Economy, Finance and Trade Egypt: On the Road to Macroeconomic Stability
Euromonitor International’s Egypt Economy, Finance and Trade Country Briefing focuses on one of the Arab world’s largest and most populous economies that was harshly hit by the political upheaval experienced between 2011 and 2013. The political crisis left Egypt with very low levels of foreign exchange reserves, a soaring currency black market, very high levels of youth unemployment and a weak fiscal position. However, through subsidy reforms (that started since 2014) and higher infrastructure investment, Egypt is on the right path of recovery. Nonetheless, this is just the beginning; long-term steadfast reforms are needed, in order to restore macroeconomic stability.
The government has been implementing various reforms in order to increase foreign investment, stimulate economic growth and improve its fiscal stance:
- In 2015, Egypt posted the highest annual real GDP growth of 4.5% since 2010, driven by robust growth in the manufacturing and construction sectors, continuous financial support from the Gulf nations, and a surge in foreign direct investment (FDI) inflows and domestic demand. The economic outlook remains positive, as annual output growth is expected to accelerate to 4.8% in 2016, mainly owing to the opening of the new Suez Canal in August 2015 and the discovery of the Zohr gas field in 2015, coupled with continuous inflows of international aid packages;
- In February 2015, to wipe out the foreign currency black market, the Central Bank of Egypt (CBE) imposed restrictions on bank deposits in the US dollar to a maximum of US$10,000 per day and US$50,000 per month. In January 2016, the daily limit was removed and the monthly limit was increased to US$250,000. Furthermore, in March 2016, these limits were ended for those involved in importing essential goods, such as medicines, however, the restrictions are still applicable for other imports;
- The decline in tourism and exports weakened the EGP by 7.7% against the US dollar in 2015. Furthermore, in March 2016, the CBE devalued the EGP by 13.0%, in a bid to adopt a more flexible exchange rate regime;
- Various pro-business reforms have been imposed under the new government since 2014, including a reduction in income tax rates on individuals and companies, for instance, the corporate income tax rate was slashed from 25.0% to 22.5% in 2015. This along with an acceleration in economic growth increased FDI inflows by 45.7% year-on-year in real terms in 2015;
- Egypt’s general government net budget deficit deteriorated from 8.2% of GDP in 2010 to 13.3% in 2015, owing to the political upheaval since 2011 that resulted in the government adopting expansionary policies, coupled with increased spending on defence to strengthen internal security. However, the widening of the deficit would have been worse if not for the financial assistance from the Gulf States. Substantial further cuts in fuel subsidies, lower oil prices, and continued international financial assistance should help improve public finances in the future.
Infrastructure investment and subsidy cuts will create more jobs and reduce the budget deficit
After four prolonged years of political turmoil and sluggish economic growth, Egypt has set itself on a new path of reforms. The government has continued to embark upon fuel subsidy reforms since July 2014 that has helped slightly bring down its high budget deficit. Furthermore, in its 2016 budget, the government announced cuts in the total subsidy bill by 14.0% in the 2016/2017 fiscal year, mainly by reducing subsidies on petroleum products by approximately 43.0%. Through deeper cuts in fuel subsidies, the Egyptian government should be able to reallocate more resources to the poorer populace and towards labour-intensive activities, such as, infrastructure. The expansion of the Suez Canal project unveiled in August 2015 is expected to substantially increase current annual revenues and create a large number of new job opportunities. According to trade sources, the government plans to invest US$2.3 billion, during 2015-2020, on building large malls and superstores that is estimated to create 40,000 new jobs. In March 2015, the government announced a mega-project to build a New Cairo Capital, worth US$45.0 billion. However, Egypt has just begun its journey of reforms; continued steadfast reforms if implemented resolutely, should help sustain long-term economic stability, spur job growth, restore public finances and boost investment.