Egypt's reforms are at a critical stage.

Egypt is a developing market economy that can-and should-be doing better, in spite of the fact that its macroeconomic statistics in recent years make it look like Egypt is doing very well indeed.

International Monetary Fund (IMF) estimates of Egypt's GDP growth for 2006 show the economy expanding 6.8 percent. For 2007 the IMF predicts 6.7 percent. And for 2008, the IMF's forecasts 6.6 percent growth for Egypt.

While this growth is unquestionably favorable, there is a dark side. The dark side is inflation.

Oddly enough, the most recent inflation information (April 2007) is favorable. According to Egypt's State Information Service (SIS) the annualized rate of inflation declined in April 2007 to 11.7 percent. In March 2006, the rate of inflation was 12.8 percent.

The IMF expects Egypt's rate of inflation to increase 12.3 percent in 2007, and another 10.7 percent in 2008.

Not only does inflation erode consumer purchasing power (and confidence) but it also negatively affects Egypt's competitive position in the global marketplace. In addition, double digit inflation is taken by many investors as a sign that an economy is not being well managed, and thus high inflation becomes a drag on foreign investment. (Although it must be noted that Egypt has done well in terms of FDI in recent years.)

But none of these factors adequately explain why Egypt isn't doing better. The mystery is embroidered by the fact that Egypt began a program of reform in the mid-1990s and has pursued it aggressively ever since.

A March 2007 release by the IMF explored the puzzle in a Working Paper titled, "Egypt-Searching for Binding Constraints on Growth." This closely reasoned paper is a complex rendering of Egypt's economy and is worth a read.

Among the more central of Egypt's difficulties explored by the IMF was the issue of "institutional weakness" where, basically, the country's bureaucracy was not organized sufficiently well to deal with the demands of a sophisticated global economy.

Red tape appears to pervade the crucial export sector, taxes, the "non-financing rationing of credit," and other microeconomic arenas. Education and the development of human capital are as well affected. "There is a broad consensus that the skills produced by public education poorly match market needs, and recent growth may have brought Egypt to the point where education constraints become binding."

The IMF freely acknowledges Egypt's "bold reforms" in several areas. What is required, says the IMF, is an "unleashing of entrepreneurial spirit," which can be accomplished by "reforms along many dimensions and paying attention to the complex interaction among them."

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