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publication October 11, 2017

Egypt’s Economic Outlook- October 2017

Macroeconomic conditions are showing signs of stabilization following the liberalization of the exchange rate. Important fiscal reforms are underway, with energy subsidy cuts and containment of the wage bill contributing to fiscal consolidation. However, inflation has spiked to record high levels with negative implications on social conditions. The Central Bank of Egypt (CBE) has tightened monetary policy and the Government has increased spending on social protection to mitigate the impact on living conditions.

Recent Developments

Egypt’s economy is estimated to have grown at 4.1 percent in FY2016/17 (July/June), slightly lower than the 4.3 percent real growth achieved in the previous year. Following two quarters of slowdown in growth, economic activity is picking up, driven primarily by the resilient private and (to a lesser extent) public consumption, as well as by an uptick in investments with net exports contributing positively for the first time in two years, albeit still marginally.

The liberalization of the exchange rate in November 2016 has eased shortages in foreign currency, eliminated the parallel market and kick-started an improvement in Egypt’s external accounts. The Balance of Payments (BoP) achieved a US$13.7 billion surplus (5.8 percent of the year’s projected GDP); 90 percent of which was realized only following the November exchange rate foatation. This compares to a BoP deficit of US$2.8 billion (-0.8 percent of GDP) a year earlier, with the large improvement in FY2016/17 resulting from a narrowing current account deficit (albeit in absolute terms only), and a surge in capital and financial inflows. The current account deficit fell to US$15.6 billion in FY2016/17 from US$19.8 billion a year earlier, due to higher oil and non-oil exports, contained imports, an uptick in tourism and remitances. The capital and financial account jumped to US$29 billion in FY2016/17, from US$21.2 billion due to increased external borrowing as well as the rise in net FDI (reaching 3.3 percent of projected GDP, from 2.1 percent a year earlier) as well as a surge in portfolio inflows that were encouraged by Egypt’s improved outlook and attractive returns on EGP-denominated assets. The exchange rate adjustment has helped in freeing up resources to pay for part of the accumulated arrears to international oil companies, which currently stand at US$2.3 billion in end-June 2017 down from US$3.5 billion in end-2016. Net international reserves spiked to a record level of US$36 billion (7.5 months of merchandise imports) in end-August 2017, compared to US$19 billion in end-October 2016.