Egypt’s recent macroeconomic and structural reforms stabilized the economy and have allowed the country to enter the global COVID-19 crisis with improving fiscal and external accounts. However, the adverse repercussions of the pandemic have since undermined this recent progress, shedding light on longstanding challenges. These include sluggish private sector activity and job-creation, especially in the formal sector, underperforming non-oil exports and Foreign Direct Investment (FDI), elevated government debt-to-GDP ratio (despite its significant reduction in recent years), below-potential revenue mobilization, and an unfavorable budget structure, with limited allocations to key sectors, such as health and education.
Real growth declined from 5.6% in FY2018/19 to 3.6% during FY2019/20, as the COVID-19 crisis caused a year-on-year contraction of 1.7% during April to June (Q4-FY2019/20). Growth inched upward in July to September and October to December (Q1- and Q2-FY2020/21), with the lifting of a nighttime curfew and easing of social distancing measures, albeit remaining low at 0.7% and 2%, respectively. Unemployment declined to 7.2% by Q2-FY2020/21 (after spiking at 9.6% six months earlier), as the initial drop in total employment at the outset of the COVID-19 crisis was reversed, and both labor force participation and employment rates rebounded from their large initial dip, though remaining below potential at 43.5% and 40.4% of the working-age population. Key sectors, such as tourism, manufacturing, the Suez Canal and oil and gas extractives continue to be severely impacted by restrictions on international travel, the slump in demand, and disruptions to supply chains and trade, both domestically and abroad.
At the outset of the COVID-19 crisis, the government devised an emergency response package worth LE100 billion (1.7% of FY2019/20 GDP). Key measures include an exceptional monetary grant to irregular workers and the expansion of existing cash transfer programs. Forbearance measures were introduced in the form of delayed tax filing and loan repayments, in addition to subsidized credit for targeted sectors. The Central Bank of Egypt slashed policy rates by 400 basis-points to ease liquidity and enable individuals to access credit at favorable terms. This monetary expansion came against the backdrop of subdued inflation, registered at 5.7% in FY2019/20, which further declined to 4.5 percent during the H1-FY2020/21.
International reserves remain relatively ample, at US$40.1 billion at end-January 2021, although still below their pre-crisis peak of US$45.5 billion. External accounts were still bolstered by remittances, rebounding foreign portfolio inflows, and external financing, notably from the IMF, Eurobond issuances, and an innovative Green-bond. Growth is forecast to decline from 3.6% in FY2019/20 to 2.3% in FY2020/21, in light of the ongoing effect of the pandemic, and especially the renewed surge in the COVID-19 cases since end-2020. The slowing of economic activity is expected to have adverse social implications.
Under the scenario that the COVID-19 vaccine is steadily rolled out through 2021 and early-2022, Egypt is expected to slowly start regaining its pre-pandemic growth momentum by FY2021/22/23. A downside scenario for growth over the forecast horizon would happen if the vaccination process becomes more protracted or variants of the disease cause further disruption, with lockdowns repeatedly imposed.
The multi-dimensional health and economic crisis caused by the pandemic underscores the importance of advancing the human capital agenda, fast-tracking digital transformation, and strengthening social protection. A second wave of pending reforms, designed to unleash private sector activity and address Egypt’s long-standing structural challenges, is crucial to create better employment opportunities and improve livelihoods.
Last Updated: Apr 05, 2021