The coronavirus crisis is wreaking havoc on economies around the world, and Egypt is no exception. As a multifaceted crisis, Covid-19 has hit hard the health sector as well as the social and economic fabrics of Egyptian society and its well-being. After a three-year successful structural adjustment programme, Egypt was on the verge of taking off into the next level towards inclusive, private sector led growth of the economy. However, Egypt’s adjustment programme did not plan for the dire times of Covid-19, which has had its grip felt, pushing Egypt to resort to the IMF programmes for Structural Stand-by Arrangements (SBA) and Rapid Financial Instruments (RFI), lest it loses its pre-Covid achievements. The Covid-19 crisis has brought to the surface the increased dependence of the Egyptian economy on foreign exchange earnings, such as tourism and remittances, which are at the mercy of exogenous shocks. Covid-19 may entail an opportunity to reshape Egypt’s economy and to delve into moving away from a rent economy into a more productive and competitive economy.
Prior to the emergence of Covid-19, Egypt had successfully terminated its adjustment programme with the IMF (2016-19). Inflation as well as unemployment levels were at single digits. The outlook was favourable with a projected GDP growth of six per cent in 2020 that would have counted among the highest worldwide. Egypt was ready for further institutional and transformational reform, as well as a more conducive business environment for the private sector. Covid-19, however, came to hit the very indicators that Egypt worked so hard throughout its reform drive to stabilise, and the heavy sacrifices the people had to undergo to support. Real GDP is expected to decline by four per cent in 2020 bringing it to two per cent growth at most. Measured against the 2.7 per cent rate of population growth, which is one of the highest global growth rates, means that Egypt would suffer a negative per capita growth rate.
Furthermore, due to the global impact of the pandemic and the worldwide lockdown, Egypt is encountering a huge drop in its net financial inflows. It is most unfortunate that such a shortage of finance comes at a time when the prevailing conviction was that Egypt was pulling itself out of the bottleneck. Egypt lost its income from the tourism sector, faced a significant drop in Suez Canal revenues, and a sharp contraction of export proceeds. The steep descent overnight in global oil and gas prices, from $60 per barrel to no more than $25 per barrel, is leaving its mark on Egypt’s budgetary outlays. Adding to all this, the fall of remittances by 20 per cent globally will have a devastating effect on Egypt’s economy, as the world’s fifth largest recipient of remittances. According to the World Bank, the decline in remittances may even exceed its closest comparison in the 2008-09 global financial crisis, when remittances fell around five per cent. Remittances and tourism are the two largest sources of foreign currency for Egypt and may be difficult to recoup for some time into the future in the post-corona era.
In line with its request, and as approved by the IMF Executive Board on 11 May, Egypt will receive $2.772 billion (100% of quota) from the IMF Rapid Financing Instrument (RFI) to fight the effects of Covid-19. Contrary to the thinking of many, there is nothing wrong with resorting once again to the fund. It is to the government of Egypt’s credit to have recourse to emergency programmes that the IMF assigns to its members affected by unforeseen crises. By responding to Egypt’s demands, the Fund is keen not to risk the successes previously achieved by the reform programme and associated macroeconomic policies. The new package of financial support will achieve a dual-purpose. First, help Egypt cope with its current plight due to the pandemic. Second, safeguard previous successes, support future reform needs aimed at supporting broad-based private sector led development and a more inclusive and sustainable growth. It is also expected that other financial resources will flow easier into the country due to the agreed RFI, assisting in overcoming the predicament at hand and stimulating development.
As noted, Egypt will have to delve into the structural transformation of its economy and move swiftly from a rent economy to a more dynamic, diversified and competitive economy based on the ability to produce goods and services. Egypt will have to dispense largely — in the short to medium term — with the income it receives from tourism, workers’ remittances and perhaps count on less returns from the Suez Canal and its oil exports. The situation will continue to be fluid and volatile long after the coronavirus pandemic abates.
The government of Egypt will have to continue efforts to kick-start private sector led inclusive growth, which requires — now as before — the alleviation of longstanding constraints, lessening red tape, and further enhancement of the business environment. The challenge is the consolidation and effective implementation of the long-spoken about private-public partnership. This should not deny the government its continued role, post-corona, as public investment in the health and education sectors remains key to inclusive growth.
Moreover, the government should continue with its megaprojects, needed in the framework of the overall development programme. It needs also to expedite the restructuring and upgrading of its institutions and the adaptation of an adequate regulatory framework. Though the efforts made in financial regulation deserves praise, the government needs to exert additional effort to align domestic regulation and compliance in areas such as information and communication technology, trade and standards of international practice to boost international cooperation and exports of goods and services.
The best way forward for Egypt is to transition to a digital economy. This should give a positive twist to the negative impacts of Covid-19. The lockdown of the coronavirus pandemic has made it all the more necessary to move into digitisation of practically all sectors of the economy, including health, education, finance and trade. There is no alternative to e-commerce, digital marketing, e-learning, hybrid-learning, online platforms and delivery businesses rising to the top in the Egyptian market. We already witness fundamental changes in the education sector because of the crisis, and Egypt is to invest in health to combat the pandemic. Digitalisation will certainly help advance the inclusion of the more disadvantaged population in economic growth, so no one is left behind.
There is no room for complacency. Egypt should not shy away from a second wave of reforms in order to tap the potentials of the private sector, sustain growth, enhance productivity and ultimately create jobs. In fact, without pursuing a second wave of economic reform, targeting a more conducive business environment and inclusive growth, Egypt will fail to benefit from its prior successes. It would have ended by paying the costs of the first wave of reform, without acquiring its dividends.
The writer is former assistant foreign minister for international economic affairs.
*A version of this article appears in print in the 21 May, 2020 edition of Al-Ahram Weekly