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AfricaApril 1 2019

Is Egypt's tough reform programme paying off?

The IMF is ready to launch the next tranche of a $12bn loan package for Egypt, following government attempts to push through economic reforms. While some of these moves have proved unpopular, such as removing energy subsidies, they have boosted investor confidence, as Kit Gillet reports.
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Cairo

Egypt is putting the turmoil of the early part of the decade behind it as it looks to greater growth and a more diversified economy, and while many challenges remain, the economic situation in the country continues to tick upwards. 

According to rating agency Moody’s, real gross domestic product (GDP) growth in Egypt is forecast to hit 5.5% in 2019, and rise to 5.8% in 2020. Meanwhile, inflation has dropped steadily, unemployment is at an almost 10-year low, and the drive towards a balanced, competitive and diversified economic model, as laid out in Egypt’s Vision 2030, is taking shape.

There are still challenges: notably high rates of inflation and government debt. Still, Moody’s and Fitch both raised their outlook for the Egyptian economy from 'stable' to 'positive' in 2018, with Standard & Poor’s upgrading its Egyptian credit rating from B- to B (though it also lowered its outlook from 'positive' to 'stable').

“When we look at GDP growth in the range of 5.5%, and this is being revised upwards, along with the oil and gas industry supporting the growth of the economy, and there being less reliance on imports – all of these are positive factors that will allow us to maintain this momentum,” says Mohamed Aly, CEO and managing director of Abu Dhabi Islamic Bank–Egypt.

Economic reforms

Since coming to power in 2014, president Abdel Fattah el-Sisi has pushed Egypt along a path towards improving its economic fundamentals. In 2016, the government launched a far-reaching economic reform programme, backed by the International Monetary Fund (IMF), which included tough cuts to energy subsidies, the floating of the Egyptian pound and new taxes, including the introduction of a value-added tax.

“Removing subsidies, floating the currency, and doing all of this in two or three years, even the IMF people’s jaws dropped,” says Michel Accad, group CEO of Al Ahli Bank of Kuwait (ABK). “It’s not the sort of thing that gains a lot of popularity at first – you need to be courageous to take this bold move.” He points to the short-term impact for many Egyptians, especially the lower and middle classes, whose salaries were badly affected by the double hit of the currency devaluation and rising inflation, not to mention the removal of fuel subsidies.

In January 2019 it was reported that the IMF was getting ready to unlock the fifth tranche of its $12bn loan package to Egypt, agreed in 2016, following progress made on fiscal reform. “Egypt has made substantial progress, as is evident in the success achieved in macroeconomic stabilisation,” IMF managing director Christine Lagarde said at the time, adding that Egypt’s growth rate is now among the highest in the Middle East and north Africa region, the budget deficit is on a declining trajectory, and inflation is on track to reach the Central Bank of Egypt’s target by the end of 2019.

Egypt is targeting a budget deficit of 8.4% of GDP for the fiscal year 2018/19, down from 9.7% in 2017/18, with the goal of lowering that to 7.1% in 2019/20. This would be achieved through a combination of cost-cutting measures and increased tax revenues – public revenue rose 28.4% in the second half of 2018, against a growth of 17.7% in public spending, according to the ministry of finance, with tax revenues up 22.2%. For the first six months of fiscal year 2018/19, the deficit fell to 3.6%, down from 4.2% during the same period of 2017/18.

Meanwhile, Egypt’s debt-to-GDP ratio dropped from 108% in June 2017 to 98% in June 2018, with a target of 93% by the end of June 2019. Foreign exchange reserves at the central bank were $44.1bn in February 2019, just shy of their all-time high of $44.5bn, reached in November 2018. In February, the central bank also cut its overnight interest rates, reducing them by 100 basis points on the back of a strong drop in inflation and improvements in other macroeconomic indicators. This followed similar cuts in February and March 2018.

“As the government’s ambitious economic reform agenda has begun to bear fruit, confidence is growing, as reflected in the IMF’s and rating agencies’ positive economic outlooks. Perhaps most significantly, lowered interest rates have signalled the return of investment, which will clearly accelerate the positive momentum,” says Hisham Ezz Al-Arab, chairman of Commercial International Bank, Egypt’s largest private lender.

Focused approach

Egypt’s government has continued to look towards the small and medium-sized enterprise (SME) sector as a key driver of growth. In 2016, the central bank launched a four-year programme, worth $25bn, that offers incentives to SMEs as part of efforts to reduce unemployment and encourage young people to start their own businesses. In February 2019 it launched NilePreneurs, a new initiative aimed at supporting small enterprises and start-ups by providing technical and administrative support, with deputy governor Lobna Helal saying that financing was no longer the main obstacle facing businesses and entrepreneurs in the country.

The government has also enacted legislative changes designed to make the country more appealing to foreign and domestic investors. These include an investment law, passed in 2017, that grants new rights and protections, including residency permits, the right to repatriate profits and the right to receive international financial assistance without restriction. In January 2018, Egypt’s parliament also passed the country’s first bankruptcy law, minimising the need for companies to resort to the courts and simplifying post-bankruptcy procedures. 

While these are promising developments, Egypt continues to struggle to attract new foreign investors, who have been cautious following the 2011 uprising and subsequent social and political tensions. Elena Sanchez-Cabezuelo, head of financials and equity research at EFT Hermes, a financial services group headquartered in Cairo, says: “The one area that is not yet showing a lot of strength is foreign direct investment – multinational companies investing in Egypt – but this is something that government officials are working very strongly on.” She adds that the currency devaluation in 2016 has made Egypt far more attractive for companies in terms of potential labour and other costs.

Ongoing concerns

Despite the recent economic progress, millions of Egyptians still live below the poverty line, and political issues could hamper Egypt’s future growth. While Mr Sisi has received praise for spearheading economic reforms, he is considered an authoritarian leader who won re-election in April 2018 with 97% of the vote in an election heavily criticised for its crackdowns on opposition politicians. Mr Sisi now looks set to win constitutional changes that would allow him to stay in power until 2034.

Inflation, which surged following the flotation of the Egyptian pound in November 2016, is also a concern. The Egyptian pound lost half of its value in the immediate aftermath of its free float, and basic costs for Egyptians have skyrocketed, with the consumer price inflation reaching as high as 35% midway through 2017. 

In February 2019, headline inflation rose to 14.4%, up from 12.7% in January, highlighting the ongoing challenge. Food and beverage prices increased by 15.3% year on year, while the accommodation, water, electricity, gas and fuel sectors saw a similar increase, as did education. The country’s medium-term objective is to bring inflation down into the single digits.

The right stuff

Even so, on the economic front, many believe that Egypt now has the right ingredients to succeed, and with sectors such as tourism rebounding, amid lessening security concerns, there is a growing sense of optimism.

“Egypt is probably one of the best placed emerging market countries for growth and development,” says Mohamed Ozalp, managing director and CEO of Blom Bank Egypt. “We are in the middle of Africa, Europe, the Middle East and Asia, we have free-trade agreements with all of the main trading blocs, and we have sun 350 days a year, so we are an all-year-round tourist destination. Really, we have it all. We have a captive market of 95 million, and over and above that the level of working skills is quite advanced.”

In the last quarter of 2018, Egypt’s unemployment rate dropped to 8.9%, its lowest level since 2010. Meanwhile, the Zohr offshore gas field, which started production in December 2017, is now producing 57 million cubic metres of gas a day, enabling Egypt to achieve natural gas self sufficiency as of October 2018.

In a fillip to Egypt’s reputation, in January 2019 Standard Chartered Bank published a report that predicted the country would be the seventh largest economy in the world by 2030, valued at $8200bn and the only economy in Africa to make it into the global top 10. 

“People have suffered a lot, but after two years you see the economy turning around so fast and so clearly that people can see the improvements,” says ABK’s Mr Accad. “At first you get hurt, because you’re forced to tighten your belt and so on, but then you start reaping the benefits.”

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Read more about:  Africa , Egypt