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Deeper reform needed in Egypt to expand its economic achievements, expert reports say

Egypt’s reform efforts have resulted in positive outcomes, but the country needs to deepen its structural reforms to preserve these achievements, say reports by World Bank and BNP Paribas

Nesma Nowar , Thursday 9 May 2019
El-Areesh Cement Company
File Photo: A general view of the new plant of El-Areesh Cement Co. in the Egyptian Southern governorate of Beni Suef, south of Cairo, Egypt January 31, 2018 (Reuters)

Thanks to the success of Egypt’s economic reform efforts, the World Bank has announced it will extend its 2015-2019 Country Partnership Framework (CPF) with Egypt for two more years, it said in a statement last week.

It said that the extension of the CPF to 2021 aimed to maintain the momentum on reforms and ensure continued progress toward inclusive growth and job creation and more and better opportunities for all Egyptians.

The Egypt 2015-2019 CPF focuses on three areas: improving opportunities for private-sector led job creation, social inclusion and improving governance.

Operations under the CPF extension will work on reforming the health and education sectors, strengthening social safety nets, enabling job creation and private-sector growth, and transitioning Egypt into a digital economy, Marina Wes, World Bank country director for Egypt, Yemen and Djibouti, said in the statement.

The bank has also further hailed Egypt’s economic reforms, saying that they had helped make the business environment more conducive for the private sector and allowed the government to improve its debt sustainability outlook.

Egypt’s economic reform efforts have made significant achievements that have helped lift the economy out of a tight situation, a recent report by the French bank BNP Paribas said.

The report expected growth to accelerate in the short term, thanks to the steady improvement in household purchasing power as inflation gradually eases.

It said that investment prospects were favourable, notably in the energy sector, but on a smaller scale than in recent years. However, a significant rebound in investment in non-hydrocarbon manufacturing seemed unlikely in the short term, the report said.

The report expects economic growth in Egypt not to exceed six per cent by 2020.

The Finance Ministry has revised its growth forecast for fiscal year 2018/2019 to 5.6 per cent, down from 5.8 per cent previously, the daily business newsletter Enterprise reported last week.

An earlier poll of economists by Reuters expected Egypt’s economy to grow by 5.5 per cent in fiscal year 2018/2019, which ends on 30 June.

The economists expected that the country’s economy would grow by 5.6 per cent in fiscal year 2019/2020, a lower rate than the six per cent target of the government in the 2019/2020 draft budget and the 5.7 per cent in fiscal year 2020/2021.

The BNP Paribas report said that the most substantial progress Egypt had made since the start of the economic reform programme in 2016 was in terms of external imbalances, while public finances were recovering gradually.

It showed that in 2017/2018, the current account deficit narrowed significantly to 2.4 per cent of GDP, down from more than six per cent in the previous two years. It is expected to narrow to 2.1 per cent of GDP in 2019 and 1.9 per cent of GDP in 2020, according to the report.

However, the report also warned that the deficit could widen again since Egypt is likely to become a net gas importer in 2020/2021, and investment growth is likely to fuel imports.

In order to preserve the achievements of the ongoing reforms, Egypt needed to pursue structural reforms, the report said.

“Looking beyond the reduction of macroeconomic imbalances, structural changes will be needed to face up to hard-to-curb demographics and to preserve the economic achievements of the past three years,” the report said.

Looking forward, it gave a favourable outlook. It said that over the next two years, the current account balance should continue to improve, although it should remain in negative territory, and the trade deficit should continue to narrow as the country temporarily becomes a net gas exporter.

It added that non-hydrocarbon exports should continue to grow at a moderate pace, while the gradual acceleration in economic growth was expected to boost imports. The report also expected private domestic productive investment to recover mildly as of 2020, which should boost capital goods imports.

Meanwhile, the tourism sector is expected to become the driving force behind the improvement in the external accounts, while foreign reserves are expected to continue growing in 2018/2019 to $47 billion.

As for the budget deficit, the report said that the reforms had significantly reduced this, mainly because of the gradual deregulation of energy prices. The report showed that energy subsidies had averaged six per cent of GDP between 2011 and 2014 but were trimmed to 5.3 per cent in 2018.

The reforms have also significantly improved the primary fiscal balance, excluding interest payments on government debt, the report said. In fiscal year 2017/2018, the primary deficit shrank to 0.3 per cent of GDP, compared to an average of 4.3 per cent for the period between 2013-2017.

The report predicted that the primary balance was expected to shift into positive territory again at 1.7 per cent and 3.3 per cent of GDP, respectively, in 2018/2019 and 2019/2020, thanks to ongoing cutbacks in energy subsidies and a mild increase in tax revenues.

It expected inflation to average 13.8 per cent in 2018/2019 and 10.7 per cent in 2019/2020.

However, despite the improvements and favourable outlook, the report said that GDP growth in Egypt would not create sufficient jobs. It said that economic growth had been relatively buoyant since 2015, but its capacity to absorb a fast-growing active population was still limited.

This was notably due to the social impact of macroeconomic consolidation and the persistence of structural constraints, it said. Creating enough employment is the main challenge facing the Egyptian economy, according to the report.

It said that Egypt’s unemployment rate did not seem to be alarming, however, having declined to 8.9 per cent at year-end 2018 from 11.3 per cent the previous year.

But it added that the employment situation took on another dimension if the share of the active population underemployed in the informal sector was integrated.

The report said that Egypt had the region’s highest population growth at about 2.5 per cent a year, with roughly 600,000 new job market entrants each year.

“In recent years, however, economic growth has not been very job intensive. The main growth engines are in the energy sector, which is not very job rich, and in construction, a source of temporary employment,” the report said.

Meanwhile, tourism, a job-rich sector, rebounded strongly in 2018, and the government’s policy in favour of small and medium-sized enterprises (SMEs) could boost the job content of economic growth, the report said.

It added that Egypt had a large informal sector, accounting for between 40 and 50 per cent of the economy.

*A version of this article appears in print in the 9 May, 2019 edition of Al-Ahram Weekly under the headline: More reform needed

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