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UPDATE 3-Egypt says economy on right track after 5.6% growth in 2018/19

Yousef Saba and Momen Saeed Atallah

(Adds World Bank report, quotes, detail)

CAIRO, July 17 (Reuters) - Egypt's economy grew 5.6% in the 2018/19 fiscal year and is "on the right track" as it completes IMF-backed reforms, Prime Minister Mostafa Madbouly said on Wednesday.

The budget deficit came in at 8.2% of GDP, he said in a statement after the weekly cabinet meeting, which was slightly better than an official forecast of 8.4%.

Deputy Finance Minister Ahmed Kouchouk said the overall budget deficit this fiscal year was at 431 billion Egyptian pounds ($26 billion), equivalent to 8.2%, down from 9.7% last year.

Egypt is emerging from a three-year economic reform programme tied to a $12 billion loan from the International Monetary Fund.

Madbouly said Egypt's primary surplus stood at 2% for the fiscal year, which ended in June, and also pointed to a recent drop in inflation as positive signs. Economic growth was up from 5.3% in 2017/18 and in line with a government forecast.

"We want to achieve bigger numbers. We want to fulfil the dreams and ambitions of the Egyptian citizen more than this and faster than this," Madbouly told a news conference after a cabinet meeting.

Egypt has been praised by international lenders for swift reforms implemented since 2016, though austerity measures and inflation have left many Egyptians struggling to get by.

The reforms included a sharp devaluation of the currency, the introduction of value-added tax and the elimination of subsidies on most fuel products.

Madbouly said the IMF was due to vote on July 24 on the disbursement of the final $2 billion tranche of the 2016 loan.

The move follows Egypt's decision this month to implement the final round of fuel subsidy cuts, which raised domestic prices by between 16% and 30% to bring them into line with their real cost.

The World Bank largely praised Egypt's macroeconomic indicators in its Egypt Economic Monitor report published on Tuesday. But it said the government "is struggling to create the fiscal space necessary to shift towards a human-capital focused policy".

The government has only been able to partially mitigate adverse socioeconomic impacts, it said.

"The second generation of reforms should put larger emphasis on levelling the playing field to allow for more private sector participation in the economy, based on fair and transparent rules of competition and economic empowerment."

DEBT-TO-GDP RATIO DOWN

Headline annual inflation dropped to 9.4% in June from 14.1% the previous month, though it is expected to rise over the rest of the summer as the impact of the latest round of fuel subsidy cuts kicks in.

Madbouly said the ratio of Egypt's debt to GDP has declined to 90.5% in the 2018/19 fiscal year, from 108% the year before, and that the government was targeting a further drop in the current fiscal year to 82%.

Finance Minister Mohamed Maait, speaking at the news conference with Madbouly, said the government was targeting a further drop in the 2010/21 fiscal year of around 70%.

"Today we are proud that in one year, we went from 108 to 90.5," Maait said, referring to the debt-to-GDP ratio.

Egypt's Planning Minister Hala al-Saeed, speaking at the same news conference, said Egypt will pay 160.5 billion Egyptian pounds annually to pension and insurance funds, with a compound interest of 5.7%.

She also said the government would expand its social safety net programmes for Egyptians most in need.

Over five years, Maait estimated that Egypt will pay a total of 1.111 trillion Egyptian pounds to pension and insurance funds.

Madbouly said bolstering industry was a strategic goal for the government.

"Our goal as a state today is the deepening of local manufacturing. This is a strategic goal," he said, adding that Egypt should reduce imports by bolstering industry.

"This is what made successes out of big, giant countries that we all look to, like China and other east Asian countries," he said. "I'm saying this because we still have a long way to go."

Standing in the way of higher Egyptian exports is a focus on traditional areas of comparative advantage instead of goods that are in high demand globally, the World Bank said. Significant trade barriers, especially non-tariff, and connectivity and infrastructure challenges are other obstacles, it said.

Egyptians "can see improved road networks, can see electricity, can see housing," Madbouly said. "But it is natural - and I am with them - that they want better than this and faster."

($1 = 16.5600 Egyptian pounds) (Reporting by Momen Saeed Atallah and Yousef Saba; Writing by Aidan Lewis and Sami Aboudi; Editing by Susan Fenton and Ed Osmond)