The economy after the second wave

Mohamed Shadi
Thursday 11 Mar 2021

Egypt’s economy has passed the most dangerous point in the Covid-19 crisis and is on its way to recovery and a new period of steady growth

The second wave of the coronavirus pandemic has now abated after battering the global economy during the last three months, driving down employment rates and forcing the Western economic powers to reintroduce lockdowns. 

As the world struggles to get back on its feet, it has begun to assess the economic damage incurred during the first quarter of 2021. The losses sustained during the first wave of the pandemic, continue to weigh heavily, including a 4.4 per cent shrinkage in gross world production, with none of the major economies managing to achieve positive growth in GDP aside from China at a mere 2.3 per cent, the lowest level in 30 years. 

The British economy shrank in size by nearly a tenth at around 9.9 per cent, the worse figures for some 300 years.

The situation in Egypt has been better despite the pandemic’s impact on main economic sectors like construction and tourism that have driven growth over the past five years. Egypt’s tourist sector registered its poorest performance for 20 years, with revenues falling to only $305 million during the second quarter of 2020 compared to $3.17 billion during the same quarter in 2019. As a result, the hotel and restaurant sectors shrank by over 17 per cent over the course of last year. 

But the government managed to counter the worst impacts of the pandemic by keeping the economy partially running instead of resorting to a full lockdown even when the infection rate was at its height. It struck a carefully calibrated balance between health issues and the economy, ensuring a minimal level of economic growth. 

Fiscal and monetary policies were harmonised to lend impetus to growth rates. First, the government allocated LE100 billion to address the economic and health impacts of the pandemic. From this, a LE500 per month cash subsidy for casual workers was disbursed six times, and LE12 billion was earmarked for a presidential initiative to promote local products. This coincided with a reduction in the cost of natural gas and electricity for industry and a LE1 billion disbursement to exporters in March and April 2020.  

Funds were also allocated to provide for five allowances for pensioners, set at 80 per cent of the basic wage, with a rise in the annual increase in pensions to 14 per cent. All these measures contributed to stimulating consumption, which had begun to stagnate.

Second, on the monetary side, the Central Bank of Egypt’s (CBE) quantitative-easing measures also contributed to growth. Interest rates were cut by 300 basis points in April 2020, followed by another 50-point cut in November, stabilising at 8.25 per cent for deposits and 9.25 per cent for loans. At the same time, micro, small and medium-sized enterprises were given six-month deferments on credit payments.

A LE50 billion stimulus was allocated to real-estate financing for middle-income homebuyers through the banks, another LE50 billion was allocated to sustaining hotel operations and funding current expenses, and LE20 billion was injected into the Stock Exchange.

These short-term measures were reflected in the macroeconomic indicators for the second half of 2020. Unemployment rates decreased from 9.6 per cent in the second quarter of 2020 to 7.2 per cent at the end of the year, while inflation rates steadied at 5.4 per cent in December after the consumer price index for food and beverages – the rising costs of which had strained consumers during the government’s economic reform programme – fell to 2.8 per cent on a monthly basis in the same month. 

The stabilisation of the unemployment and inflation rates forestalled the economic free fall that had been anticipated for the last quarter of 2020. Thus, instead of a shrinkage of more than 1.7 per cent, GDP grew by about 3.6 per cent at market prices during the 2019/2020 fiscal year.  

Although the fiscal indicators did not reach the budgetary targets for the first assessment period, the overall performance was good given the general context of the pandemic. In the first quarter of 2020 – the third quarter of the 2019/2020 fiscal year – the budget was performing at its highest level since the beginning of the decade, having reaped the results of the economic reforms implemented since 2016. 

The total deficit as a proportion of GDP fell to its lowest level since 2020, and the budget registered a surplus after seeing a deficit equivalent to 3.4 per cent of GDP at the end of the first quarter in 2013/2014 and a surplus of 1.9 per cent of GDP for the same period in 2018/2019. This surplus has remained relatively steady since despite the huge outlays and plunging revenues seen during the pandemic, registering 1.8 per cent in the closing statement for the year. 

The banking sector proved to be the safety net for the Egyptian economy during the pandemic thanks to the huge credit facilities it made available to all sectors. It has emerged from the crisis squarely on its feet, perhaps best illustrated by the fact that the exchange rate stood at LE15.77 to the dollar at the beginning of March 2021, whereas before the beginning of the crisis in February 2020 it stood at LE15.59, or just over a one per cent decline. Meanwhile, other emerging markets like Turkey and Argentina experienced precipitous plunges in the value of their currencies, which have not yet recovered. 

It should also be noted that the CBE’s hard-currency reserves, standing at $44.48 billion in June 2019, fell to $40.1 billion at the beginning of the crisis in March 2020 due to the massive outlays that needed to be made for medical and food supplies and also to the flight of foreign investment in monetary instruments due to the panic that the pandemic generated among investors.

In May, the reserves fell to $36 billion, their lowest level for the year. They then began to rise again, however, reaching $40.1 billion by the end of January 2021 after public expenditure levelled off and indirect investment began to return. The latter recorded a historic high, entirely reversing the negative flow that had prevailed for most of 2020, as the volume of foreign holdings of Egyptian treasury bonds and certificates climbed to $28.5 billion by February this year. 

With regard to foreign debt, on 8 February the government put up for sale $3.75 billion worth of long-term bonds, of which $750 million were five-year bonds offering an interest rate of 3.875 per cent, $1.5 billion were ten-year bonds with a 5.875 per cent return and $1.5 billion were 40-year bonds with a return of 7.5 per cent. The offer was covered four times, receiving purchase orders of around $22 billion. 

The investor turnout for 40-year bonds, in particular, demonstrates high levels of confidence in the Egyptian economy, especially in these times. 

In its last report on the Egyptian economy released in January 2020, the International Monetary Fund (IMF) predicted that the percentage of foreign debt to GDP would decrease from around 24 per cent by the end of this year to 16 per cent in 2024/2025 and that domestic debt would decline from 72 per cent by the end of the year to 63 per cent in 2024/2025. In other words, the national debt will drop from 91.5 per cent of GDP at the end of the year to 78 per cent in 2024/2025, being a full 14 per cent.

What the above-mentioned numbers tell us is that the Egyptian economy has passed the most dangerous point in the crisis and is on the way to recovery, with its sights set on a return to full capacity next year. With the near completion of the government’s infrastructure programme, the export of liquified natural gas from Egypt to Europe as one of the first fruits of the project to transform Egypt into a regional energy hub, and the near completion of the electricity link-up with Cyprus, our economy can look forward to a new period of steady growth. 

*The writer is a senior researcher at the Egyptian Centre for Straregic Studies.

*A version of this article appears in print in the 11 March, 2021 edition of Al-Ahram Weekly

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