Record low inflation, GDP growth nearing six per cent, foreign currency reserves at more than double their level three years ago, and positive credit ratings — these are just some of the signs of a vastly improved macroeconomic position in Egypt following three years of International Monetary Fund (IMF)-backed reforms. 

Although these years may have seemed to have gone by in the blink of an eye, their positive outcome did not come cheap, however. Many Egyptians saw the ground moving beneath their feet, as prices doubled on the back of a currency that lost half its value, and decades of energy subsidies were removed. 

Subsidies on fuel products were reduced by about 40 per cent in the summer of 2019 to reach LE52.96 billion, down from around LE89 billion last year. There is now a system in place to adjust fuel prices every three months according to international oil prices. 

This year, annual headline inflation began levelling off after reaching 30 per cent highs in the summer of 2017. In October, it recorded 3.1 per cent, the lowest in over a decade, but began rising slightly in November when it reached 3.6 per cent. Analysts see inflation as maintaining single-digit levels throughout next year.

The Egyptian pound also gained ground this year, 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 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.

Meanwhile, the country’s budget deficit, one of the reasons that triggered the reforms, came in at 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.

All these are manifestations of the positive outcome of the reforms, said Sherif Fahmi, a manager at N Gage Consulting, as macroeconomic stabilisation and growth recovery were achieved despite regional instability and a global economic slowdown. 

He also pointed to the unemployment rate dropping to its lowest level in a decade. Unemployment fell to 7.5 per cent, its lowest level in 30 years in the second quarter of 2019, compared with 9.9 per cent a year earlier and 13 per cent six years ago. 

Fahmi noted that budgetary primary balances had stemmed from the containment of energy subsidies and increased revenue collection, notably from the new value-added tax (VAT) and income tax. Egypt’s external position has also stabilised, with foreign reserves recording around $45 billion at the end of November. They stood at around $17 billion three years ago.

This positive economic performance, according to Fahmi, has been assisted by massive government investments in infrastructure on a public-private partnership model. He said growth had been mainly driven by the construction, real estate, gas, wholesale and retail trade, and tourism sectors. GDP growth is expected to reach 5.9 per cent in the current fiscal year.

The main drivers of growth going forward will be in the manufacturing sector, added Habiba Ahmed, also at N Gage Consulting. She estimated that this would contribute 23 per cent of GDP and hoped that the new Export Support Programme enacted this year would help achieve this target. The programme has promised to settle payments owed by the Export Subsidy Fund since 2012 and support new exports.

The information and communications technology sector, Ahmed said, was also set to make significant contribution to the economy, adding that it had contributed approximately eight per cent to GDP in fiscal year 2018-19. 

“Government digitisation efforts are paving the road towards optimisation and efficiency, alongside unprecedented development of infrastructure and human capacity building,” she said. Digital service exports, said Ahmed, had already recorded $3.67 billion in fiscal year 2018-19 and were expected to grow 12 per cent in 2020.

GOING FORWARD

Ahmed hopes that investments will grow on the back of efforts to improve the business climate and lower interest rates. The Central Bank of Egypt (CBE) cut interest rates by 450 basis points in 2019 amidst cooling inflation, and they fell from around 17 per cent in 2018 to around 12.5 per cent by the end of 2019 with further cuts foreseen for 2020. 

“Despite the institutional reforms, Egypt is still heavily bureaucratic, and this poses an obstacle for investors looking to either set up or grow,” Ahmed said, however. She said Egypt’s investment climate was hampered by a lack of foreign direct investment (FDI) and a concentration of it in brown-field investment when a firm invests in an existing facility. 

FDI was often concentrated in capital-intensive sectors, such as oil and gas, which limit positive spill overs in labour-intensive sectors and do not necessarily create jobs or further business opportunities. Nonetheless, Ahmed pointed to a set of institutional and legislative reforms that aim to increase investor trust and facilitate doing business in Egypt.

“Draft legislation such as the personal data-protection law and amendments to the customs act hold the potential to satisfy investors’ needs and tackle previous obstacles,” she said.

In fiscal year 2018-19, FDI to Egypt recorded inflows of $5.9 billion, according to the Ministry of Finance’s monthly bulletin. A few years back, Egypt had been targeting $10 billion in investments.  

Better investment levels may be possible by capitalising on Tharaa (Wealth), Egypt’s new sovereign wealth fund, Fahmi added. This began operating in October 2019 and will bring the government and private sector closer in strategic projects, Fahmi said. He also hopes for a greater role for small and medium enterprises (SMEs) to drive the economy forward, especially in the light of a draft SMEs law and enhanced access to finance. The draft law aims to encourage informal businesses to formalise. 

Fahmi said it was vital to avoid an economic recession by increasing consumer spending, handling the trade balance deficit, and improving the manufacturing and export-sector performance. The preservation of the current cushion of foreign exchange reserves was also a must for sustaining a flexible exchange rate, he stressed. 

Fahmi would like to see a new non-loan IMF agreement take place to anchor the achieved reforms and ensure the continuation of sound policy implementation. “The reforms should aim to provide the necessary 700,000 new annual job opportunities to the growing young population,” he said.

Another economist who preferred to remain anonymous said that the reforms had tackled the imbalances in the economy but said more were now needed. Beneath the surface there was more to be desired in terms of structural reforms to address inequality, increase FDI and exports, create more jobs, and find more resources to protect the most vulnerable groups and invest in human capital and innovations. 

She too wanted to see another agreement with the IMF to anchor the further stabilisation of the economy and boost investor confidence. However, the “agenda should embrace priority structural reforms to address social concerns and make growth more inclusive for the wider population,” she said.

She added that going forward the sources of growth should be the private sector, employment-intensive manufacturing projects, SME growth, exports, innovation and non-renewable energy, all supported by tourism, remittances and FDI flows. 

She called for reforms in education, healthcare, and direct support to vulnerable groups. She also called for more taxation of the informal economy, the levelling of the playing field for the private sector, and a more aggressive tackling of red tape to improve Egypt’s rankings in competitiveness and ease of doing business indicators. 

Egypt ranked 114th among the 190 countries surveyed by the World Bank’s annual Doing Business Report this year, six places higher than last year. Small and medium-sized enterprises in Egypt saw tangible improvements in starting a business, getting electricity, protecting minority rights, and ease of paying taxes, it said. However, the report added, Egypt still underperformed in the areas of trading across borders and resolving insolvency. 

The economist who spoke anonymously expressed concerns about growing external debt. The continued reliance on external funding, particularly hot inflows, was problematic as it increased artificial liquidity that could dry up quickly under a sudden stop scenario that could create problems for the international reserves and the stability of the exchange rate, she said.

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. “To the extent that we need to tap the international markets, we need to make sure that the resources of foreign income such as exports, tourism, remittances and FDI flows are back on track to contain the deficit in the current account and ensure that inflows are supporting growth and are of long-term nature,” the economist added.  

Fahmi agreed, saying that although Egypt had succeeded in reducing its debt-to-GDP ratio to 90.5 per cent by the end of June 2019, compared to 98 per cent in the same month last year, the journey to debt sustainability remained long. 

Constant borrowing may lead to inflationary pressures and tax increases, which will inch up the already existing strain on the government, the private sector, and the population as a whole, he said. Even though Egypt’s issuance of euro-bonds had been oversubscribed this year, this threatened the sustainability of the international reserves, he added.

Aware of this problem, the government began implementing a debt-reduction strategy in 2019 that aims to diversify debt instruments and shift the debt portfolio towards longer-term debt.

*A version of this article appears in print in the  26 December, 2019 edition of Al-Ahram Weekly.