Egypt has been one of the world’s best performing economies during the pandemic. Yet the impact of Russia’s invasion of Ukraine may prove costly to food prices and tourism. Kit Gillet reports.
In the face of the global coronavirus pandemic, Egypt was one of the few countries in the world to experience positive economic growth in 2020, and its economy has continued to push forward, expanding by 9% in the second half of 2021.
In a press conference in February, prime minister Mostafa Madbouly said that Egypt’s gross domestic product (GDP) growth should exceed 6% for the fiscal year ending June 2022. Meanwhile, the country’s debt is expected to fall below 90% of GDP by the end of the fiscal year, according to finance minister Mohamed Maiit, with total export revenue reaching a record high of $45.2bn in 2021.
It is not all good news, however. Egypt’s annual urban consumer price inflation rose by 8.8% year-on-year in February, up from 7.3% in January, according to the country’s statistics agency — the largest increase in more than two years and driven by a 17.6% increase in food and beverage costs. This will be a source of concern for the country, with the central bank targeting annual headline inflation of 7% for 2022.
The country is also susceptible to global geopolitical challenges, with the recent conflict raising concerns over Egypt’s reliance on Ukrainian and Russian wheat, as well as tourist dollars. On March 10, Egypt banned the export of wheat, flour of all kinds, pasta, beans and lentils for an initial period of three months amid rising food prices.
Strong finances
Egypt’s financial situation is considerably stronger than in the past. A significant part of this is down to reform measures put in place since 2016, following years of political and economic turmoil.
In 2016 the International Monetary Fund (IMF) agreed a $12bn loan package for Egypt, contingent on major economic reforms, including the floating of the national currency, a reduction in energy subsidies and new taxes, including the introduction of a value-added tax. The economic reform programme was fully implemented as of 2021, according to a statement from the prime minister.
According to Mr Maiit, Egypt now aims to achieve a sustained primary surplus of 2% of GDP and bring the overall deficit to below 5% of GDP by fiscal year 2024/25. The country’s budget deficit has dropped significantly in recent years, from nearly 13% of GDP at the end of 2012/13 to 7.4% at the end of the last fiscal year.
“The main point that we need to take into account when looking at the past two years is the benefit the economy received from the IMF programmes that have been in place since late 2016,” says Monsef Morsy, head of financial analysis at CI Capital in Cairo. “I think they helped us manoeuvre as much as possible throughout the past few years and the impact and implications that the whole world saw from the pandemic.”
Mr Morsy points out that at the start of the pandemic, Egypt signed two agreements with the IMF, including a 12-month stand-by arrangement (SBA) worth $5.2bn and aimed at addressing the balance of payments financing needs, with continuous talks between the two parties, potentially leading to a new agreement in the future.
Pandemic support
In the early months of the pandemic, Egypt announced E£100bn ($6.4bn) in subsidised loans to support businesses and key economic sectors, extended through the banks and with an annual interest rate of 8%. The country also put in place restrictions to keep the infection rates down, though it shied away from imposing total lockdowns.
“The Egyptian authorities have managed well the economic and social impact of the Covid-19 pandemic,” Antoinette Sayeh, deputy managing director of the IMF, said in a statement last year, on the completion of a review of the SBA. “Proactive economic policies shielded the economy from the full brunt of the crisis, alleviating the health and social impact of the shock while maintaining macroeconomic stability and investor confidence,” she added.
However, Ms Sayeh said that high public debt and large gross financing needs “leave Egypt vulnerable to shocks or changes in financial market conditions for emerging markets”.
According to Fitch Ratings, Egypt continues to be highly dependent on external financing, which exposes it to global liquidity and monetary conditions, which are becoming less accommodating. Egyptian central bank reserves, meanwhile, are now significantly lower than pre-pandemic, the rating agency said in a December 2021 report.
Even so, Fitch said that many factors support Egypt’s external resilience, “including its relationships with bilateral and multilateral lenders and access to non-market financing”.
Ukraine conflict impact
One strong positive for Egypt until recent weeks has been the return of international tourists. Its tourism revenue jumped 253.3% on an annual basis in the first quarter of the current fiscal year, according to the Central Bank of Egypt, with the sector recording $2.83bn in tourism revenues between July and September 2021, compared to $801m the previous year. The tourism sector accounts for up to 15% of Egypt’s GDP.
In August 2021, Russia resumed direct flights to Egyptian Red Sea resorts after a six-year pause that followed a deadly plane crash in 2015, for which an Egyptian-affiliate of the Islamic State group claimed responsibility.
However, the fighting in Ukraine could have strong implications for Egypt, which relies on both Ukraine and Russia for wheat imports and, to a lesser extent, for tourist dollars; Russian and Ukrainian tourists make up the main visitors to Egypt’s Red Sea region.
It is estimated that wheat exports from Russia and Ukraine account for about 80% of Egypt’s wheat demand, with the country being the largest consumer of Ukrainian wheat in 2020, importing more than three million tonnes, as well as 8.9 million tonnes from Russia. Even before the conflict, Egypt had announced an increase in the cost of subsidised bread, the first price change since 1988. Higher wheat prices had already been forecast to add $763m to Egypt $3.2bn bread subsidies bill in 2022.
On February 23, Egyptian president Abdel Fattah el-Sisi announced that the country had planted an additional 250,000 acres of wheat, which will be increased to two million acres in 2024, as part of efforts to improve the country’s food security.
Egypt has also begun work on widening and deepening parts of the Suez Canal, after global shipping traffic was disrupted for around a week last year when one of the world’s largest container ships got stuck in the waterway. The first stage of the project will see an additional 10 kilometres of the canal accessible to two-way traffic, with a second phase widening an additional 30-kilometre stretch. Overall, the project is expected to cost $191m, and be completed by the middle of 2023.
Entering the sukuk market
Net foreign direct investment into Egypt dropped to $5.2bn for the 2020/21 fiscal year, according to central bank data, down from $7.5bn the year before. At the same time, remittances jumped 6.6% year-on-year during the first 11 months of 2021, hitting $28.9bn.
In January, it was reported that Egypt was finalising regulations related to the issuing of sovereign sukuks, in preparation for issuing its first sukuk bonds, worth about $2bn, later this year.
“The Sovereign Sukuk Act is one that has been long-awaited in Egypt,” says Hussein Abaza, chief executive of Commercial International Bank, Egypt’s largest private lender. “I think the significance of this step will be that it will attract a new segment of Arab and foreign investors, specifically those from the Middle East, north Africa and Asia, who prefer financial transactions that follow Islamic sharia principles.
“The introduction of sukuk in the market will contribute to the achievement of development goals in a manner consistent with the state’s efforts to enhance aspects of improving the standard of living by creating and producing through the funding of large projects,” he adds.
Private sector growth
Egyptian authorities have been putting in place measures to try to stimulate the private sector, with the central bank recently raising required lending to small and medium-sized enterprises to 25% of banks’ total loan books, up from 20% previously. The contribution of the private sector to Egypt’s economy is targeted to rise from 26% of GDP to around 50% of GDP by 2024, Mr Maiit told The Banker in a recent interview.
In January, Egypt’s planning minister, Hala El-Said, told Reuters that the country was pushing ahead with selling stakes in many state-owned companies, potentially at a pace of one every one or two months. This comes amid long-standing concerns over unfair competition, with state-owned firms enjoying tax breaks and other perks that many believe have negatively impacted the growth of the private sector. In 2018, Egypt named 23 state-owned companies earmarked for privatisation, but the sales were delayed in part due to the pandemic.
At the same time, Egypt will begin to classify different sectors of the economy related to their potential for private investment, as part of a three-year structural reform programme, Ms El-Said said.
The government also recently raised the minimum wage to roughly $172 per month, the third such increase since 2014. However, wages have failed to keep up with inflation, and almost a third of Egypt’s population of 100 million live below the World Bank’s definition of the poverty line.
Yet there is a sense of optimism in the country, following developments in recent years and the emergence of the country from the Covid-19 pandemic in relatively good shape.
“The Egyptian economy and the banks are in good health. If the global condition stabilises, the economy and the banking sector will improve further, and will pick up significantly,” says Mr Morsy.
