The coronavirus pandemic has hard hit economies worldwide, with even the most developed countries witnessing slowing if not negative growth rates, widening deficits, and escalating unemployment levels.
Egypt has been no exception, but the negative impacts of the pandemic have been relatively much less than in other emerging markets. This was because it came against a background of a largely stable macroeconomic environment characterised by relatively high growth rates, improved fiscal accounting, and a comfortable level of foreign reserves, according to the World Bank’s World Economic Update (WEU).
The country is one of just three Middle Eastern and Central Asian economies that will escape economic contraction this year, the IMF also said this week in its World Economic Outlook (WEO) report.
Both international organisations expect a growth rate of around 3.5 per cent in Egypt for the current fiscal year, compared to the IMF’s previously less optimistic figure of two per cent in June.
Moreover, the IMF’s Fiscal Monitor report, also issued this week, expects the effects of Egypt’s budget deficit to be limited. After shrinking to 7.5 per cent of GDP in fiscal year 2019-2020, the deficit, according to fund estimates, will increase to 8.1 per cent this year and decrease again to 5.2 per cent next year.
Despite mushrooming spending needs, the primary balance — the difference between revenues and expenditures after deducting interest rates — will show a surplus of 0.4 per cent compared to 1.4 per cent in 2019. Egypt saw primary balance surpluses for the first time in 2018 and 2019.
The government has introduced several measures since March to support the economy, starting with an emergency response package of LE100 billion and increased health expenditures and expenditures on social-protection programmes, including a one-off cash grant to irregular workers and extending the existing cash-transfer programmes.
Forbearance measures have been introduced in the form of delayed tax-filing and loan repayments, in addition to subsidised credit to targeted sectors.
In a report on the situation, Deutsche Bank added to the above-mentioned measures the expansion in the ICT and energy sectors in Egypt, together with a growth in net exports as factors that have also cushioned the effects of the coronavirus.
On another positive note, an increase, though mild, of 0.8 per cent of GDP is expected in the country’s revenues for the current year, according to the IMF’s Fiscal Monitor.
This most probably comes on the back of measures introduced to mobilise domestic resources, including increased fees on some government services, a one-year deduction of one per cent from the salaries of public and private-sector employees and 0.5 per cent from pension pay-outs, and amendments to the income tax law to enhance its progressivity.
This is in addition to the loans the country has acquired throughout the year, like the $8 billion from the IMF, and the revenues from its Eurobonds and green bonds offerings, as well as inflows of foreign investments in local treasuries, which yield the second-highest return in the emerging markets.
According to Deutsche Bank estimates, the overall value of Egypt’s loans from international financial institutions and banks exceeds $15 billion, while foreign holdings of local treasury bills rose by $3.1 billion throughout the year.
As for the public debt, the WEU points out that the one-off cancellation of the debt owed by the government to the Social Insurance Fund (SIF), worth LE371 billion (6.4 per cent of GDP), is estimated to bring down government debt to 87.4 per cent of GDP by the end of 2020 compared to previous projections of 93.8 per cent.
However, the country will see its share of the coronavirus-induced global slowdown. The IMF expects the country’s current-account deficit to widen to 4.2 per cent of GDP in 2021 from 3.2 per cent this year, and it has listed Egypt among several countries that are particularly vulnerable to a decline in remittance flows.
This is seconded by the World Bank. While remittances may initially react counter-cyclically, as expatriates may increase one-off transfers, they are expected to eventually decline with the economic downturn in the Gulf countries, it said.
Egypt is the fifth-highest recipient of remittances in the world, reaching $26.8 billion in 2019 and making up nearly 10 per cent of GDP. Remittances unexpectedly went up by 7.8 per cent year-on-year during the first seven months of the year to reach $17 billion.
The current-account deficit, the World Bank said, may deteriorate as the decline in remittances supersedes the expected narrowing of net exports due to the global recession and a decline in imports.
The lockdown and social-distancing measures introduced to halt the spread of the coronavirus led to the loss of around 2.7 million jobs during the fourth quarter of the year, pushing unemployment to 9.6 per cent from 7.7 per cent in the previous quarter. Workers in the retail and wholesale trade, manufacturing, tourism, transport, and construction sectors have been the hardest hit.
Increased joblessness and salary cuts have limited private consumption, which is expected to remain constrained. According to the World Bank, poverty is forecast to increase, particularly in urban areas. Since high-skilled formal-sector jobs were relatively shielded during the crisis, inequality is also expected to rise.
Going forward, it is important to maintain the pace of reforms and to accelerate the structural reforms to allow the private sector to be in the lead for the next economic recovery phase, said Jihad Azour, director of the Middle East and Central Asia Department at the IMF.
Supporting the private sector is one of the main aims of the Central Bank of Egypt’s (CBE) easing of monetary policy, which saw it slashing interest rates by 3.5 points this year, firstly in March by three per cent, and then in its last meeting in October by 0.5 per cent.
In a press briefing on the WEO this week, Azour praised Egypt’s monetary policy, which targeted inflation and had succeeded in reducing it to its lowest levels in years.
Deutsche Bank expects the CBE to maintain rates until it next meets on 12 November in anticipation of global market volatility ahead of the US presidential elections.
Current rates stand at 8.75 per cent on deposits and 9.75 per cent on loans.
*A version of this article appears in print in the 22 October, 2020 edition of Al-Ahram Weekly