In 2014, the Government started implementing a bold and transformational reforms program, aimed at spurring the economy, enhancing the country’s business environment and staging a balanced and inclusive growth. The first wave of reforms package focused on rebalancing the macroeconomic aspects, which included difficult policy choices that were adopted simultaneously; such as the VAT Law, reducing energy subsides, containing the high growth of the wage bill and the liberation of the Egyptian Pound. The second wave of reforms targeted improving governance and investment climate, which includes the Civil Service Reform Law, that was passed in October 2016, in addition to a set of undergoing reforms targeting to remove investment barriers and attract local and foreign investments. The Government of Egypt’s reform program is widely endorsed by key Development Partners, including through the World Bank’s programmatic Development Policy Financing (DPF) series, the IMF Extended Fund Facility (EFF) and the African Development Bank parallel financing.
The implementation of reforms along with the gradual restoration of confidence and stability are starting to yield positive results. The economy is gradually improving with the annual rates of GDP growth reaching 4.3 percent in 2015/2016, up from an average of only 2 percent during the period 2010/11-2013/14, and grew at 5.2% in H1-FY18, compared to 3.7% a year earlier, mainly driven by investment, exports and consumption. The overall budget deficit declined in the first half of FY17 to 5.4 percent of GDP, down from 6.4 percent in the same period in FY16, then decreased by 1 percentage point to 4.4% and 0.3% of GDP, respectively, during H1-FY18 (July/June), compared to the same period the year before. Following the floatation of the local currency, the exchange rate has initially displayed some volatility, but has subsequently started to strengthen, notably with the strong foreign investor demand for local debt instruments. Net international reserves surged to a record high of US$42.5 billion in end-February 2018, after the most recent international bond issuance of US$4 billion Eurobond to help plug the country’s financing needs.
To alleviate the adverse effects of the economic reforms on the poor and vulnerable, the government has scaled up key social protection short-term mitigating measures, including through higher allocations of food smart cards and targeted cash transfer programs and shifting from generalized energy and food subsidies to more poverty targeted programs.
Despite the Government’s current efforts, social conditions remain difficult due to the episode of high inflation and the erosion of real incomes. While extreme poverty in Egypt is almost eradicated, high inflation over the course of FY17 has taken a toll on social and economic conditions. Regional disparities are an enduring characteristic, where Upper Rural Egypt continues to lag behind other regions, with poverty rates reaching as high as 60% in some governorates. Although, the unemployment rate has declined to 11.3% in Q2-FY18, reaching its lowest level since 2010, still, unemployment remains high especially among youth and women.
The ability of the private sector to create jobs (especially for the youth and women) is critical to reap the benefits of the reforms and mitigate the impact on the non-poor but vulnerable and the middle class. To that end, the government has introduced a series of key legislative reforms to enhance the business environment. These include a new industrial licensing law, investment law, bankruptcy law, capital markets law, as well as amendments to the companies law, each dealing with important aspects of the business environment in Egypt. The effect of such extensive reforms on private sector activity and job-creation will depend on their effective implementation.
Going forward, the economy is expected to continue recovering over the medium-term. Growth is expected to increase and budget deficit is projected to continue declining. However, this positive outlook is conditioned by the Government’s ability to address real sector problems that hinder the competitiveness of the Egyptian economy and undermine growth prospects, in particular, a cumbersome business environment and the absence of a level-playing field.
Last Updated: Apr 16, 2018