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Egypt’s Economic Outlook- October 2016

Egypt’s nascent recovery faded in FY16, owing to the foreign exchange crunch, a drop in tourism, and an unfavorable external environment. The government seeks to implement measures that will address the ongoing macro-imbalances (especially in the external and fiscal accounts), introduce structural reforms to improve the business environment, and redirect resources towards social programs. This would be supported by a 3-year Extended-Fund Facility (for which a Staff-Level Agreement was reached in August and is pending IMF Board approval).

GDP is expected to grow by 3.8% in FY16, slightly lower than the 4.2% growth achieved in FY15, before rebounding gradually thereafter. Growth in FY16 is expected to be entirely driven by domestic demand as consumption remains resilient and public investments crowd-in the private sector. Net exports, on the other hand, continue to be a drag on growth due to the shortages in hard currency and an overvalued real exchange rate. Over the medium term, growth is expected to pick up as economic reforms progress and key sectors recover.

The fiscal deficit is expected to narrow over the medium term, assuming the government implements the envisaged fiscal consolidation measures. On the external front, Egypt’s accounts are likely to worsen in FY16 due to the sharp decline in tourism and lower transfers before recovering slowly afterwards, provided that the CBE continues to ease restrictions on foreign exchange and re-aligns the exchange rate.

Current conditions do not appear conducive to significant poverty reduction. While recent efforts to better target food subsidies and to implement the constitutional commitments to increase spending on health and education should help alleviate poverty, higher energy prices and the new VAT could lead to higher inflation in the short term with a negative impact on the poor. The gradual expansion of programs like Takaful and Karama and geographically-targeted programs such as the “Economic Development for Inclusive and Sustainable Growth in Upper Egypt” hold promise for poverty-reduction in the future.

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