Egypt has weathered the pandemic relatively well despite a severe contraction in tourism. The country now needs to look beyond the public sector for future growth.

Egypt was one of the few countries in the world that experienced positive economic growth in 2020, with an estimated rise of 1.5% year-on-year.

This was still significantly down from the gross domestic product (GDP) growth of about 5.9% the government had predicted for the 2019/2020 financial year back in January 2020. But a lot has happened since then, with the coronavirus pandemic hitting economies hard all around the world.

Growth in Egypt is expected to continue in 2021, with the International Monetary Fund (IMF) raising its forecasted growth for the fiscal year 2020/2021 from 2% to 2.8% in January. The IMF also expects growth of about 5.5% for the fiscal years 2021/2022 and 2022/2023, rising to 5.6% and 5.8% for 2023/2024 and 2024/2025, respectively.

In early March, the Egyptian government said that the economy grew by 2% in the second quarter of fiscal year 2020/2021, bringing six-month growth to 1.35%.

Pandemic response

While Egypt imposed some restrictions to keep Covid-19 infection rates down, the country shied away from a total lockdown, aided by relatively low incidences of the virus and a low mortality toll. At the same time, it rolled out an economic support package worth the equivalent of 1.7% of GDP.

Among the measures put in place was E£100bn ($6.4bn) worth of subsidised loans extended by the government through the banks, at an annual interest rate of 8%, to support businesses and key economic sectors.

“These measures helped keep businesses afloat while at the same time inflation has come down significantly from the post-flotation levels,” says Khaled El Salawy, chief executive and managing director of Al Ahli Bank of Kuwait — Egypt. “The country managed to avoid a full-fledged shutdown, which would have impacted especially smaller businesses and retail stores,” he adds.

The reform programme Egypt has undertaken in recent years likely helped the country weather the challenges of 2020, enabling it to build up fiscal reserves while also bringing down inflation and unemployment levels.

In 2016, following years of political and economic turmoil, and with the economy faltering, the IMF agreed a $12bn loan package for Egypt, to be disbursed over three years. The package was contingent on major economic reforms, which included floating the national currency, new taxes — including the introduction of a value-added tax — and reducing energy subsidies.

These measures caused some notable short-term pain, with the loss of subsidies hurting much of the population and inflation rising sharply following the devaluation of the Egyptian pound in 2016, which lost half of its value in the immediate aftermath of its free float. Consumer price inflation reached as high as 35% in 2017.

Still, the long-term effects have been positive. Annual inflation in Egypt dropped to 5% in 2020, its lowest level in 15 years, while unemployment fell to 7.2% in the fourth quarter, down 0.8% from a year earlier. The poverty rate also dropped for the first time in two decades, falling from 32.4% in 2018 to 29.7% in 2020, with the average net income for families increasing by 15%.

In January, prime minister Mostafa Madbouly said that the government had implemented 100% of its 2016 economic reform programme. In June, the IMF approved a further 12-month stand-by arrangement for Egypt, worth $5.2bn, to help the country manage the current pandemic and aid the authorities in preserving the achievements made over the previous years.

Antoinette Sayeh, the IMF’s deputy managing director, said in a statement in December that Egyptian authorities had “managed well the Covid-19 pandemic and the related disruption to economic activity”. However, she added that the high level of public debt and gross financing needs leave Egypt vulnerable to volatility in global financial conditions.

Large debt

Egypt’s public debt still hovers at around 90% of GDP, although it is expected to decline steadily over the coming years.

In February, Egypt’s finance minister, Mohamed Maait, said that the country’s budget deficit had fallen from 4.6% to 4.4% during the period from July 2020 to January 2021, compared to the previous year. This was due to a 16% increase in government revenue, compared with a 12.4% increase in overall expenditures, with spending on national programmes of social protection rising by around 24%.

“The government has kept a very strong fiscal discipline,” says Mohamed Abu Basha, head of microeconomics at EFG Hermes, a financial services group headquartered in Cairo. He adds that in the first half of the current fiscal year, from July to December, the country actually maintained a primary surplus. “Smaller than before, but obviously there’s the Covid impact.”

Egypt is in this delicate transition where it needs to shift the balance back towards the private sector

Mohamed Abu Basha, EFG Hermes

Even so, in March, ratings agency Fitch predicted a “modest and temporary widening” of the budget deficit, to 8.5% of GDP for the fiscal year ending in June, from 7.0% in 2020 and 7.9% in 2019.

Egypt has repeatedly turned to the bond market to fund public spending in recent years, most recently in February, when it raised $3.8bn. At the same time, the country has been able to shift towards longer-term debt issuance, offering greater stability and highlighting a return in confidence among international investors after years of political and economic unrest.

The country also sold $750m in five-year green bonds in September 2020, the first issuance of its kind in Africa, with the money set to be used to finance or refinance green projects in areas such as transportation, renewable energy and energy efficiency.

Tourism in trouble

The Egyptian government has ramped up investments during the pandemic, which were up 28% in the first half of the current fiscal year, on an annual basis, according to the minister of planning and economic development, Hala El-Said.

However, one source of concern for the economy is the continued impact of the global pandemic on the key tourism sector. According to the Ministry of Finance, tourism revenue dropped by 70% in 2020, compared to 2019, down from $13bn to $4bn.

On the positive side, despite initial concerns, remittances have remained robust. During the past fiscal year, ending June 2020, remittances to Egypt hit an all-time high of around $27.1bn, according to Mr Abu Basha. “Numbers for the first quarter of this fiscal year, so the third quarter of 2020, also showed remittances were growing very strongly, at around 15–20%. That’s nothing special to Egypt honestly, as remittances globally have proved to be quite resilient,” he adds.

Egypt also benefits from having a young population. “The Egyptian demographic profile is another main pillar attributing to business growth, with 66% of the total population under the age of 35,” says Shaikha Al-Bahar, deputy group chief executive of National Bank of Kuwait (NBK) and chairperson of NBK Egypt.

Meanwhile, Egypt’s current account deficit narrowed to 3.1% of GDP in 2020, from 3.6% a year earlier, aided by remittances and an increase in non-oil exports. At the same time, foreign direct investment is expected to drop slightly to $5.5bn for the current fiscal year, after hitting $7.1bn in 2020.

Growing the private sector

Over the past decade, the Egyptian government has relied heavily on the public sector to push the economy forward, both before and in the immediate aftermath of the IMF deal, when inflation was still running high.

However, going forward, there remains a concern over the level of support that state-owned enterprises (SOEs) receive in Egypt. In December, the World Bank said that SOEs receive special tax exemptions and a favourable regulatory environment for incumbents that has an impact on the growth of the private sector and private sector investment.

In its March report, Fitch said that it expects bank credit to the private sector to grow by 20% year-on-year in 2021, similar to growth in 2020 and up from 12% in 2019.

Some believe that now is the time for Egypt to push the growth of the private sector. 

“I think now Egypt is in this delicate transition where it needs to shift the balance back towards the private sector,” says Mr Abu Basha. “That’s really the big challenge that the country has to go through right now, because it has fixed its balance sheet to a large extent; it’s fixed some very important infrastructure deficits, like in the energy sector, in terms of fuel, power — even roads — which was great work by the public sector.”

He adds: “Now it’s time for that to recede a little bit, and for the private sector to gain more room and lead the investment cycle. That’s going to be a key focus in the next few years.”


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