Egypt undertook exchange rate, monetary and fiscal measures in response to adverse global developments (including soaring prices, tightening financial conditions and fading demand), aggravated by the war in Ukraine. On March 21, the Central Bank of Egypt (CBE) allowed the exchange rate to depreciate overnight by around 16% to stem the widening net exports deficit. It also raised policy rates by 100 basis points to curb inflation and contain large-scale portfolio outflows that were causing reserve losses. Meanwhile, the government announced a mitigation package worth LE130 billion (1.6% of FY2022/23 GDP) to alleviate the impact of the rising prices through hikes to public sector wages and pensions, tax measures and expanding coverage of the cash transfer programs, among other measures. These policy adjustments were mainly triggered by the adverse global economic developments that were recently exacerbated by the war in Ukraine. They also reflect the need to address structural challenges facing the Egyptian economy that result in the below potential performance of nonoil exports and foreign direct investment (FDI).
Prior to the external shocks that triggered these policy measures, economic activity was recovering strongly, although inflation was on the rise and pressures on external accounts were building. Growth had surged to 9% during H1FY2021/22 (July–December 2021), compared to a modest rate of 1.4% a year earlier. The resumption of international travel and trade, global pent-up demand and favorable base effects allowed for strong rebounds in the export-oriented sectors. On the demand side, consumption and investment improved, but the net exports deficit widened. This was partly because the real exchange rate appreciation over the previous years favored imports growth, and the accelerating global commodity prices also inflated Egypt’s import bill. The net foreign assets position of domestic banks has been in deficit since the beginning of FY2021/22. This indicates that external accounts have been under pressure prior to the escalation of the war in Ukraine, and the banking system may have partly borne the consequences, and indirectly supported foreign reserves. Domestic prices were gradually rising, and inflation spiked to 8.8% in February 2022 (more than 2.7 percentage points higher than its average since the beginning of FY2021/22), reflecting early repercussions of the war in Ukraine.
Egypt is still on track to achieve higher growth in FY2021/22, but economic activity in the near term is expected to be affected by the repercussions of the war in Ukraine, as well as phasing-out base effects. Growth is expected to average 5.5% in FY2021/22, up from 3.3% a year earlier, mainly reflecting the solid performance in the first half of the year. However, base effects and the demand overshoot are expected to start tapering off, and economic activity will be adversely affected by the repercussions of the war in Ukraine. Thus, growth is expected to slow down to 5% in FY2022/23. Inflation is forecast to surpass the CBE’s inflation target range (7 (+/-2) %) through the remainder of FY2021/22 due to the impact of the depreciation, imported inflation and possible supply bottlenecks, along with the continuation of upward adjustments to retail fuel prices. While some social mitigation is expected from the recent fiscal package, existing food subsidy and cash transfer programs, as well as the relatively large reserves of wheat and other cereals, poverty may still increase as inflation undermines real incomes.
External accounts are expected to deteriorate in FY2021/22 due to the widened current account deficit and portfolio outflows. The current account deficit-to-GDP ratio is expected to widen in FY2020/21, due to the higher imports bill, as well as the adverse impact of the Ukraine war on tourism and on demand for nonoil exports (notably by Europe). The capital and financial account is expected to worsen due to the portfolio outflows, as part of the broader emerging markets selloff. That can be potentially more pronounced in Egypt given the country’s concentrated nature of trade and tourism relations with Russia and Ukraine. On March 23, 2022, Egypt requested support from the International Monetary Fund, which can result in a program with potential financing and thus buoy reserves. Other possible mitigating factors include the boost that higher international prices can provide to Egypt’s gas exports, remittances from the GCC, and FDI inflows to oil and gas extractives. Egypt also issued a Samurai bond worth US$500 million in end-March 2022. Other sovereign issuances are expected to continue, including innovative Green Bonds and Sukuk.
The budget deficit and government debt are expected to rise in FY2021/22, before fiscal consolidation resumes over the medium term. The budget deficit is forecast to increase in FY2021/22 on account of the additional mitigation measures introduced in March 2022, in addition to the impact of the soaring international prices and monetary tightening. Together, these factors are driving up the cost of government purchases, subsidies, wages and interest payments. Government debt was already elevated (at an estimated 92% of GDP) at end-FY2021/22, and it will increase due to the higher deficit and the adverse valuation impact stemming from the currency depreciation. This is expected to temporarily dilute the fiscal consolidation gains which had contributed to a consistent decline in the budget deficit-to-GDP ratio over the previous six years.
As such, Egypt continues to face the dual challenge of pursuing fiscal consolidation, whilst raising spending on key human development sectors, social protection and investment. Fiscal space remains constrained by the still-large interest burden and low revenue mobilization. Allocations to the health and education sectors remain limited, despite their cumulative increase in nominal terms (by 43.1% and 33% respectively during the three-year period FY2017/18–20). The sectors’ allocations as a share of GDP (at 1.5% and 2.4%, respectively as per the FY2021/22 budget) are below their pre-FY2017/18 levels. Official estimates indicate recent gains in welfare. However, poverty rates were at 29.7%, as reported for the period October 2019–March 2020. Egypt has been strengthening social protection, expanding existing programs and introducing key mitigation measures at the onset of the COVID19 pandemic and more recently due to the adverse repercussions of the war in Ukraine. Yet, the rising inflationary pressures warrant further intensification of poverty reduction efforts. This necessitates enhancing public expenditure efficiency and revenue mobilization to advance human and physical capital for the population of above 103 million. Continuing to pursue structural reforms to unleash the private sector’s potential in higher value-added and export-oriented activities is necessary to create jobs and improve living standards.
The government embarked on the “Egypt Takes Off” program (FY2018/2019–FY2021/2022) followed by the newly launched National Structural Reform Program (NSRP) (FY2021/2022– FY2023/2024) in order to undertake more structural “second wave” reforms, building on pre-pandemic stabilization reforms. These programs aim to improve the standards of living and service delivery to all Egyptians without discrimination. It seeks to implement a package of structural policies to address existing imbalances, strengthen and better target social safety nets and develop human capital.
Last Updated: May 16, 2022