The Egyptian economy: Steering through the storm

Niveen Wahish , Saturday 14 Aug 2021

This week’s resumption of direct flights from Russia to Egypt’s Red Sea resorts gives a welcome boost to the economy as the government continues to navigate the challenges posed by Covid-19

Russian tourists
Visitors from Russia arrive in Egypt's Red Sea resort of Hurgada on August 9, 2021 on the first Russian tourist flight since the October 2015

On Monday, direct flights from Russia to the Red Sea resorts of Sharm El-Sheikh and Hurghada resumed after a six-year hiatus. The return of the Russians was cause for much jubilation in the tourism sector.

Until 2015 Russia was the Egyptian tourism sector’s number one market, constituting more than a third of the nine million tourists who visited Egypt. The return of Russian tourists to Red Sea resorts will improve tourist receipts, says Ahmed Hafez, head of MENA research at Renaissance Capital (Rencap), an international investment bank focusing on emerging and frontier markets.

Tourism, one of Egypt’s main hard currency earners, has been hard hit by the pandemic.

“The resumption of Russian flights is a positive development that will boost revenues, especially during the winter season,” said Sami Saad, chairman and managing director at ACHTI for Touristic Projects.

Tourism revenues declined by 70 per cent in 2020 due to the pandemic. Revenues picked up slightly this year, reaching between $3.5 billion to $4 billion during the first half of 2021.

From January to June, 3.5 million tourists arrived, a senior official in the Ministry of Tourism and Antiquities told Reuters. This is around a quarter of the 15 million tourists who came to Egypt in 2010.

Hafez and Saad do not expect a full recovery of the sector this year. “Tourists will not return until people feel more comfortable about getting on a plane,” says Hafez. He points out that Egypt is classified as a high-risk destination by countries like the UK, and is currently on the UK’s red list, meaning returnees face a 10-day mandatory quarantine in a hotel at a cost of almost £2,000.

According to a report by Rencap, passenger numbers at airports had recovered to two-thirds of pre-coronavirus levels, up from 45 per cent in March. “We expect the pick-up in tourist arrivals to be sustained over the short term, owing to ongoing vaccinations and the resumption of direct flights from Russia to Red Sea destinations,” the report said. Recovery, however, is projected to be slow by the IMF which only expects tourism revenues to return to pre-pandemic levels by 2023-24.

This is not the only challenge facing the economy. On Tuesday, the Central Agency for Public Mobilisation and Statistics (CAPMAS) reported that Egypt’s annual inflation rate increased to 6.1 per cent in July, up from 5.3 per cent in June, and 4.6 per cent in July last year. The increase is attributed to hikes in the price of tobacco, electricity, fuel, and transport.

The increase in inflation follows global trends. Worldwide inflation has been on the rise since the beginning of the year. Recent price pressures for the most part reflect unusual pandemic-related developments and transitory supply-demand mismatches, said the IMF’s World Economic Outlook in late July. It predicted that “inflation is expected to return to its pre-pandemic ranges in most countries in 2022 once these disturbances work their way through prices, though uncertainty remains high.”

The IMF projects inflation to jump to 6.6 per cent in 2021-22, and to soar to 6.9 per cent in 2022-23.

Increases in the price of subsidised bread will have a one-off effect on inflation, said Hafez, adding that the extent of that effect will depend on how much the price is increased. President Abdel-Fattah Al-Sisi last week indicated that the price of subsidised bread, currently sold at LE0.05, needs to increase. He said the actual cost of a loaf is around LE0.65.

Despite higher inflation, it remains within the Central Bank of Egypt’s (CBE) target of seven per cent (±2 percentage points) through the fourth quarter of 2022, prompting analysts to conclude that the CBE will maintain interest rates unchanged for the rest of the year. The CBE’s Monetary Policy Committee met last Thursday and kept the overnight deposit rate, overnight lending rate, and the rate of the main operation unchanged at 8.25 per cent, 9.25 per cent, and 8.75 per cent, respectively, for the fifth time this year.

Maintaining interest rate levels is important to continue to attract foreign investments in Egypt’s treasuries and one of the reasons Rencap doesn’t see any interest rate cuts out of Egypt in the short term. The net foreign investments in treasuries — the biggest source of inflows in Egypt’s financial account —reached $5.8 billion in the first quarter of 2021. These flows are helping finance the current account deficit. The current account deficit more than doubled to $5.7 billion in the third quarter of 2020-21 compared to the same period last year.

The deficit was affected not only by low tourist receipts since early 2020. Foreign direct investments also plummeted to $5.4 billion in 2020 compared to $8 billion a year earlier. Egypt reverted to portfolio investments and external borrowing to cover its finances, says Hafez, “but there was no one to blame. It is an external shock.”

Hafez argues the government reacted nimbly by moving quickly to procure financing through an agreement with the IMF and by issuing Eurobonds to ensure no shortfalls in financing.

Egypt received $2.77 billion in emergency financing from the IMF in May, and received a further $5.4 billion under a 12-month stand-by arrangement (SBA) in June 2020. 

A $750 million green bond offering in September followed by a Eurobond issue in February 2021 together yielded $4.25 billion in 2020-21.

Egypt, says Hafez, has managed Covid-19 stresses with relative success: “We did not see a hard landing like other economies. From a budget perspective, the deficit did not go out of control and there was no sharp deterioration in finances.”

The budget deficit decreased to 7.8 per cent in fiscal year 2020-21, down from 12 per cent in 2013-14, and it is expected to fall to 6.7 per cent in the current fiscal year, Minister of Finance Mohamed Maait said in July.

Hafez warns, however, the Egypt’s slow vaccination take-up represents a risk, especially given the Delta variant. Rencap expects year-on-year growth to strengthen to 4.5-5 per cent in 2021, albeit from a low base. He expects by the fourth quarter to see a faster rollout of vaccines, both local and imported.

But the skies are not yet blue. Net international reserves increased marginally in July to $40.61 billion from $40.58 billion in June, according to CBE figures. While this is six per cent higher than a year before, prospects remain worrisome.

“Pressures on external sectors are still accumulating as the rally in global commodity prices continues and coronavirus-related threats are still active,” noted a report by Prime securities.

*A version of this article appears in print in the 12 August, 2021 edition of Al-Ahram Weekly

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