The COVID-19 crisis has altered Egypt’s macroeconomic outlook, as the country’s growth in FY2019/2020 and FY2020/2021 had already been lowered to 2 and 2.8 percent in May and June, compared to the pre-pandemic baseline of 5–6 percent in both fiscal years, the International Monetary Fund (IMF) announced on Tuesday.
Given that the global recovery is now expected to be more gradual and domestic activity is projected to remain weak for longer, growth in FY2020/2021 has been further revised down to 2 percent, according to the IMF.
In its country report, the IMF projected Egypt’s domestic activity to contract in the second quarter and the third quarter of 2020, with a slight recovery starting in the fourth quarter of the year and a potentially stronger rebound in 2021 as domestic activity normalises and tourism slowly recovers.
Tourism activity is expected to return to pre-crisis levels only by the second half of 2022, as health concerns and global recovery conditions likely continue to weigh on international travel, according to the report.
Regarding inflation, the IMF expects it to hit 8 percent on average in FY2020/2021, up from 5.8 percent (Y-o-Y) in FY2019/2020, which reflects several underlying factors including unfavourable base effects.
The report also stressed that Egypt’s public finances are under pressure, as the public debt is projected to surge to 93 percent of GDP in FY2020/2021 before resuming its downward path accompanied by a planned return to primary surpluses of 2 percent of GDP.
The report attributed such an increase to the current baseline primary surpluses of 1.4 and 0.5 percent of the GDP in FY2019/2020 and FY2020/21 respectively, which target a more prolonged economic support, including the government’s purchases of grains and medical supplies to bolster its strategic stockpile to protect food and health security.
The banking system has remained stable, according to the report, as the most recent data indicates that the system was liquid, profitable, and well capitalised heading into the crisis; however, risks around banks’ loan portfolios, capital costs, and profitability have increased due to the economic slowdown, according to the IMF’s estimations.
In this regard, the IMF expects Egypt’s external balances to deteriorate compared to the baseline under the rapid finance instrument’s $2.4 billion loan, which Egypt obtained in May, reflecting the significantly weaker global outlook and lower foreign inflows.
“There is considerable uncertainty around Egypt’s economic outlook, with risks tilted to the downside. IMF Staff’s baseline projections are predicated on normalization of domestic and global economic activity by end of 2020. However, a more severe and/or prolonged shock to economic activity and delayed recovery could further aggravate public finances, resulting in greater financing needs, and higher public debt and risks to debt sustainability. The greater output losses could also lead to higher unemployment, rising poverty and inequality, and financial stability risks, all of which could undermine social support for the government’s reform plans. Moreover, a further tightening of global financial conditions could put renewed pressure on capital flows and the government’s borrowing costs,” the report says.
For the one-year $5.2 billion loan that the IMF’s Executive Board approved for Egypt in June under the stand-by agreement (SBA), the report revealed that the authorities’ policies, supported by the SBA, will aim to maintain macroeconomic stability while pursuing targeted structural reforms to improve debt management and private sector-led growth.
Amid the uncertainty the COVID-19 crisis imposes, the SBA loan seeks to strike a balance between providing the crucial short-term stimulus to minimise the human and economic toll of the pandemic while avoiding build-up of imbalances in the medium term, in addition to recalibrating policies and priorities to continue to strike this balances as the crisis evolves, according to the report.
The program also targets a primary surplus of 0.5 percent of GDP for FY2020/2021 to balance crisis-related spending while avoiding an excessive increase in public debt, according to the report, while The current baseline aims to restore the pre-crisis primary surplus of 2 percent of GDP in FY2021/2022 and resume the reduction in public debt, according to the report.
Under the program, Egypt is committed to continuing structural reforms that already began under the Extended Fund Facility (EFF), under which Egypt had obtained the $12 billion to finance its economic reform program, including fiscal structural reform, enhancing role of the private sector, according to the report.