The world is holding its breath as the global economy sees daily deterioration on the back of the spread of Covid-19. Egypt has been no exception.
On Monday, the Central Bank of Egypt (CBE) slashed interest rates by three per cent during an emergency meeting in support of the economy during the Covid-19 crisis. The CBE’s overnight deposit rate fell to 9.25 per cent from 12.15 per cent. The bank’s lending rate is now 10.25 per cent, and the main operations and discount rates are both at 9.75 per cent.
The CBE’s Monetary Policy Committee statement said that this “pre-emptive decision provides appropriate support to domestic economic activity given the current challenging external environment.”
The CBE also extended bank loans for a period of six months for everyone from large companies to individuals. The extension applies whether the facility is held by a small business, a large corporation, or an individual borrower.
The effect of the spread of the virus on Egypt’s economy is primarily measured according to how far sectors such as industry and tourism, a main source of foreign currency, are affected, said Sally Mikhail, a former financial analyst at Naeem Holding, an investment bank.
The new coronavirus has shackled movement in the economic world, affecting supply and demand, restricting travel, and closing factories, she added. The majority of the medical and healthcare products that have been in high demand of late are imported, and “therefore it is not a case where a certain industrial sector [pharmaceuticals] will grow to compensate for losses in other sectors,” she explained.
However, the sharp decline in oil prices, due to a lack of agreement between the Organisation of Petroleum Exporting Countries (OPEC) and non-OPEC members on cutting production, “is positive for the Egyptian economy,” Mikhail said.
Oil prices have dropped to $35 per barrel on average. Being an oil-importing country, the decrease in oil prices will reflect positively on the budget since Egypt still partially subsidies fuel products.
“For every $10 drop in the price of a barrel of oil, Egypt’s budget saves between $250 million to $350 million in subsidies,” noted Mohamed Abu Basha, director of macroeconomic analysis at investment bank EFG Hermes.
“The decrease in oil prices will reflect positively on the balance of payments and gas prices,” he continued.
The government targets a reduction of spending on fuel subsidies to around LE53 billion in the current fiscal year, down from around LE89 billion in the last fiscal year.
However, the closure of Egypt’s air space and the suspension of flights from 19 to 31 March is sure to negatively affect Egypt’s revenues from tourism, Abu Basha added.
Hani Genena, head of research at Beltone Financial, a securities brokerage company, said Egypt was expected to incur $2 billion to $3 billion in losses due to the loss of tourism revenues in the next two to three months, adding that Egypt has lost 70 to 80 per cent of its tourism revenues thus far, and if the virus is not contained, tourism revenues may be lost altogether.
Minister of Tourism and Antiquities Khaled El-Enany said this week that losses from the tourism sector would reach $1 billion per month after the suspension of flights. Egypt’s tourism sector brought in some $12.6 billion in fiscal year 2018-2019.
Tourism contributes around 0.5 per cent to GDP. If it comes to a complete halt for a year, it will cause Egypt’s total GDP to drop by around 0.5 per cent. The Finance Ministry is targeting a growth rate of 6.4 per cent in fiscal year 2020-21, up from a targeted growth rate of 5.8 or 5.9 per cent this fiscal year.
The new coronavirus as well as global and domestic challenges will have positive and negative repercussions on Egypt’s balance of payments, said Radwa Al-Sweify, head of research at Pharos Holding. She said lower oil prices meant less income for Egypt’s oil exports, which reached $11.5 billion in fiscal year 2018-19.
Abu Basha does not expect Egypt’s industrial sector to be hit as hard as in Italy and Spain. Al-Sweify believes that the moves made by the US Federal Reserve to lower interest rates paved the way for the CBE to lower interest rates by three per cent to support production and the industrial sector.
The benchmark US interest rate is now in a range of zero to 0.25 per cent, down from a range of one to 1.25 per cent.
Abu Basha also does not see remittances being affected by the new coronavirus in the short term. It all depends on whether oil prices will continue to decline, he said, estimating that even if oil prices dropped to around $20 per barrel that should not last for more than nine months.
He added that Egyptian expatriates make transfers when they have steady jobs, adding that the continued drop in oil prices would negatively affect the economies of the Gulf countries, foremost among them Saudi Arabia.
Egyptian expatriate transfers are one of the key sources of foreign currency for the country. Egypt receives around US$26 billion in remittances annually from Egyptians working abroad, mostly in the Gulf.
In the past few days, the US dollar has appreciated against the pound, leading analysts to observe that the reason is the panic of investors over the new coronavirus.
“The price of the dollar in the near future can’t be predicted, but the state budget for this fiscal year has put the price of the dollar at a rate higher than that at which it is currently trading. Consequently, the dollar’s appreciation against the pound will not constitute a problem for the budget,” said Abu Basha, adding that “less demand for imports will put the brakes on the appreciation of the dollar.”
Since the outbreak of Covid-19, supply chains around the world have been disrupted, affecting imports.
The state budget estimated the price of the dollar at LE17.46 this fiscal year. It was trading at LE15.7 on Tuesday.
An important factor in the value of the dollar are foreign inflows into government debt. These reached around $18 billion by the end of January, up from around $16 billion in December 2019. It remains to be seen how these will be affected now, given investors withdrawing from many emerging markets.
Abu Basha does not believe that the appreciation of the dollar will affect inflation or people’s standards of living in Egypt, however. “There has not been a noticeable drop in the prices of commodities since the dollar depreciated against the pound from LE18 to LE15.5 in early February,” he said.
*A version of this article appears in print in the 19 March, 2020 edition of Al-Ahram Weekly