Egypt's structural reforms: Riding out the coronavirus

Friday 8 Jan 2021

While the effect of the Covid-19 new wave on the local economy is still unknown, Al-Ahram Weekly looks back on how the structural reforms introduced since 2014 have helped Egypt weather the storm in 2020

Riding out the coronavirus

No one expected it, and no economy was able to escape its repercussions. The coronavirus pandemic made 2020 one of the worst years for the world economy since the Great Depression, pushing advanced economies and emerging markets alike into recession.

While it was not left unscathed, the Egyptian economy’s relative resilience and limited losses from the pandemic have been praised by financial institutions and ratings agencies worldwide, including the International Monetary Fund (IMF) and World Bank and ratings agencies Fitch and Standard and Poor’s.

Thanks to a set of structural reforms it has been adopting since the end of 2016, including the devaluation of the currency, the elimination of energy subsidies, the containment of the public-sector wage bill, the introduction of a value-added tax (VAT), and the government’s heavy investment in infrastructure projects, Egypt has been one of the few economies worldwide able to deliver growth by year end.

That was despite the fact that the pandemic slowed growth from the expected 5.7 per cent of GDP to an actual 3.6 per cent in 2019-20 and a projected 3.5 per cent for the current fiscal year.

Other improved reform-induced indicators include Egypt’s primary budget balance, reflecting the difference between government expenses and revenues after deducting interest, switching to a surplus and reaching 1.9 per cent of GDP in 2018-19  and the overall budget deficit and government debt-to-GDP ratios declining to 8.1 and 90.2 per cent in 2018-19, respectively, compared to 10.9 and 108 per cent two years earlier.

 Egypt recorded a budget deficit of 7.9 per cent of GDP in 2019/2020, compared to 8.2  per cent in 2018-2019. Finance Minister Mohamed Maait said last month that Egypt is on track to narrowing the budget deficit to reach 6.3 per cent in 2020-2021.

This came as state revenues headed south  as the lockdown negatively affected the tax revenues, the tourism sector was hardly hit by the flights suspension and trade disruptions caused Suez canal revenues to drop. However, this was partly offset by the decline in the international oil prices which limited the government spending on subsidies by 77 per cent during the fiscal year.

Moreover, private investment recorded 74 per cent growth during 2018-19 following two years of contraction. It surpassed private investment for the first time since 2015-2016 thanks to private-sector involvement in gas and renewables like the Zohr field for natural gas and the Benban Solar Park.

Another buffer for the economy was Egypt’s ample foreign reserves, which reached $45 billion in February 2020, a level that has helped the country absorb the shocks of foreign portfolio outflows, covering debt repayments, and paying for imports in addition to the severe decline in tourism and export revenues due to Covid-19.

The government was able to rebuild Egypt’s reserves after they lost $10 billion between March and May to end the year at $39.2 billion.

The LE100 billion emergency response package the government allocated to deal with the pandemic also helped. It included different plans to support the most-affected sectors of the economy, such as tourism, aviation, and healthcare, and provided tax incentives and tax breaks for the private sector. 

The package was also channelled to provide financial relief for individuals, adding 124,000 vulnerable households to social safety nets. It set up a LE3 billion fund to support irregular labour, including one-off LE500 disbursements and increasing payments to women community leaders.

Nevertheless, the World Bank’s Egypt Economic Monitor report, which came out in November, pointed out that the Covid-19 pandemic had inevitably caused job and income losses, posing additional strains to Egyptian household livelihoods and exacerbating the long-standing challenge of job-creation in Egypt, notably in the formal private sector.

According to World Bank figures, 2.7 million jobs were lost due to Covid-19 in Egypt, pushing the unemployment rate to 9 .6 per cent during the second quarter of 2020, its highest in two years, before declining to 7.3 per cent in the third quarter after the country eased its lockdown and social-distancing measures. 

The improvement in the employment figures does not negate the fact that economic growth has failed thus far to be inclusive or powerful enough to result in improved living standards for many. Egypt’s most recent household income and expenditure survey shows that the wealthiest 10 per cent of the population is responsible for 25 per cent of household consumption and demand in the economy, pinpointing the discrepancy in wealth distribution in Egypt.

The same survey reveals that Egypt’s poverty rate decreased for the first time in 20 years during 2019-2020 to reach 29.7 per cent of the population compared to 32.5 per cent in 2017-2018, however. The poverty line is set at an income of less than LE857 a month. The rate of extreme poverty also decreased to 4.5 per cent from 6.2 per cent during the same two-year period.

Had it not been for a number of social-protection programmes, the poverty rate would have been much higher. The government has introduced several such socially-friendly plans over recent years to cushion inflationary pressures, including the smart-card system by which quotas of bread and staples can be bought at subsidised prices. The Takaful and Karama welfare programmes introduced in 2015 provide cash-based subsidies to eligible beneficiaries and currently cover almost nine million individuals.

According to the Well-Being Index prepared by local investment bank Pharos, which uses real GDP, inflation, and unemployment rates to derive a proxy for prosperity in Egypt at a micro level, prosperity “was on a recovery path after the currency floatation and the consequent high inflation that deteriorated real income and living standards. Fortunately, the effect of the pandemic on well-being was mild because of the Central Bank of Egypt’s (CBE) inflation targeting and monetary easing, which absorbed most of the shock received by GDP and unemployment.”

The inflation rate has been declining thanks to the CBE’s inflation-targeting policies. The rate increased after the introduction of reforms in 2016, reaching 33 per cent in July 2017. The jump in inflation, according to Pharos, was due to sensitivity to oil and wheat prices, since Egypt is a heavy wheat-importer. Transportation costs also account for an important portion of the cost of food in Egypt.

“This correlation became more visible after the structural reforms that floated the currency, liberalised energy prices, and alleviated subsidies,” noted a Pharos research note. It added that inflation was also sensitive to the exchange rate, given the weight of imported items in the basket of commodities according to which inflation is calculated.

Standing at 5.7 per cent in November, inflation now remains below the lower bound of the annual inflation target set by the CBE of nine per cent (+/- 3 per cent). The reduction in the weights of food and beverages in the basket in September 2019 helped to keep food price volatility in check, in addition to other efforts to secure the supply of food items and prevent irregularity in prices, Pharos said.

Though praising the relative resilience of the Egyptian economy, observers and international financial institutions voiced concerns at persistent problems, notably the elevated debt-to-GDP ratio, despite its significant reduction in recent years, the below-potential performance of non-oil merchandise exports, and non-oil foreign direct investments.

*A version of this article appears in print in the 7 January, 2021 edition of Al-Ahram Weekly.

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