Economy, Finance and Trade Egypt: Key Economic Reforms will Boost Egypt’s Economic Potential
Euromonitor International’s Egypt Economy, Finance and Trade Country Briefing focuses on the fifth largest and fastest growing economy in the Middle East and North Africa (in US$ terms), which is currently carrying out major economic reforms to help restore its macroeconomic stability. The economy has been able to partially recover from the shock of the Arab Uprising experienced over 2011-2013. Through various reforms, the government has been successful in improving its overall, yet still fragile, fiscal position; as well as thwarting the growth of the currency black market. Furthermore, large infrastructure funding should help not only boost the country’s overall competitiveness, but also create more jobs; thereby increasing consumer spending and the country’s economic potential.
Prudent economic reforms should help restore economic stability:
- The Egyptian economy continued on its path of recovery, posting the highest annual real GDP growth of 4.3% in six years in 2016, thanks to various positive reforms executed by the government, coupled with the revenue boost provided by the new Suez Canal that opened in August 2015;
- In the wake of steep cuts in fuel subsidies in 2016 and substantial depreciation of the Egyptian pound (that has caused imports prices to rise greatly), annual inflation surged from 10.4% in 2015 to 13.5% in 2016. The government continues to focus on further raising energy prices. This, coupled with its decision in November 2016 to allow the Egyptian pound to freely float, will further push inflation to 25.8% in 2017 to become the fourth highest regionally;
- Egypt has suffered from continued terrorist attacks and political uncertainty that have greatly impacted its foreign direct investment (FDI) inflows. However, since 2014, the political situation has improved, with the Egyptian government making strides in enhancing the country’s business environment via a privatisation programme and addressing the issue of foreign currency shortages. This, coupled with growing economic activity, has caused FDI inflows to further surge by 35.2% annually (in real terms) in 2016;
- Continued severe cuts in fuel subsidies, hikes on imports custom duties, and the implementation of value-added tax (VAT) in 2016 have helped the Egyptian government marginally reduce its soaring general government net budget deficit from 14.1% of GDP in 2013 to 12.3% in 2016. Further cuts imposed on fuel subsidies and the increase in the VAT rate from 13.0% to 14.0% in July 2017 should further help narrow the budget deficit;
- The share of those aged 65+ comprised 5.3% of the total populace in 2016, which will rise to only 6.4% in 2030. The old-age dependency ratio will also rise from 8.8% in 2016 to 10.6% in 2030. These figures suggest that Egypt is a youthful country, which poses a major threat, given very high youth unemployment.
The state continues to implement pro-business reforms to boost investment
To boost FDI, the government is implementing pro-business reforms. On the fiscal front, the government plans on investing largely in infrastructure, this will boost employment levels; driving wages and consumption in the economy. As per trade sources, the state plans to invest US$2.3 billion during 2015-2020 on building large malls and superstores that will create 40,000 new jobs.
While on the monetary side, in November 2016, Egypt liberalised its exchange rate and scrapped most of the capital controls that did not allow access to foreign currency previously. To rein in the foreign currency black market and combat soaring inflation, the Central Bank of Egypt (CBE), since late 2015, has been continuously raising its key interest rate (overnight deposit rate). In July 2017, it was hiked by 300 basis points to reach 18.75% (the highest in more than two decades). In the same month, the overnight lending rate was also increased from 17.75% to 19.75%.
The shortage in foreign currency persists and might continue to hamper smooth business operations; thereby bringing annual real GDP growth marginally down to 4.0% in 2017. However, with a free-floating currency and further cuts in energy subsidies, the Egyptian economy is expected to become more sustainable. Furthermore, in November 2016, the IMF sanctioned a bailout package worth US$12.0 billion to be released over three years, which should offer additional support to the economy, helping bring about sustainable economic growth.