2021 Yearender: Stronger than the pandemic

Niveen Wahish , Wednesday 29 Dec 2021

Egypt’s economy has done well during another year of Covid-19, but with rising global inflation and the new Omicron variant of the virus, the challenges are not yet over.

CAPMAS, Al-Ahly Pharos Estimates

“While Egypt’s economy was hard hit by the pandemic, it was also one of the first to bounce back to a path of growth. This was owing to the swift measures it introduced and the fact that it was on a stronger footing at the outbreak of Covid-19.”

This is what the South African Rand Merchant Bank said in September this year when it released its list of top 10 investment locations in Africa. Egypt topped the list, followed by Morocco and South Africa as the most robust markets for investment, according to the bank’s report entitled “Where to Invest in Africa 2021”.

That was only part of the good news for the country’s economy. In November, initial data for the first quarter of fiscal year 2021-22 (July-September) showed that GDP had grown by 9.8 per cent compared to the same period the year before.

Minister of Planning Hala Al-Said said at the time that she expected overall GDP growth to range from 5.5 to 5.7 per cent by the end of the current fiscal year in June 2022. This would mean a return to pre-Covid-19 levels of growth. While the exceptional performance in the first quarter is attributed to a strong base effect, the economy grew at a mere 0.7 per cent in the first quarter of the last fiscal year due to the slump caused by Covid-19. The figures suggest that the economy is now on the rebound.

Besides the favourable base effect, the improved performance of the economy is due to the successful rollout of the Covid-19 vaccines and the lifting of travel bans to Egypt by several countries. These have maintained the momentum of consumer spending and the government’s mega-projects, Monette Doss, chief economist at investment bank HC Securities and Investment, told Al-Ahram Weekly.

This year the government continued on its major overhaul of the country’s infrastructure, including roads and transportation. It also embarked on its Decent Life Initiative, one of the biggest development projects in terms of funding and number of beneficiaries and costing some LE700 billion over three years and targeting 58 million people in 4,500 Egyptian villages.

Gradual tourism and investment recovery in the second half of the year also contributed positively to growth, Doss said, adding that she believes both are still below their potential.

This year, Russian direct flights to the Red Sea resorts of Hurghada and Sharm El-Sheikh were restored for the first time since 2015. Russian tourists account for around 30 per cent of Egypt’s inbound tourism.

A research note by investment bank Al-Ahly Pharos expects foreign direct investment (FDI) to reach $6.9 billion in the current fiscal year up from $5.2 billion in the last fiscal year and to rise further in the next two years. “As we expect the mining and exploration sector to regather some strength, we believe the net inflows of foreign direct investments to gradually increase, yet at a moderate pace, reaching around $9 billion by fiscal year 2023-24,” it said.

Egypt needs more FDI in manufacturing, specifically manufacturing for exports, said global chief economist and head of macro strategy Charles Robertson at Renaissance Capital, a leading emerging and frontier markets investment bank.

He told the Weekly that this would produce higher-paid jobs and hard-currency earnings such that Egypt could easily service its external debt. “Egypt needs some high-profile big FDI projects — perhaps in car manufacturing or IT production,” he added.

Just as Egypt has been one of the best destinations for bond investors since 2017, he said, it could attract more FDI, especially with better adult literacy, a minimum wage, and single-digit inflation and currency stability. “Unfortunately, foreign-currency restrictions in 2016, inflation in 2017, Turkey’s crisis in 2018, and Covid-19 in 2020-21 has discouraged that investment,” he said.

Another sector that showed significant growth in the second half of the year following the recovery in international oil prices was natural gas and petroleum extraction, Doss said.

Reuters reported that Egypt was capitalising on the surge in international gas prices and that it was exporting 1.6 billion cubic feet per day (bcf/d) from its two natural gas liquefaction terminals, according to Minister of Petroleum Tarek Al-Molla. Egypt’s natural gas production was stable, currently ranging between 6.5 and 7 bcf/d, Al-Molla told Reuters.

But just as the economy was coming around, some experts were nervous that global inflationary pressures could dampen growth. US inflation hit an almost 40-year high in November, and record high inflation was also registered in the Eurozone at 4.9 per cent in November, the highest in 25 years.

The higher inflation is attributed to strong consumer spending. After almost two years of lockdowns, increased vaccination rates and the reopening of the economy have been encouraging consumers, but supply-chain issues and, in the case of agricultural products, weather conditions, have meant there is not enough to go around.

For Egypt, which imports much of its food and production inputs, this means a higher imports bill, a greater need for hard currency, and some further straining of the pockets.

The UN Food and Agriculture Organisation (FAO) Food Price Index is up 27.3 per cent from November 2020. The latest increase marks the fourth consecutive monthly rise in the value of the Index, the highest level since June 2011.


Higher inflation could prompt the Central Bank of Egypt (CBE) to hike interest rates, even as the CBE’s Monetary Policy Committee (MPC) has kept the overnight deposit rate, the overnight lending rate, and the rate of main operations unchanged at 8.25 per cent, 9.25 per cent, and 8.75 per cent, respectively.

The discount rate has also been kept unchanged at 8.75 per cent. Despite the lower interest rates, Egyptian treasury bills and bonds are still attractive. Foreign holdings of Egyptian debt stood at around $23 billion in June.

However, “given the signals of global tightening and the slowdown in the US Federal Reserve’s asset purchase programme,” Al-Ahly Pharos believes the CBE might “hike rates during 2022 to keep real interest rates at attractive levels, maintaining the much-needed foreign inflows into local treasury bills.” It forecasts a one per cent rate hike during 2022.

Should the MPC hike interest rates, this would make Egyptian debt instruments more attractive to foreigners, but it would also mean a higher debt bill for the government. “Egypt can manage, unless US interest rates rise and Egypt’s borrowing costs go up too,” said Robertson of Renaissance Capital.

Doss expects inflation to normalise at an average of eight per cent over 2022. She said she expected the effects of inflation to be largely mitigated. “We expect it to remain within the targeted range of the Central Bank of Egypt of seven per cent (+/- two per cent), and also below Egypt’s historical long-term average of 10 to 11 per cent,” she said.

However, there are things to worry about. The outlook is still clouded by uncertainty related to the pandemic, including regarding the full recovery of tourism, a July IMF Country Focus said. The travel restrictions imposed upon the discovery of the new Omicron variant are a reminder of what could go wrong.

Egypt’s high public debt and large gross financing needs are other challenges, according to the IMF. “They leave it vulnerable to external shocks, such as higher costs of borrowing at the global level as developed economies gradually withdraw their economic stimulus,” it said.  In October, the IMF projected Egypt’s government gross debt to reach around 91 per cent of GDP in 2021, up from the 89.8 per cent in 2020.

Going forward, continuing to preserve economic stability and reduce public debt will be important, the IMF said.

Egypt’s external debt increased to around$135 billion in the third quarter of fiscal year 2020-21, compared to around $111 billion in the same quarter a year earlier. The growth of external debt has served to support Egypt’s net international reserves, given the diminished tourism receipts over most of the last two years and the need to finance the government’s mega investment projects, which supported economic growth over the same period, Doss said.

She added that “the pace of external debt growth is largely unsustainable.”

Egypt’s budget deficit came to 7.8 per cent in fiscal year 2020-2021. It is expected to decrease to 6.7 per cent in the current fiscal year, Minister of Finance Mohamed Maait announced in July. Al-Ahly Pharos, however, see it coming to around seven per cent overall, because it is less optimistic about tax collection and the impact of the expected monetary tightening on interest payments.

This would be a marked improvement on the 12.5 per cent deficit in fiscal year 2015-2016, however, and is attributed to fiscal consolidation by the government begun with the economic reform programme in 2016.

The investment bank also expects the government to maintain a 1.5 per cent primary surplus, which it said was “positive for the debt trajectory”.

Fiscal consolidation has proved successful in containing the government’s subsidy bill, and the implementation of property taxes has supported government revenue growth, Doss said. However, the delayed recovery of the private sector and employment has been reflected in stagnant income-tax revenue, she added.

“We believe that promoting the private sector is key to achieving growth while relieving the pressure on government finances,” Doss said. “Going into 2022, the government’s structural reform programme aimed at promoting the private sector is key to sustainable investment and GDP growth,” she added.

The government announced the launch of the second phase of its economic reform programme in April this year, which shifts the focus to structural reforms. The three-year programme, called the National Structural Reform Programme (NSRP), aims to bolster comprehensive and sustainable growth.

In the same framework, the government signed with the Organisation for Economic Co-operation and Development (OECD) a Memorandum of Understanding (MoU) in October to start a three-year country programme supporting a structural-reform agenda by providing analysis, advice, and guidance to inform the design and implementation of policies to help address Egypt’s main economic challenges, while moving towards closer alignment with OECD policy standards.

Egypt implemented the first phase of the reform programme between 2016 and 2019 with the backing of $12 billion of IMF financing. It had another 12-month programme with the IMF that ended in June 2021, during which the latter lent it $5.4 billion to help address the challenges posed by the pandemic.

*A version of this article appears in print in the 23 December, 2021 edition of Al-Ahram Weekly.

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