Egypt has made a “strong start” on its reform program, but high inflation threatens macroeconomic stability, according to the recent IMF report, Egypt Oil & Gas reports.

Fiscal and regulatory reforms have improved Egypt’s financial situation and business climate, the report states.

The floatation of the pound has eliminated the currency black market and alleviated the foreign-exchange shortage, the IMF noted, allowing Egypt to increase its foreign-exchange reserves and improve its balance of payments.

Subsidy reforms, the new value-added tax (VAT), and resistance to wage pressures have also improved the government’s financial position, according to the report. Gross public debt, while having risen to 98% of GDP in fiscal year (FY) 2016/2017, is projected to fall “to 88 percent of GDP in 2017/18 and 78 percent in 2020/21.”

The government surpassed the projected primary deficit for FY 2016/2017 by 1% of GDP, the report states, because of slow implementation of the VAT and a greater devaluation of the Egyptian pound than expected. The IMF, however, projects that for FY 2017/2018, Egypt will record a 0.4% primary account surplus due to higher tax revenues and subsidy cuts.

Further cuts to the country’s energy subsidies are necessary, the report states. While noting that Egypt had implemented a number of subsidy cuts, the report points out that “because of depreciation, fuel price increases have been barely enough to contain the fuel subsidy bill as a share of GDP and to increase price-to-cost ratios compared to the pre-program levels.”

The IMF praised Egypt’s structural reforms, particularly the licensing and investment reforms, as “crucial steps in improving the business climate and fighting corruption,” but warned that implantation of the laws was “equally important.”

Because of Egypt’s reform program, “[m]arket confidence is returning and capital flows are increasing,” according to the IMF, auguring “well for future growth.”

High inflation, however, threatens Egypt’s economic stability, the IMF states, warning that the Egyptian government needs to take steps to bring it under control. According to the report, this is Egypt’s top priority.

The IMF praised the Central Bank of Egypt (CBE) for taking steps to draw down liquidity and raise interest rates in an attempt to counteract inflation, but noted that these steps had only been taken “after some delay.”

The full report can be accessed on the IMF website.