Yearender 2022: What are the four major economic challenges Egypt will face in 2023?

Doaa A.Moneim , Monday 26 Dec 2022

The COVID-19 pandemic continues to create serious challenges for the Egyptian economy, which has been exacerbated by the repercussions of the Russian-Ukrainian conflict that sparked in March.

Inflation

 

Ahram Online explains below the four significant challenges the Egyptian economy will face in 2023, covering the end of the current FY2022/2023 and the start of FY2023/2024.

It is worth noting that all procedures and measures Egypt has started to adopt since October, including its planning for FY2023/2024, come in line with the country’s new loan deal with the International Monetary Fund (IMF) under its Extended Fund Facility that allows Egypt to secure $3 billion over 46 months.

The US dollar shortage

Since the onset of the Russian war in Ukraine, a total of around $25 billion of foreign indirect investments, mainly centred on local debt instruments (hot money), have fled the domestic market, causing a significant shortage of the US dollar on the market liquidity level as well as in the country’s international reserves.

This challenge has affected Egypt’s imports, much of which are currently held up in ports due to the lack of dollars required to release them. This has led to a shortage of basic goods in the domestic market.

The currency shortage has also driven the US dollar prices in the parallel market, which had increased significantly to above EGP 30. During December, this rate fell to around EGP 28 but has started to rise again.

The government will have to deal with this grand challenge to keep the stability of the local market and help traders release their shipments.

Earlier this month, the government announced that an "urgent and solid" plan will be executed in coordination with the CBE through end of current FY2022/2023. This will ensure the country's foreign currency needs are met and help the economy to flexibly navigate the impacts of the ongoing global crisis.

Inflation

Since March, Egypt’s inflation has been accelerating at a rapid pace, reaching over 21 percent by end of November – the highest in almost five years.

The rising inflation is driven mainly by the increasing prices of food and beverages basket as well as services.

According to the CBE, November’s inflation figure was mainly impacted by the depreciation of the Egyptian pound that took place in October, as well as the higher broad money growth and the ongoing repercussions of the Russia-Ukraine conflict. Since the beginning of calendar year 2022, annual food inflation was mainly driven by core food inflation, they added.

During the final meeting of the Monetary Policy Committee (MPC) in 2022 held this December, the CBE maintained its inflation target – set before through fourth quarter of 2022 – at seven percent (±2 percent) through end of 2024, ensuring its mandate to control the inflation rate in the local market.

According to its latest report on the global economic outlook issued in October, the IMF raised its projections for the country’s inflation to 13.1 percent in 2022, up from 8.7 percent it predicted in April, while decreasing its projections in 2023 to 9.2 percent, down from 14 percent.

One of the main tools Egypt uses to contain inflation is interest rates. Since March, the CBE hiked interest rates four times for a total of eight percent (800 bps), the highest rates seen in Egypt’s monetary policy.

As per the IMF’s loan deal for Egypt, the CBE is expected to introduce more interest rate hikes in 2023, especially with the continuing war in Ukraine that is still disrupting the global food basket, as well as the tightening policy the US Federal Reserve announced for 2023 in order to contain the elevating inflation.

Debt

Egypt has already adopted a medium term strategy of debt management that aims to sustain the downward path of the country’s debt to GDP ratio to run at 71.9 percent by FY2026/2027, down from the current 87.2 percent.

According to the finance ministry, 87 percent of Egypt’s overall debt is local, while the remaining 23 percent is external to international institutions, which is in the safe zone.

Minister of International Cooperation Rania Al-Mashat said in December that the total development financing Egypt secured in 2022 alone was worth $13.7 billion, with $11.1 billion directed to sovereign projects across various economic activities and $2.6 billion dedicated for the private sector.

The shortage of the US dollar as well as the country’s objective of reaching a five percent real GDP growth in current FY2022/2023 are expected to push the government to secure more loan financing.

Under the IMF deal, Egypt also pledged to attain an overall budget deficit of six percent of GDP and to raise the initial surplus by 1.6 percent in FY2022/2023 to support the country’s budget.

Egypt’s external debt rose to $155.7 billion (37.2 percent of FY2021/2022 GDP) at the end of June 2022, up from $137.9 billion (32.3 percent of GDP) posted at the end of June 2021, the World Bank expected in its economic monitor report on Egypt published in December.

Real GDP growth

Amid all these challenges, attaining real GDP growth in 2023 will be very challenging for Egypt. The country decreased its expected growth in 2022 from 6.5 percent prior to the Ukrainian war to five percent after it. It plans to hit 5.5 percent growth in 2023.

Egypt attained a real GDP growth of 6.2 percent in FY2021/2022, which is expected to slow down before jumping to seven percent in FY 2025/2026 and FY2026/2027, at the same time that the recently announced IMF deal will conclude.

The World Bank downgraded in December its predictions for Egypt’s real GDP growth in FY2022/2023 to 4.5 percent, down from 4.8 percent it expected in October and below the 6.6 percent the country attained in FY2021/2022, driven mainly by the repercussions of the Russian-Ukrainian conflict and the pandemic.

However, the bank projected Egypt’s real GDP growth performance to start to improve hereafter.

It also predicted the poverty rate (last recorded at 29.7 percent during October 2019-March 2020) will increase due to the impact of inflation on real incomes.

The government estimated the financing gap the country is facing as a result of the Ukrainian war at $16 billion over three years.

Under the recent IMF deal, Egypt is committed to securing $14 billion from international and regional partners over the four years of the loan programme, aiming at securing $2 billion from selling valuable untapped state-owned assets.

Short link: