Eighteen months after the beginning of the Revolution, Egypt’s economy is still suffering from a severe downturn and the government faces numerous challenges. The biggest challenge is how to restore growth and market confidence... Read More »
Egypt has undergone dramatic political changes since the 2011 revolution toppled the regime of former President Hosni Mubarak. In June 2012, elections were held and Mohamed Morsi won 51.7 percent of the vote. President Morsi, a leading member of the Muslim Brotherhood and the Freedom and Justice Party (FJP), resigned from both organizations and took office on June 30, 2012. A new Constitution was passed in a referendum in December 2012. The Shura Council, Egypt’s upper house of parliament, drafted laws regulating protests and elections which were deemed unconstitutional by the Supreme Constitutional Court. The delayed parliamentary elections are scheduled to be held in October 2013. All Islamist-affiliated parties confirmed that their participation. The opposition party, National Salvation Front’s (NSF) leadership, appears divided with founding member Mohamed ElBaradei calling on Egyptians to boycott the elections while former presidential candidate Amr Moussa giving indications that the NSF might participate if the European Union and the Carter Center monitor the process. Parliamentary elections are viewed by analysts as central to reaching some political stability.
Egypt’s economy is still suffering from a severe downturn and the government faces numerous challenges as to how to restore growth, market and investor confidence. Political and institutional uncertainty, a perception of rising insecurity and sporadic unrest continue to negatively affect economic growth. Real GDP growth slowed to just 2.2 percent year on year in October-December 2012/13 and investments declined to 13 percent of GDP in July-December 2012. The economic slowdown contributed to a rise in unemployment, which stood at 13 percent at end-December 2012, with 3.5 million people out of work. Foreign exchange reserves have continued to decline and are now less than 3 months of imports.
The government also needs to reconcile the need for more public spending with the objective of reducing the deficit, which rose to 11 percent of the GDP in FY11/12. A major challenge the government faces is managing the state budget which includes salaries for public sector and subsidies, items that account for more than half of all public expenditures. Measures to further reduce fuel subsidies planned for April 2013 have now been postponed to later this year. Ongoing political tensions have prolonged Egypt’s bid to secure a $4.8 billion loan from the International Monetary Fund (IMF). The IMF has been discussing a program of support with the government and calling for stronger fiscal adjustment, full disclosure of underlying measures, and broader political support.
Over the past two decades, Egypt showed marked improvements in a number of social indices: infant mortality and malnutrition among children under five both decreased by half and life expectancy rose from 64 to 71 years. The economy and the living standards for the vast majority of the population improved although in an uneven manner. The Household Income, Expenditure and Consumption Survey (HIECS) for 2010/2011 showed that the poverty rate increased from 21.6 percent in 2008/09 to 25.2 percent in 2010/11. Conversely, the extreme poverty rate declined from 6.1 percent in 2008/09 to 4.8 percent. Inequality remained constant over the last 2 years, according to the Gini coefficient recorded with 31 percent in both 2008/09 and 2010/11. Although only a little over half of the population lives in rural areas, more than 78 percent of the poor and 80 percent of the extreme poor live there. These income disparities are reinforced by the gaps in social indicators, where virtually all health indicators and literacy rates are worse in Upper Egypt than in Lower Egypt and worse in rural areas than in urban areas. Illiteracy rates among young women in Upper Egypt are 24 percent, twice the rates of their male counterparts. The new government also faces the challenge of addressing social inequality. This will involve developing an education system that equips students with the skills to compete in the global economy, and a private sector governed by transparent rules that allow for equal access to both entry and opportunities. A better targeted system of social benefits would ensure that the needs of the most vulnerable are being met while reducing the pressure on the national budget. The previous government had made efforts to modernize the economy with a program of privatizations. While there had been periods of sustained growth, averaging seven percent before the economic slowdown in 2008, the opportunities it created were not shared equally. The uprising was motivated by the perception that both the political and economic systems were rigged in favor of a privileged minority. This was equally true of the expansion of the private sector, which was seen as yet another way of benefitting the elite. Investment will be needed to stimulate business activity as the only source for the scale of jobs and opportunities needed. The education system will need reforms that gear it more toward a market economy, as enterprise surveys have shown that workers’ skills do no match the needs of private businesses.
Updated: April 2013
An interim strategy note (ISN) that defines the program of support for the government through December 2013 was endorsed by the World Bank Board of Directors in June 2012. The ISN is based on three pillars: economic management, jobs and inclusion. It focuses on actions expected to lead to sustainable, longer-term benefits. The pillars aim at: (i) improving economic management through control of the fiscal deficit and initiating reforms to enhance transparency in government operations; (ii) creating opportunities for short-term, productive job-creation, particularly for women and young people, and initiating steps to improve the environment for longer-term private sector job creation; and (iii) fostering approaches that will broaden access to and greater participation in the delivery of economic and social services for disadvantaged groups, again with special attention paid to women and young people, and to lagging regions of the country.
The focus of the ISN reflects concerns and suggestions expressed during in-country consultations with a wide range of stakeholders, including the government, civil society, members of the main parties, academicians, bankers, private sector, other donors, and trade unions.
The ISN envisages a program estimated at US$0.9 billion International Bank for Reconstruction and Development (IBRD) loans for investment projects in the power and transport sectors. This is in addition to a project approved on June 28, 2012, the US$200 million Emergency Labor Intensive Investment Project is estimated to create 250,000 employment opportunities over three years, targeting mainly youth in poor regions and expanding opportunities for females.
The government has made good progress on a development policy loan (DPL) for tentatively US$750 million in support of governance and social safety net (SSN) reforms. In both governance and social safety nets, the Bank is helping Egypt find the right "solutions" not just analytics, working across sectors and drawing the best skills from within the Bank by sharing global experience in design and management of efficient SSN programs, including an analysis of the proposed smart cards, ways to improve administration and accountability, and to better identify the poor and vulnerable. Technical assistance in both fuel subsidy and social safety reforms is being designed in the context of the Transition Fund.
The World Bank’s current portfolio includes 22 projects from the IBRD for a total commitment of US$4.1 billion (Power: 38.9 percent, Transport: 21.6 percent, Financial Sector: 14.7 percent; Agriculture and irrigation: 5.4 percent; Social Sectors: 8.5 percent; and Water & Sanitation: 8 percent).
Egypt is the International Finance Corporation’s (IFC), the World Bank’s private sector arm, largest exposure country in the Middle East and North Africa region with a total committed portfolio of US$1.1 billion in 34 companies (as of end-January 2013). The portfolio is diversified and includes investments in the financial, infrastructure, oil and gas, agribusiness, manufacturing and health care sectors. IFC’s large investment program is complemented by a strong Advisory program in Egypt. During the past few years, IFC has provided assistance in the areas of strengthening financial markets, simplifying business start-up procedures, supporting SMEs, initiating Public Private Dialogues, improving corporate governance, and providing transaction advice for public-private partnerships in health, education and infrastructure. IFC is also supporting Egypt in becoming a regional hub for commercial mediation and is engaging in the area of debt resolution.
The Multilateral Investment Guarantee Agency (MIGA) does not have any exposure from guarantees in Egypt. However, MIGA’s most important contribution to date has been to support investments by an Egyptian telecom company(Orascom Telecom) in two telecom projects in Pakistan and Bangladesh, with a combined gross exposure of US$152 million – an example of South-South investment which is a key priority for MIGA. Requests for MIGA’s guarantees into Egypt are limited for now, as many investors are holding back on investments until the election cycle is complete and the political situation stabilizes but MIGA is following up on several leads especially in the infrastructure and energy sectors.
The World Bank Group is coordinating closely with the African Development Bank and the European Investment Bank to support infrastructure development during the transition period. This is in addition to a broader international effort in Egypt, which includes the European Commission (EC), bilateral agencies, Gulf countries, Japan, United Nations agencies and United States Agency for International Development (USAID). The Egyptian government takes the lead in donor coordination efforts in the country.
Updated: April 2013
The World Bank has had a long term commitment to Egypt and will continue to offer a full range of support. The Bank has implemented a variety of projects which targeted multiple issues. Following are some of the results:
An IBRD-supported Skills Development Project has been implemented with the participation of numerous partners such as federations, associations, economic sector councils, and the private sector. This project has trained 22,000 workers in 800 Egyptian enterprises.
In the financial sector achievements were made in: (i) operational status of Real Time Gross Settlements (RTGS) and Automatic Clearing House (ACH) with capacity to encompass low value payments, (ii) increase in the number of government workers and retirees receiving payments through financial institutions, 2.9 million in 2011, compared to 0.6 million in 2008; (iii) Central Bank of Egypt issued regulations on mobile phone payments, and issued licenses to two banks and their mobile phone partners; and (iv) licensed money transfer from customer to customer and from customer to merchant. Key profitability and efficiency indicators of the state-owned commercial banks continued to improve despite the global crisis and the immediate implications of the January revolution. Improvements in indicators is evident in: (i) decline in Non-Performing Loans (NPLs)-to-total loans, from 14.8 percent in 2008 to 10.9 percent in 2011; (ii) increase in provisions-to-NPLs from 92.1 percent in 2008 to 94.6 percent in 2011; (iii) decline in the state-owned enterprises (SOEs) NPLs to reach zero in 2011, as opposed to LE 10 billion in 2008; and (iv) increase in the capital adequacy ratio of the banking system to reach 15.6 percent, compared to 14.7 percent in 2008. Although restructuring of the specialized state-owned banks was at a slower pace, PBDAC managed to improve its coverage ratio from 51.8 percent in 2008, to 60 percent in 2011.
Mortgage Finance: Achievements of the Mortgage Finance Project include: (i) An increase in volume of market-based mortgage loans from LE 300 million in 2006 to LE 4.5 billion in 2011 exceeding the initial target of L.E 4 billion; (ii) an increase in the length of term to maturity of a mortgage from 7 years in 2006 to 16 years in 2011, exceeding the target of 15 years; (iii) An increase in mortgage finance companies from 2 in 2006 to 12 in 2011, much beyond the target of 6 companies and (v) A rise in bank lending for mortgages from LE 12 million in 2006 to LE 2.6 billion in 2011.
Energy Development: IBRD loans have successfully financed the expansion of power-generation capacity. Since 2005, the IBRD has approved over US$3 billion in funding for four investment projects in the energy sector, which are under implementation and promise over 3,500 megawatts of efficient generation capacity.
Transport Development: IBRD has worked in partnership with the government since 2003, helping to boost airport capacity to 14 million passengers a year from 9.5 million.