In 2014 when President Abdel-Fattah Al-Sisi came to office, the economy was not in great shape. It had been battered by four years of political uncertainty and upheavals since the 25 January Revolution. Economic growth averaged barely two per cent per year, inflation was in double digits, and the unemployment rate had gone from nine per cent in 2010 to over 13 per cent in 2013. In three years, the foreign reserves had fallen from over $35 billion to $17 billion.
However, in 2014, with a new regime in place, there were grounds for optimism. They encouraged support from the Gulf states and international institutions, and fiscal reforms launched in 2014 in the form of the partial lifting of fuel and energy subsidies were an unexpected, and much called for, way of streamlining finances.
The widening and doubling of the lanes of the Suez Canal was also launched in 2014, a national project that attracted LE64 billion from the savings of more than a million Egyptians. The project, inaugurated only a year later, was intended to facilitate traffic in two directions and minimise waiting times for transiting ships.
2015 saw the Egypt Economic Development Conference where hundreds of investors and international organisations gathered to pledge their support and investments in the Egyptian economy. The conference saw the launch of mega-infrastructure and construction projects such as the New Administrative Capital which today is nearing completion.
Another major project launched during the conference and brought to completion was a multibillion-dollar project to build three combined-cycle power plants to boost Egypt’s power-generation capacity by over 40 per cent by connecting 14.4 gigawatts to the national grid. The plants, completed in record time and inaugurated in 2017, supply over 40 million Egyptians with reliable electricity and provide much-needed power to different industrial sectors.
While other projects did not see the light, observers believe the conference was an important political statement that Egypt was safe for investment and that the world was behind it in helping to supply funds for investment.
In 2015, the Suez Canal Economic Zone (SCZone) was launched as a trade hub and logistics centre along the banks of the newly expanded Suez Canal. Almost two-thirds the size of Singapore, the SCZone has four ports and provides investment opportunities for industrial and commercial enterprises, infrastructure and real estate development, logistics, amenities, and technology.
But 2015 also saw the bombing of a Russian flight leaving Sharm El-Sheikh with 224 people on board. This act of terrorism hit tourism hard, one of Egypt’s major hard-currency earners. Following the incident, the trajectory of the economy took a downward trend. Hard currency was becoming short, and government finances, already in trouble, were not making ends meet. These factors forced the government to move forward with an economic reform programme with the blessings of the International Monetary Fund (IMF) that ended in November last year.
After three years of hard work, Egypt’s economic performance had been looking up until the coronavirus pandemic arrived earlier this year. A three-year agreement with the IMF was successfully over, there was record low inflation, GDP growth was nearing six per cent, foreign-currency reserves were at their highest level in a decade, and positive credit ratings and hard-currency earners such as tourism were at their best. The foreign-currency reserves were at more than double their level three years earlier until a few months ago, for example.
The three years had seen the government enacting much-called-for reforms, such as the floatation of the currency, fuel and energy subsidy cuts, and the collection of new taxes such as the value-added tax (VAT). These measures had helped to trim the budget deficit, lowering it to 8.2 per cent of GDP for fiscal year 2018-19, compared to 10.9 per cent in 2016-17 and 12.5 per cent the previous year.
Unemployment had dropped to its lowest level in a decade to 7.5 per cent compared with 9.9 per cent a year earlier and 13 per cent six years ago.
GOING FORWARD: The reforms had not come cheaply, however, as prices had doubled, and many Egyptians were finding it hard to get by.
The government attempted to protect the most vulnerable by increasing cash subsidies and widening their distribution. It also worked on redirecting savings from the fuel subsidy cuts towards improving vital services such as healthcare and education.
By the end of the three years, inflation had begun levelling off after reaching 30 per cent highs in the summer of 2017. Analysts were expecting inflation to maintain single-digit levels throughout the current year.
By the end of the agreement with the IMF, the Egyptian pound had begun gaining ground, appreciating by around 10 per cent and helped by improved foreign-currency inflows on the back of higher hard-currency revenues from tourism, rising natural-gas exports, and foreign investments in treasury bills.
Egypt resumed exporting gas in March this year for the first since 2015, when high demand and depleting production pushed it to become a net importer. However, production from the Zohr field off the coast of the Mediterranean, along with other discoveries, made Egypt self-sufficient in gas once again in 2019 and enabled it to export a surplus.
The Zohr field, discovered in 2015 by the Italian energy company Eni, is the largest natural gas find in the Mediterranean, with an estimated 30 trillion cubic feet of gas.
This positive economic performance, experts say, has been assisted by massive government investments in infrastructure on a public-private partnership model. Criticism has nevertheless been levelled against the government for focusing on infrastructure and costly infrastructure projects while other areas are in need of resources.
However, the government’s argument has been that infrastructure creates more jobs, and real estate encourages the 90 industries contributing to it. The government’s argument has been to look to the future and not just tackle existing problems.
Economists have called upon the government to implement structural reforms to address inequality, increase investment and exports, create more jobs, and find more resources to protect the most vulnerable groups and invest in human capital and innovations.
Its achievements were, however, dealt a hard blow with the outbreak of the Covid-19 pandemic, to the extent that Egypt has had to request another loan from the IMF in the shape of a $2.77 billion loan under its Rapid Financing Instrument (RFI) and a $5.2 billion standby agreement.
The IMF financing will be used to tackle the economic fallout from the coronavirus crisis on everything from the tourism industry to healthcare. What has complicated the situation is the slowdown in demand for Egyptian exports, most of which go to Europe, and the downturn in global trade, which is affecting Suez Canal revenues.
Remittances from Egyptians working abroad have also been affected, with the Gulf region, where most remittances come from, seeing a double blow in the coronavirus pandemic and record low oil prices.
Last year brought in $13 billion in tourism revenues, $26.8 billion of remittances, and $5.9 billion of Suez Canal revenues.
The coronavirus crisis has also prompted foreign disinvestment in Egyptian treasuries, as investors liquidate their holdings, leading to a drop in hard currency reserves to around $36 billion, down from around $45 billion in January. This has in turn meant pressure on the currency, causing it to depreciate against the dollar. Experts believe that if this trend continues, it could trigger higher inflation.
Growth rate projections for this year are not always optimistic. GDP is expected to slow down to three per cent for the fiscal year ending this months, according to World Bank estimates released this week, down from a previous forecast of 5.6 per cent.
Observers have argued that the Covid-19 crisis is an opportunity to boost manufacturing and exports to new destinations whose supply chains have been disrupted because of the dependence on Chinese products, however. They have also said that the crisis has revealed the need to focus more on investment in research, development, and technology.
These recommendations are well noted by the government. This week Minister of International Cooperation Rania Al Mashat told Bloomberg that Egypt is intent on pursuing its refom track despite the Covid-19 crisis. “We have not been sidetracked by covid, but we are looking into details on how to create more jobs, create a more inclusive economy and that is going to be important to investors and for everyone who is following the Egypt story,” she said.
Nonetheless, experts have expressed concerns about growing external debt, and the more so with the new agreement with the IMF. However, the government has said that the IMF provides cheap financing and that it is implementing a debt-reduction strategy that aims to diversify debt instruments and shift the debt portfolio towards longer-term debt.
Egypt’s foreign debt stood at around $109 billion at the end of the fourth quarter of 2018-2019, up 17.3 per cent on the year before.
*A version of this article appears in print in the 11 June, 2020 edition of Al-Ahram Weekly