Egypt undertook exchange rate, monetary and fiscal measures in response to adverse global developments (including soaring prices and tightening financial conditions), aggravated by the war in Ukraine. Yet, these policy actions also reflect underlying structural challenges. The surge in growth to 9% in H1-FY2021/22 (supported by rebounds in export-oriented sectors) is expected to slow down gradually through FY2022/23. Reforms to enhance private investment, exports and FDI remain crucial for the economy’s resilience and competitiveness.
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, and raised policy rates by 100 basis points to curb inflation and contain portfolio outflows. Meanwhile, the government introduced 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.
The recent surge in economic activity has set Egypt on track to achieve growth of 5.5% in FY2021/22. 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 in FY2022/23.
Going forward, enhancing public expenditure efficiency and revenue mobilization will be crucial to avail the fiscal space needed to advance human and physical capital for the population of above 103 million. Importantly, continuing to pursue structural reforms to unleash the private sector’s potential in higher value-added and export-oriented activities are necessary to create jobs, and improve living standards.