The severity of external shocks can be gauged by the extent to which economies are resilient enough to absorb them. But building a well-founded economy and making it more resilient requires major domestic structural reforms and well-coordinated economic policies, including the expansion of social safety nets to protect the poorest individuals and the most vulnerable households.
It is also essential to consider the size of the population and its growth trends in order to ensure that the fruits of such reforms are felt across all segments of society and preserve income equality and eradicate poverty in the long-term.
Egypt has succeeded in setting up the bases for a more resilient economy and society in this way, focusing on four main aspects: well-sequenced structural reforms, coordinated policies, efficient and effective social policies and heightened public awareness. These bases are helping to mitigate the challenges facing the economy, which include the increasing trend of population growth and various external shocks.
Egypt’s major economic reforms started in November 2016 and have focused on introducing a floating exchange-rate regime, reducing the budget deficit, reforming energy subsidies, increasing the employment rate and boosting labour-force participation for women and youth, and bolstering social-protection measures to shield the most vulnerable.
These reforms have helped to build the resilience of the Egyptian economy in mitigating the current Covid-19 crisis and even finding opportunities within it.
In the midst of the outbreak, the economy has proven its resilience to external shocks. The country has adopted well-coordinated fiscal and monetary policies to cushion the negative economic and financial impacts of the global Covid-19 pandemic, notably by providing adequate liquidity for the economy. The negative impacts of the pandemic are mainly driven by weaker external demand and lower global growth, partially disrupting earnings from tourism, the Suez Canal, remittances from abroad, non-oil exports, foreign direct investment and portfolio investments.
But Egypt’s external buffers, built up since 2016, have allowed these external shocks to be absorbed. The volume of the country’s international reserves is still adequate to cover the imports of commodities and services for the next five or six months. And Egypt’s credit ratings have not been severely affected by the impact of the global pandemic, unlike other countries in the region that started out with the same credit ratings. In April, the international credit-rating agencies decided to keep Egypt’s credit rating at the B level and maintained its stable outlook, reflecting the confidence in Egypt’s economy to cope with the crisis of Covid-19.
However, the Covid-19 outbreak, accompanied by domestic containment and mitigation measures, has adversely disrupted supply chains and led to a behavioural economics of fear. The next supply shock in the medium term may reflect a fall in demand driven by such fear. This is driving people and businesses to avoid purchasing some services and hiring new workers, resulting in diminishing employment and declining growth in key sectors of the economy.
Yet, in spite of these challenges, the Egyptian economy has been capable of cushioning the impacts of the pandemic by relying on the sustained implementation of structural reforms, the deepening industrialisation of import-substitution commodities, and the promotion of digitisation.
Egypt has fiscal space equivalent to two per cent of GDP, which is enough to finance its 1.6 per cent of GDP Covid-19 stimulus package, backed by the Central Bank of Egypt (CBE) policy rate cuts of three per cent in March and providing adequate fiscal savings at current debt levels. Such significant cuts in interest rates will also help to ease further well-targeted fiscal-stimulus packages.
Looking ahead, the financing gap stemming from recent developments can be bridged through Egypt’s application to the International Monetary Fund (IMF) Rapid Financing Instrument (RFI). The IMF has recently approved Egypt’s request for emergency financial assistance of $2.772 billion under the RFI, and this will help to ease pressures on the financing needs of the healthcare sector, social protection and other hard-hit sectors. It will also contribute to limiting the decline in Egypt’s international reserves, further cushioning the negative economic impacts of the pandemic.
There is also room for further monetary easing and more policy rate cuts, bearing in mind that the rates are still positive at around 2.5 per cent. It is essential to strike a balance between easing credit conditions and avoiding vulnerability to capital outflows and allowing the exchange rate to cushion some shocks, while at the same time undertaking fiscal and structural measures that enhance investor confidence.
The Covid-19 crisis could be an opportunity for Egypt to build a more resilient and digitised economy, reacting to significant developments in consumer preferences and boosting domestic demand as well as deepening domestic industrialisation to cover the essential needs of households and limiting disruptions to supply chains resulting from external shocks.
Egypt has already taken progressive steps to advance domestic industrialisation and boost economic digitisation. The Covid-19 crisis could be an opportunity to encourage individuals and businesses to rely more on domestic outputs and inputs of production and e-services, e-banking and e-commerce more than they did prior to the crisis. Further depending on such electronic services and technologies would minimise operational costs and maximise economic benefits across all sectors of the economy. A turning point is anticipated in consumer preferences, which will impact the elasticity of market forces and the contribution of real-economy sectors to GDP.
The information and communication technology (ICT) sector is playing a critical role in the crisis. It has already achieved remarkable progress, recording a rise of 16.6 per cent during the 2018/2019 fiscal year and bearing in mind that the sector’s contribution to GDP increased to four per cent, vindicating the government’s keenness on building a digital society. The growth achieved in the communication sector as a whole recorded an increase of 16 per cent, the highest among all economic sectors during the first quarter of the 2019/2020 fiscal year. The government’s IT strategy aims at creating many more jobs in ICT fields, increasing digital exports.
In conclusion, the Covid-19 crisis has underlined the importance of building a resilient economy based on solid domestic buffers capable of absorbing external shocks. Relying on the external front could put economies at risk of severe depressions amidst major external shocks. But bolstering public investments in areas that have large positive externalities for the rest of the economy including healthcare, education and digital and environmental infrastructure should continue to support demand and boost living standards.
The writer is a member of the Economics and Political Science Department at Cairo University.
*A version of this article appears in print in the 25 June, 2020 edition of Al-Ahram Weekly