The Egyptian economy: Cautious outlook on reform

Nesma Nowar , Thursday 24 May 2018

Egypt’s economic reform programme and macroeconomic indicators are well on track, but inflationary pressures and rising oil prices could pose a threat to economic restructuring

Subir Lall
File Photo: Subir Lall, IMF mission chief for Egypt

Egypt’s economic reform programme received another positive nod from the International Monetary Fund (IMF) when it passed the fund’s third review last week.

An IMF mission visiting Egypt this month concluded its review by approving a staff-level agreement with Egypt to disburse the next $2 billion tranche of the IMF’s three-year $12 billion Extended Fund Facility. The agreement is subject to approval by the IMF’s executive board.

Finance Minister Amr Al-Garhi said he expected the tranche to be disbursed by the end of June.

The fourth disbursement will bring the total Egypt has received so far from the fund to $8 billion.

“Egypt has begun to reap the benefits of its ambitious and politically difficult economic reform programme,” Subir Lall, IMF mission chief for Egypt, said in a statement following the end of this month’s mission.

Macroeconomic indicators are on the right track, with Lall saying that Egypt’s GDP growth has continued to accelerate during 2017/2018, rising to 5.2 per cent in the first half of the year from 4.2 per cent in 2016/2017.

Lall also referred to the sharp drop in the country’s current account, reflecting the recovery in tourism and strong growth in remittances, while improved investor confidence has continued to support portfolio inflows.

This was in addition to cooling inflation and the rise in Egypt’s international reserves to reach $44 billion by the end of April, equal to seven months of imports, Lall said.

Remittances from expatriate Egyptians rose by 11.6 per cent year-on-year in February to stand at $2 billion, compared to $1.8 billion in February last year, the Central Bank of Egypt (CBE) said earlier this month.

Remittances jumped 24 per cent year-on-year in the period between July 2017 and February 2018 to reach a record of $17.3 billion, compared to $13.9 billion the previous year, CBE data showed.

Annual inflation dropped to 13.1 per cent in April from 13.3 per cent in March and a peak level of 33 per cent in July 2017.

Lall also spoke about Egypt’s achieving a budget surplus. “Egypt is on track to achieve a primary budget surplus excluding interest payments in 2017/18, with general government debt as a share of GDP expected to decline for the first time in a decade,” he said.

Egypt’s new budget targets achieve a two per cent primary surplus.

Lall further said that continuing energy subsidy reforms accompanied by raising revenues through tax policy reforms would help create fiscal space for important infrastructure projects, targeted social protection measures, and essential spending on health and education.

He said that the social safety net remained a top priority for the authorities and was strongly supported by the IMF.

Egypt’s reform programme has undeniably showed welcome signs of stabilisation, with GDP growth growing at an accelerated pace.

President Abdel-Fattah Al-Sisi said at the Fifth Youth Conference last week that GDP growth for the third quarter of fiscal year 2017/2018 had accelerated to 5.4 per cent.

He flagged population growth as one of the biggest challenges facing the country, saying that Egypt’s economy needed to grow by at least 7.5 per cent a year to lift living standards for a surging population.

A recent report by Harvard’s Centre for International Development (CID) ranked Egypt third in its list of the fastest-growing economies to 2026.

It predicted that Egypt would achieve average economic growth of 6.63 per cent per year for the next eight years.

Egypt aims to achieve and maintain sustainable growth rates of between six and seven per cent, according to Al-Garhi.

While the economic reform programme seems on track and fiscal restructuring seems to be very much in line with the government’s targeted rates, there are risks concerning rising global prices and an expected spike in inflation on the back of a new round of subsidy cuts by the start of the new fiscal year, however.

It was against this backdrop that the CBE decided last week to leave key interest rates unchanged.

The CBE’s Monetary Policy Committee (MPC) kept the overnight deposit and lending rates unchanged at 16.75 per cent and 17.75 per cent, respectively, while leaving the discount rate also unchanged at 17.25 per cent.


“The increase in international oil prices gained momentum in April and May 2018, leading to the materialisation of an upside risk to the domestic inflation outlook,” the MPC said in a statement.

However, it said that the outlook “remains consistent with achieving the inflation target of 13 per cent (+/-3 per cent) in the fourth quarter of 2018 and single digits thereafter.”

Brent Crude oil prices have risen 19.3 per cent since the beginning of 2018, to almost $80 per barrel.

The MPC said that domestic risks surrounding the inflation outlook continued to include potential fiscal reform measures, the evolution of inflation expectations, as well as demand side pressures.

The CBE has cut interest rates by 200 basis points since the beginning of the year as inflation continued to ease, but leaving the rates unchanged this time round is seen as a “pause” to the easing cycle.

London-based research group Capital Economics said that last week’s MPC decision would mark a pause in the easing cycle as inflation would likely continue to fall over the coming years.

“We still expect that the overnight deposit rate will be lowered to 13.25 per cent by the end of this year and to 11.25 per cent by the end of 2019,” it said in a research note.

Higher oil prices will also put pressure on the government’s targets for the budget deficit and allocations for fuel subsidies in the new budget.

Al-Garhi said this week that the government was studying the effects of the rise in global oil prices on the new budget for fiscal year 2018/2019. The budget was originally drafted with an oil price of $60 to $64 per barrel and assumed an average cost of $67 per barrel.

Every $1 increase in the price of a barrel of oil raises government energy spending by LE3-4 billion, Deputy Minister of Finance Mohamed Maait told the financial newsletter Enterprise.

A recent report by Naeem Brokerage, an investment group, said that oil prices remaining high was one of the key risks that had emerged lately for Egypt, and that it could prolong the period of economic restructuring and external support.

It also warned that social instabilities re-emerging because of another round of inflation could coax the government to revert to policies aiming to assuage popular discontent, resulting in a regressive approach towards sustained economic development.

*A version of this article appears in print in the 24 May 2018 edition of Al-Ahram Weekly under the headline: Cautious outlook on reform

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