Egypt has implemented an economic reform program to stabilize the economy and address macroeconomic imbalances through the liberalization of the exchange rate, fiscal consolidation, and energy sector reforms. These measures have helped stimulate growth, generate a solid primary budget surplus, reduce the debt-to-GDP ratio, and replenish foreign reserves. Energy sector reforms have eliminated severe power shortages whilst incentivizing investments in renewables.
Key legislative reforms to improve the business environment have also been undertaken, reflecting positively on the country’s sovereign ratings. The Coronavirus pandemic is expected to undermine Egypt’s recovery, however, due to reduced global demand and the pandemic’s disruptive impact on economic activity.
Real Gross Domestic Product (GDP) growth increased in Egypt to 5.6% in fiscal year 2019 (ending June 30, 2019), compared to 4.6% in the previous three years. This robust performance was sustained throughout the first half of fiscal year 2020, driven mainly by investments and the improving balance of net exports. Job-creation has been rather subdued, with the share of employed individuals within the working-age population remaining low, at 39%, and may be hindered further by the adverse effect of the COVID-19 pandemic on the Egyptian economy, notably through its impact on domestic production, trade, tourism, and remittances.
The Central Bank of Egypt (CBE) has resumed its monetary easing cycle throughout the first half of fiscal year 2020, thus contributing to a nascent recovery in private credit. The CBE cut policy rates successively, following a strong moderation in inflation, which dropped to an average of 5.8%, compared to 14. % during the first half of fiscal year 2019, supported by favorable base effects and contained food inflation. Furthermore, in March 2020, the CBE undertook an additional 300 basis-points policy rates cut, in a surprise move to support credit extension, especially to the private sector, in the face of the negative repercussions of the COVID-19 pandemic.
The country’s fiscal accounts have improved, but remain under pressure, mainly due to underperforming tax revenues. The budget deficit declined to 8.1% of GDP in fiscal year 2019, from 9.7% a year earlier. While the primary surplus continued to increase in early-fiscal year 2020, preliminary data indicate that the revenues-to-GDP ratio decreased, especially from VAT, which reflects weaker private consumption.
The government debt-to-GDP ratio has dropped sharply (by 18%age-points over the past two years), yet it remained elevated at 90.3% in end-fiscal year 2019, and large interest payments continue to be a heavy burden on the budget. In March 2020, Egypt announced the allocation of EGP100 billion (estimated at 1.6% of the FY2019/20 GDP) as an emergency response package to combat the COVID-19 pandemic in Egypt.
While Egypt’s fiscal space has gradually improved, thanks to fiscal consolidation measures in previous years, the implications of the COVID-19 pandemic might temporarily hinder the budget deficit and government debt reduction efforts.
Foreign reserves are at comfortable levels, stabilizing at US$45.5 billion in end-February 2020, covering 8 months of merchandise imports, replenished over the past three years mainly through remittances, the Eurobond issuances, and foreigners’ purchase of Treasury bills and bonds, along with the external borrowing. Exports and FDI are yet to rebound.
Concerns remain regarding households’ welfare as real incomes have not yet recovered from the previous two years’ spike in inflation. The poverty rate–based on the national poverty line–increased from 27.8% in 2015 to 32.5% in FY2017/18. Egypt took a number of social safety net measures, including scaling up the existing cash transfer program, Takaful and Karama, adding an additional 60,000 households in March. Another 100,000 households will be added in the new Fiscal Year.
The government has also introduced a one-time-off cash payment to irregular workers impacted by the COVID-19 outbreak, targeting 1.5 million workers with EGP500/month for three consecutive months starting April 13, 2020. It has extended post office working hours, used schools as payment sites, staggered payments over several days, and is trying to innovate with e-payments to promote social distancing. It has also introduced exceptional wage and pension increases (of 14% starting next FY), revised tax exemption thresholds, and raised the minimum wage.
The pandemic aside, Egypt is launching another wave of reforms to address longstanding constraints to a strong, private sector-led economic transformation. These s should focus on cutting red-tape, lifting non-tariff trade barriers, fostering a level-playing field between the public and private economic actors, and facilitating access to key inputs (such as land and skilled labor) to cater to the private sector and allow it to expand into more productive sectors, such that it becomes capable of generating more and better jobs that can boost shared prosperity and reduce poverty.
Last Updated: May 01, 2020