For the last three years, Egyptians have shouldered the burden of a tough economic reform programme that has doubled the cost of living and made the business of making ends meet a far-fetched objective for many.
However, recent reports show that the economy is faring well and that its most persistent problems have become more manageable. “The belt-tightening has largely achieved its objectives, setting the economy up for a strong run,” as a report from US investment bank Morgan Stanley put it.
Calling it the “best reform story” in the emerging markets, Ruchir Sharma,
head of emerging markets at Morgan Stanley, recalled that on a recent visit to Cairo the owners of tech start-ups, venture capitalists, and corporate executives had told him that the government had “taken all the right steps” to creating a more business-friendly environment and reining in swelling deficits.
“The guys running the country are brave and making tough decisions” and “the worst seems to be over”, he was told, he said.
The bold moves, including reductions in subsidies from 11 per cent to five per cent of GDP, together with a cut in civil servants’ salaries, have triggered spiralling inflation and a collapse in the value of the pound.
But, according to Morgan Stanley, they have translated into an improvement in the primary balance to achieve a one per cent surplus from a four per cent deficit before the IMF agreement. Public debt has come down from 108 per cent of GDP to 88 per cent, according to the report.
Other positive achievements highlighted by the report are the government’s huge investments in infrastructure and developments in the energy sector including decreasing the country’s reliance on fossil fuel and expansion in renewable power sources.
While there are critics of the low allocations to public services, the report praised the fact that there had been a 40 per cent increase in public investment since 2010 in healthcare and education. It underscored the campaign to scan all 100 million Egyptian citizens for the Hepatitis C virus and other diseases and to digitise all schools.
The Centre for International Development (CID) at Harvard University in the US also sees Egypt as one of the fastest-growing economies in the world until 2027, with an expected annual growth rate of 6.8 per cent.
This is compared to 5.6 per cent achieved in the 2018-19 fiscal year and the projected six per cent for the current year.
Based on the latest 2017 trade data, the centre concluded that Uganda, Egypt, Myanmar, China and Vietnam would be the fastest-growing economies in the coming eight years, with all expected to grow by at least six per cent annually.
The growth projections are based on the single measure of economic complexity, which captures the diversity and sophistication of the productive capabilities embedded in the exports of each country. This measure, according to the report, has been found to predict growth with five times greater accuracy than the Global Competitiveness Index of the World Economic Forum.
The Harvard researchers also give one sub-criteria of the economic complexity measure a lot of attention: the diversity of the country’s know-how.
According to Ricardo Hausmann, director of the Growth Lab at the CID, “a stylized fact of the world today is that poor countries produce few things that everyone knows how to produce, while rich countries produce many things including some things few countries know how to produce. Growth is being driven by a process of diversification to enter more, and increasingly more complex, production.”
The report notes that what unites Uganda, Egypt, China, Vietnam, and Tanzania as the fastest-growing countries in the projection is not that they share the same education level, geographical region, religion, or any measure of institutional quality, but that each has a more sophisticated range of specialised know-how than expected or that its income will drive diversification and growth.
Cooling down fears of one of Egypt’s most talked-about economic problems, the ballooning foreign debt, a research note by Capital Economics said that in the light of the large increase in the country’s foreign reserves, this debt also looked manageable.
William Jackson, chief emerging markets economist at Capital Economics, wrote that Egypt’s external debt had increased steadily since 2015 and had breached $100 billion in the first quarter of this year, reaching 35 per cent of GDP.
He said that this high debt could create problems, since “if risk appetite deteriorates, it can become much more difficult to access new financing from abroad to roll over maturing debts.”
And since most of the external debt is denominated in foreign currencies, exchange-rate depreciation pushes up debt ratios and can create debt-servicing problems.
However, Jackson noted that the risks for Egypt were mitigated by two factors. The rise in external debt has been more than matched by a large increase in foreign-exchange reserves, jumping from $16 billion in 2016 to $44 billion currently.
The currency also looks relatively fairly valued. “Although the real exchange rate has appreciated in the last few years, it is still 15 per cent lower than it was before the devaluation in 2016. The risk of a large currency fall, which would raise the pound value of foreign currency-denominated debt, is thus low,” he said.
The reports agree that more reforms are needed for the growth story to continue, and they include further financial inclusion, more foreign direct investment, and improving the balance of trade deficit.
“We’ll be watching progress closely, knowing investors will flee at the first sign that President Al-Sisi’s reform discipline is faltering. On balance, however, we think Egypt is on track to become a breakout nation,” concludes the Morgan Stanley report.
*A version of this article appears in print in the 29 August, 2019 edition of Al-Ahram Weekly newpaper