Egypt’s economic reforms: Considerable gains yield robust ability to absorb likely shocks

Doaa A.Moneim , Monday 8 Jun 2020

Sisi
Egypt's President Abdel Fattah El-Sisi (Photo: Al-Ahram)

Over the past six years, Egypt has managed under the leadership of President Abdel-Fattah El-Sisi to prepare and implement its successful economic reform programme in light of its vision 2030, which was adopted to put the Egyptian economy on the right track in accordance with global economic trends.

In November 2016, Egypt commenced its economic reform journey backed by the International Monetary Fund’s (IMF) support.

The IMF’s executive board had approved financial assistance for Egypt under the Extended Fund Facility (EFF) arrangement for $12 billion, disbursed in six tranches.

According to the IMF’s fifth and last review on the EFF loan, which was issued in July 2019 when the sixth and last tranche of the loan was disbursed to the country, Egypt successfully completed the three-year arrangement under the EFF and achieved its main objectives.

The macroeconomic situation has improved markedly since 2016, supported by the authorities’ strong ownership of their reform programme and decisive upfront policy actions, according to the IMF review.

Critical macroeconomic reforms have been successful in correcting large external and domestic imbalances, achieving macroeconomic stabilisation and a recovery in growth and employment, and putting public debt on a clearly declining trajectory.

The economic reform programme focused on a number of key pillars, including the liberalisation of the foreign exchange system to eliminate forex exchange shortages and encourage investment and exports, monetary policy aimed at containing inflation, strong fiscal consolidation to ensure public debt sustainability, strengthening social safety nets by increasing spending on food subsidies and cash transfers, reaching structural reforms to promote higher and inclusive growth, increasing employment opportunities for youth and women, and fresh external financing to close the financing gaps.

The success of the economic reform programme has been reflected in Egypt’s macroeconomic indices, especially in the first half of the FY2019/2020, before the start of the COVID-19 outbreak in the country.

According to the Planning and Development Ministry, Egypt achieved a growth rate of 5.4 percent in the first half (1H) of FY2019/2020, and was expected to achieve 5.6 percent during the 2H of FY 2019/2020, while the unemployment rate has decreased from July 2019 to January 2020 to an average of 7.7 percent, down from 11.3 in January 2018.

The average inflation rate had also decreased to 5 percent, and foreign reserves exceeded $45 billion until February 2020, covering more than eight-and-a-half months of Egypt’s imports.

In addition, according to the Central Bank of Egypt (CBE), Egypt’s balance of payments ran an overall surplus of $410.9 million, compared to a total deficit of $1.8 billion in the same period a year earlier.

The current account deficit retreated by $684.4 million (13 percent), recording $4.6 billion, down from $5.3 billion thanks to the decline in the non-oil trade deficit and the rise in unrequited current transfers.

Additionally, total inflows of foreign direct investments (FDIs) increased to $9.2 billion, up from $8 billion.

As with all world economies, Egypt has been hit hard by the COVID-19 crisis, which has been reflected on the performance of the second half of FY2019/2020, which ends in June, and the coming FY2020/2021, which begins in July.

However, despite the dual impact of COVID-19 and the collapsing global oil prices on global economic performance, Egypt has managed to deal with the crisis and its implications effectively thanks to the success of its economic reform programme, as a number of international institutions have said.

Egypt’s Minister of Planning and Economic Development Hala El-Said said in March that thanks to the economic reforms, FY2020/2021 targets attaining a high, sustainable economic growth of 5.8 percent, and a GDP growth of 12.5 percent.

El-Said said the expected economic growth rate was calculated despite the current indices that project a slowdown in global economic growth, which had already witnessed a slowdown of 3.2 percent in 2017, 3 percent in 2018, and 2.6 percent in 2019. The World Bank projected a further drop in 2020, estimated at 2.5 percent.

It also targets 850,000 job opportunities with a stable unemployment rate of eight percent, curbing inflation and providing social insurance and protection for medium- and low-income classes.

For FY2020/2021, Egypt targets investments of up to EGP 1.3 trillion, 55 percent of which is to be directed towards public investments to meet constitutional deadlines, achieving the required expansions in the healthcare and education sectors to meet the challenge of overpopulation, in addition to achieving the initiatives on healthcare, social protection and to correct imbalances in income distribution patterns.

In this regard, Egypt has put in place two scenarios for its economic performance in light of the uncertainty imposed by the COVID-19 crisis.

The first estimates that there will be a 3.5 percent GDP growth for FY 2020/2021 and 4.2 percent for FY 2019/20, down from the initially projected 5.8 percent, due to the impact of the coronavirus.

In the second scenario, the coronavirus continues to spread as the deep and prolonged economic disruption continues well beyond June, which could cause a further 30 percent reduction in the country’s targets.

The success of Egypt’s economic reform programme has also led international credit rating institutions to keep Egypt’s credit rating at a positive outlook.

Moody’s has maintained Egypt’s credit rating at B2 with a stable outlook, and Standard and Poor's has kept Egypt's credit rating in domestic and hard currencies at B level and maintained its stable outlook.

On the other hand, a sizable number of international financial institutions expect a robust performance for Egypt’s economy despite the current crisis.

Fitch Solutions said in its recent report, issued in May, that Egypt’s economy will be solid over the coming five years due to its economic reforms and strong investments, while Spanish Focus Economics research institution expects Egypt’s economy to grow by 2.5 percent in FY2019/2020 and by 3.7 percent in FY2020/2021.

Such a robust economy has helped Egypt increase the allocations of some sectors in the imminent FY2020/2021 budget to address the repercussions imposed by the COVID-19 crisis and to keep the gains of the economic reform programme.

In this regard, Minister of Finance Mohamed Maait announced that the FY2020/2021 draft budget adopts a conservative approach regarding Egypt’s economic performance, adding that overcoming the COVID-19 pandemic on a global scale and international developments are expected to play a role in restoring previous expectations for Egypt’s economic performance.

According to the FY2010/2021 draft budget, the government has appropriated unprecedented allocations for the healthcare sector, amounting to EGP 254.5 billion, an increase of EGP 78.9 billion.

As per the orders of President El-Sisi, the draft budget includes a 75 percent increase in the bonuses of medical professionals, with an extra annual cost of EGP 2.25 billion, costing the budget EGP 5.25 billion annually.

The draft budget also raises the education sector's allocations to EGP 363.6 billion, increasing by EGP 46.9 billion, and scientific research to EGP 60.4 billion, with an increase of EGP 7.5 billion.

The new draft budget increases subsidies for the Takafol and Karama (Solidarity and Dignity) social protection programmes by 2.7 percent to reach EGP 19 billion, in addition to EGP 84.5 billion allocated for subsidised goods and bread.

The draft also includes giving state employees working under the civil service law a bonus of 7 percent of their basic salaries, with a minimum of EGP 75 monthly, and giving other employees a bonus of 12 percent of their basic wages with the same minimum.

It also includes a 14 percent raise in pensions as of 1 July with an annual cost of EGP 31 billion to improve pensioners’ livelihoods, in addition to supporting social housing with EGP 5.7 billion and backing the real estate initiative for medium-income classes with EGP 50 billion to be provided by the banking system with an interest rate of 10 percent over 20 years.

The finance ministry also said that the FY2020/21 draft budget estimations are based on the previous forecasts set before the COVID-19 outbreak and its consequences on economic growth rates. The ministry said it expects that revenues will increase at a growth rate that exceeds the increase in spending, which provides ample room for reducing the public deficit and debt rates.

According to the FY2020/2021 draft budget, the total public spending is expected to record EGP 1.7 trillion, while revenues are projected to reach EGP 1.28 trillion, increasing by 13.6 percent compared to FY2019/20.

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