The Egyptian economy: Reasons for optimism

Niveen Wahish , Sherine Abdel-Razek , Friday 11 Feb 2022

Experts are betting that the Egyptian economy can handle the aftermath of the pandemic, write Niveen Wahish and Sherine Abdel-Razek.

Global Energy Prices

Cold winter weather and political tensions worldwide are fuelling higher prices across the globe, with Egypt being no exception and putting pressure on the government to act to keep inflation on essential goods and services down.

Brent crude oil has been trading at a seven-year high, settling at around $92.5 per barrel on Monday for the first time since 2014.  The escalating prices are being pushed up by higher demand as well as worries over the situation in Ukraine.

The higher global prices have prompted Egypt’s government to increase petrol prices at the pump by LE0.25 per litre, marking the fourth hike in a year. The price of diesel fuel has been kept unchanged at LE6.75 per litre in a move designed to curb inflation as diesel is widely used in public transportation and the transport of goods. Hiking its price would have caused a domino effect on the prices of other commodities, including food.

The government has not indicated that other products will be subject to similar adjustments. President Abdel-Fattah Al-Sisi indicated last year that the bread subsidy should be revisited. A loaf of baladi bread is sold at LE0.05, whereas it costs around LE0.65, he said.  

While the issue remains under study, some fear that high wheat prices worldwide could force the government to revise the subsidy to protect its finances, especially as Egypt is one of the largest wheat importers in the world. Egypt imports around 13 million tons of wheat annually.

While world wheat prices eased down by 3.1 per cent in January, the UN Food and Agriculture Organisation (FAO) said, continued strong demand amid tight global availability of higher-quality wheat along with uncertainty over exportable supplies have prevented prices from declining further. The FAO’s Cereal Price Index was up 12.5 per cent earlier this month on its level one year ago.

While tackling the bread subsidy may not be on the cards for now, the government has raised the prices of other commodities such as sugar and cooking oil that many people receive as part of the food-subsidies programme.

The government aims to draw up a reformed subsidies programme in time for the budget preparations in March, officials told Reuters.

The food subsidies programme currently costs the government about LE88 billion a year, with higher wheat prices expected to add LE12 billion to the 2021-22 budget. Sixty million people currently benefit from food subsidies.

However, Minister of Supply and Internal Trade Ali Moselhi told Reuters that with the rise in inflation, climbing from four to around six per cent in recent months, it had become harder to replace the subsidies on bread and other food items with cash handouts.

“When inflation is stable, then you can introduce cash,” he said.

The high commodity prices are a point of concern, particularly for countries that subsidise energy and food, said Yvonne Mhango, head of Africa Research at emerging markets investment bank Renaissance Capital (RenCap), at a press briefing on Tuesday.

She said she expected that budget deficits would be higher than anticipated, delaying efforts to bring down the debt-to-GDP ratio, which is elevated in Egypt.

The upward trend in inflation is driven by unfavourable base effects resulting from the low inflation levels that were recorded in the second half of 2020, as well as higher international commodity prices and various fiscal consolidation measures, a Central Bank of Egypt (CBE) press release said.

“Food price inflation will increase over the coming months on the back of stronger global food prices. Headline urban inflation will increase over the coming months and should peak at around seven per cent in the second quarter,” said James Swanston, an economist covering the Middle East and North African (MENA) region at Capital Economics.

“However, it should then fall back and hover at around five to six per cent over the rest of this year and throughout 2023,” he added.

RenCap expects softer food inflation in 2022, forecasting it to moderate to 5.2 per cent by the end of the calendar year. However, strong energy prices and any depreciation in the value of the pound could pose a risk to this assessment.

Against the background of single-digit inflation, RenCap believes the CBE will keep interest rates unchanged in the short term. “The pickup in growth implies there is no need to further ease the monetary policy stance,” Mhango said.

The investment bank expects Egypt’s GDP to see robust growth at around five per cent in 2022 on the back of a sustained recovery of the services sector as demand picks up.

Egypt’s balance of payments recorded an overall surplus of around $300 million in the first quarter of 2021-22 compared to a deficit of around $69 million during the same quarter of the year before thanks to strong tourism, Suez Canal, and remittances receipts.

The improvement showed the ability of the Egyptian economy to withstand the negative effects of the pandemic facing the global economy, the CBE said in its report on the latest balance of payments figures.

“Compared to most African countries, the length and depth of Egypt’s downturn was short, and the recovery has been brisk,” Mhango said at a press briefing on Tuesday.

The CBE’s Monetary Policy Committee (MPC) decided to keep policy rates unchanged at its meeting earlier this month, saying that inflation remains consistent with achieving the target of seven per cent (±2 percentage points) on average in the fourth quarter of 2022 and price stability over the medium term.

Egypt’s low inflation rate implies it has high real rates on government bonds relative to its emerging market peers, which should help sustain foreign interest in the local bond market, Mhango told journalists.

Foreign portfolio investment inflows have helped to finance Egypt’s current account deficit, which continued to increase in the first quarter of 2021-22 on the back of higher import costs.

According to CBE data, the current account deficit increased by 43 per cent to $4 billion during the first quarter versus $2.8 billion a year ago. This is attributed to higher oil and non-oil import bills.  

With the current account deficit widening, it is expected that policymakers will gradually allow the pound to depreciate by around eight per cent to LE17 per dollar by the end of this year and LE18 by the end of 2023, according to Swanston. The International Monetary Fund (IMF) previously suggested that the pound is around five to 10 per cent overvalued.

RenCap expects a more moderate depreciation of LE16.2 to the dollar by the end of 2021-22 and LE16.9 at the end of the 2022-23.

A depreciation of the pound could reduce the attractiveness of Egypt’s treasury bills to foreign investors, according to Swanston. However, “it would not cause a significant hit, given that Egypt has some of the highest real interest rates in the world,” he said.

The good news, Mhango said, is that Egypt’s rejoining the JP Morgan Emerging Markets Bond Index in January could draw new capital inflows into local currency bonds and make these “stickier”, or in for the longer term.

Given the 1.8 per cent weighting in the index, Capital Economics estimates that Egypt should receive around $4 to $5 billion in passive inflows, allowing it to meet some of its foreign currency financing needs.

Borrowing from international markets to cover the remaining gap would be “unfeasible”, according to Swanston, because the yield Egypt pays on its dollar bonds is around 8.9 per cent, roughly on the threshold where emerging market economies have tended to shy away from further issuances due to their being too costly.

*A version of this article appears in print in the 10 February, 2022 edition of Al-Ahram Weekly.

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