point cut. The central bank hasn't released inflation projections for fiscal 2019-20 and instead has said it's targeting a rate of roughly 9 per cent in the fourth quarter of 2020.

Egypt's decision to float the currency and begin slashing fuel subsidies in 2016 set in motion a surge in inflation that rocketed to over 34 per cent, before easing back gradually last year. The central bank had resisted cutting rates - keeping them at levels that helped drum up investor interest in local debt.

In its report, the IMF said that "limited exchange rate flexibility is discouraging inflows into the local treasury market, while the short foreign exchange position of some banks leaves them exposed to a disorderly adjustment of the exchange rate". A wariness about loosening monetary policy, however, has also affected efforts to boost the private sector - a key part of the broader programme - by making it more expensive for companies to borrow from banks. BLOOMBERG