The IMF forecasts global GDP growth of under three per cent in 2023, reflecting the repercussions of the war in Ukraine and the continuing impact of Covid-19 on the global economy.

“With the recent increase in financial market volatility and multiple indicators pointing in different directions, the fog around the world economic outlook has thickened,” according to the IMF’s World Economic Outlook (WEO) report released on Tuesday.

The IMF expects the factors that affected the world in 2022 — including central banks’ tight monetary stances to allay inflation, limited fiscal buffers to absorb shocks amid historically high debt levels, commodity price spikes, and geoeconomic fragmentation caused by the Russian-Ukraine war and China’s economic reopening — to continue in 2023.

The IMF lowered its projections of real GDP growth for Egypt — an oil importer and middle-income developing country — to 3.7 per cent in 2023, down from 4.4 per cent it expected in October, according to the WEO report. It also downgraded its forecast for GDP growth in 2024 to five per cent from the 5.3 per cent it expected in January.

IMF projections for Egypt’s GDP growth are below the government’s target of 4.1 per cent set for FY 2023-24, which begins on 1 July.

The World Bank has also revised down its forecasts for Egypt’s real GDP growth in FY 2022-23, and FY 2023-24 to four per cent each year, down from the 4.5 per cent projected in December 2022. The WEO report also expects double digit inflation in both 2023 and 2024 to remain in double digits, at 21.6 per cent and 18 per cent respectively.

Egypt’s inflation surpassed 32 per cent in March, according to Central Agency for Public Mobilisation and Statistics (CAPMAS) figures released this week. Core inflation, however, fell slightly to 39.5 per cent, down from over 40 per cent recorded in February by the Central Bank of Egypt.

The report expects unemployment to rise to 7.6 per cent in 2023 and 7.7 per cent in 2024, up from 7.3 per cent in 2022.

Under the IMF’s Extended Fund Facility (EEF) loan programme Egypt will be able to access $3 billion over 46 months. The arrangement, agreed in December, anticipates real GDP growth to gradually rise to between 5.5 and six per cent after short-term challenges, including the impact of the spill-overs from the war in Ukraine, have dissipated, and the state’s economic footprint is gradually reduced.

The current account deficit is projected to improve by two per cent of GDP over the medium term as reserves are rebuilt and inflation falls to around seven per cent by FY 2024-25.

Meanwhile, the tax-to-GDP ratio is expected to rise by two per cent over the medium term. The government has pledged to apply new tax-related measures in FY 2023-24, targeting a growth of 0.3 per cent in the tax-to-GDP ratio.

The results of the first review of the EEF programme, which will allow Egypt to receive the second tranche of the loan worth $347 million by the end of March, have yet to be published.

The risks to “financial intermediaries have increased as interest rates have been rapidly raised to contain inflation”, says Tobias Adrian, financial counsellor and director of the IMF’s Monetary and Capital Markets Department. “Historically, such forceful rate increases by central banks are often followed by stresses that expose fault lines in the financial system.”

Since the war in Ukraine began in February 2022, the Central Bank of Egypt has hiked key interest rates by a record 10 per cent (1,000 bps) in a bid to curb soaring inflation. Egypt has also devalued its currency against the US dollar three times since March 2022, with the pound losing over 50 per cent of its value against the greenback. Currently, the US dollar is trading for around LE31 in banks and LE35 in the parallel market.

The IMF has estimated Egypt’s financing gap at $17 billion in FY 2025-26. As part of the loan deal programme, Egypt committed to bridging the gap through the sale of state-owned assets and loans from international and regional partners.

Another issue facing the global economy is growing debt. According to the WEO report, the pandemic and economic upheavals over the past three years have caused private and public debt to increase to levels not seen in decades. It also noted that monetary policy tightening, mainly by the major advanced economies, has led to a sharp increase in borrowing costs, raising concerns about the sustainability of some economies’ debts.

“Among the group of emerging market and developing economies, the average level and distribution of sovereign spreads increased markedly in the summer of 2022, before coming down in early 2023,” said the report.

The World Bank expects Egypt’s debt-to-GDP-ratio to jump to 95.5 per cent by end of current FY 2022-2023, compared to 88.3 per cent a year earlier.

As a part of its agreement with the IMF, Egypt committed to a ceiling on the gross debt of 92.1 per cent of GDP by the end of FY 2023-2024. The government also pledged to attain a primary surplus of 1.7 per cent of GDP in FY 2022-23, 2.1 per cent in FY 2023-24 and 2.3 per cent in FY 2024-25 and FY 2025-2026, and to reduce the gross debt-to-GDP ratio by around 83 per cent by FY 2026-27.

* A version of this article appears in print in the 13 April, 2023 edition of Al-Ahram Weekly