A national structural reform programme building on existing economic reforms is soon to be announced by the government.

The new programme aims to create a stronger, more resilient economy, able to withstand domestic and external shocks, Fakhri Al-Fiqi, head of the Budget and Planning Committee of the House of Representatives, told Al-Ahram Weekly.

The new measures will consolidate the gains achieved by the reform programme which Egypt successfully implemented in 2019, since when international credit rating agencies have maintained their rating for Egypt at B+ and kept a stable outlook on the economy.

As the latest International Monetary Fund (IMF)/World Bank annual meetings made clear, the post-Covid recovery for developed economies will be faster than for those that are less developed because they are more structurally sound. Which is why, argues Al-Fiqi, Egypt needs to implement further reforms to be able to deal with future shocks.

The new three-year reform programme will create an economy that is more resilient, flexible and dynamic, equitable, digitised and greener, says Al-Fiqi. Most importantly, improving living standards will be at the heart of the changes.

The government’s proposals, as outlined by Al-Fiqi, appear to fall in line with IMF recommendations: “Once the health crisis is over, policy efforts can focus more on building resilient, inclusive, and greener economies, both to bolster the recovery and to raise potential output. The priorities should include investing in green infrastructure to help mitigate climate change, strengthening social assistance, and social insurance to arrest rising inequality, introducing initiatives to boost productive capacity and adapt to a more digitalised economy, and resolving debt overhangs,” advised the April 2021 World Economic Outlook.

Observers have noted that reforms made within the framework of its IMF-backed programme enabled Egypt to better withstand the fallout from the Covid-19 pandemic. Unlike many developing economies which saw their economies contract, Egypt was one of the few countries which did not see negative GDP growth last year. And according to the IMF’s World Economic Outlook, the Egyptian economy is expected to deliver 5.7 per cent growth in FY2021-22.

“Most countries are expected to post strong growth as they recover from the pandemic shock and the restrictive measures/lockdowns imposed last year, and Egypt is no exception,” says Ahmed Shams, head of research at EFG Hermes, Egypt’s largest investment bank. “Vaccinations, both domestically and globally, should also have started to boost the tourism sector, a key driver of the potential economic recovery.”

James Swanston, a Middle East and North Africa specialist at London-based Capital Economics, adds that with Covid-19 restrictions being eased domestically there will be an increase in domestic demand that will support the recovery. Moreover, the easing of lockdowns in the rest of the world will result in stronger external demand which will boost exports and also trade through the Suez Canal. The resumption of production from Egypt’s two main gas liquefication facilities will also provide a boost to overall GDP this year.

The need to press on with reforms has been a key demand of economists and international institutions.

“It is very important that the structural reform agenda is accelerated,” said Taline Koranchelian, deputy director of the IMF’s Middle East and Central Asia Department, at a press briefing last week on the economic outlook for the Middle East and Central Asia. “It is very important to improve governance and the business environment and remove trade barriers and continue to enhance the transparency of state-owned enterprises, but also reduce gradually the state footprint and provide equal opportunities to all agents.”

Koranchelian stressed the importance of the private sector for job creation and growth in Egypt.

While funding will be central to achieving the ambitious programme, a new agreement with the IMF is not currently on the table. The second review of the 12-month Stand-By Arrangement (SBA) approved in June 2020 giving access to $5.2 billion is due in May-June according to Koranchelian. That mission will be an opportunity to take stock of the situation and to discuss the reform programme going forward, she said.

El-Fiqi believes funding could be provided by local savings, including government spending, foreign direct investment, support from international financial institutions as well as borrowing from international markets. He does not worry about increasing debt as long as the GDP is growing, which means in the long run the debt to GDP ratio will fall. Improving the business environment will attract foreign investors, as will the scheduled privatisation of state-owned companies.

“For those with limited fiscal space, improved revenue administration, greater progressivity in taxation, and reorientation of expenditures towards critical health, social, and infrastructure spending will be essential,” suggests World Economic Outlook.

The IMF expects Egypt’s budget deficit to decrease to 7.3 per cent of GDP by the end of June, compared to its earlier projections of 8.1 per cent. “A key factor is better revenue collection on the back of increased tax take, including from the public sector. Moreover, the government showed strong spending restraint, contributing to a better fiscal outcome. We expect the deficit to narrow further in FY21-22 on the back of lower interest payments and improved revenues as economic activity continues to recover,” says Shams.

Government expenses have shrunk, says Swanston, largely due to subsidy reform and reductions in the public sector wage bill.

Total government expenditure fell from 30 per cent of GDP in FY2014-15 to below 25 per cent in FY2019-20. The government anticipates the budget deficit narrowing even further, to 6.3 per cent of GDP by the end of the current fiscal year. If this happens, it will be the smallest shortfall since the early 2000s.

Egypt’s public debt is now projected to reach almost 93 per cent of GDP by the end of the current fiscal year, from 90.2 per cent last year. Shams points out that to fund the gap Egypt has had to borrow externally, including $8 billion from the IMF and $2 billion from regional banks. During the current fiscal year, the government has issued $4.5 billion of Eurobond debt, as part of its attempts to extend the average maturity of its debt to reduce short-term rollover risks. Over the same period around $90 billion was issued in Treasury Bills, almost all of it denominated in local currency, and $38 billion in domestic bonds.

Debt will begin to fall once economic activity recovers, thanks to the fiscal discipline the government has shown so far, says Shams, “but clearly debt levels remain high, offering little space for policy-makers to respond to shocks.”

Meanwhile, international reserves are inching back to pre-Covid levels, thanks to Egypt’s ability to secure access to overseas funding on favourable terms despite the persistence of pandemic-related headwinds, pressures on expat remittance flows, and downbeat predictions for tourism revenues and FDI inflows.

*A version of this article appears in print in the 22 April, 2021 edition of Al-Ahram Weekly