The European Bank for Reconstruction and Development (EBRD) raised its economic forecast for the Egyptian economy’s growth in FY 2017/18 by 0.8% to reach 5.3% by the end of the year, adding that economic activity is expected to grow at 5.5% in FY 2018/19.
The new forecasts came in the Regional Economic Prospects in the EBRD Regions 2018 report released on Wednesday.
Janet Heckman, EBRD managing director for the Southern and Eastern Mediterranean (SEMED) region, said that the Egyptian economy is improving well and is showing positive signs because of the economic reform programme that is being undertaken by the government.
“We expect the reform agenda to be continued as we see the government is working very hard to improve the economic situation,” Heckman told Daily News Egypt.
The EBRD’s report clarified that positive economic expectations are supported by the continued boost in confidence, recovery in tourism, increase in foreign direct investment, improved competitiveness, continued strengthening of exports, the start of natural gas production from the Zohr field, the implementation of business environment reforms, and prudent macroeconomic policies.
The EBRD’s positive outlook for Egypt meets expectations of other global institutions like the International Monetary Fund. On 2 May, the IMF said in its Regional Economic Outlook Update report that the outlook for Egypt has improved in the context of its IMF-supported programme.
The IMF report added that Egypt’s economic growth is projected to rise to 5.2% in FY 2017/18, rising from 4.2% last year and accelerating further to 5.5% in FY 2018/19, aided by an increase in gas production.
Meanwhile, the EBRD’s report noted that the main risks to its outlook include a slowdown in reforms, resurgence of inflation resulting from the next round of subsidy reforms expected in July 2018, and increases in global oil prices, which would delay fiscal consolidation.
The EBRD’s report mentioned that Egyptian economic risks are mitigated by the authorities’ strong commitment and ownership of the economic reform programme. However, the report mentioned that Egyptian growth continued to accelerate for the fifth consecutive quarter and reached 5.3% year-over-year in the second quarter of FY 2017/18.
The report added that the acceleration was driven by manufacturing, trade, tourism, and construction, as well as a recovery in mining, noting that exports and investment picked up and became more prominent drivers of growth thanks to the liberalisation of the exchange rate in November 2016, the resolution of foreign exchange shortages, and the strong performance under the IMF-supported programme.
Private consumption slowed down and its contribution to growth declined, a result of the record levels of inflation which reached in July 2017 and averaged 29.6% in 2017, thus eroding purchasing power, added the report.
Meanwhile, growth in the Southern and Eastern Mediterranean picked up from 3.3% in 2016 to 3.7% in 2017 as improved competitiveness and greater investor confidence supported growth in Egypt while agricultural output rebounded in Morocco and Tunisia.
On the other hand, the report said that economic activity in Jordan and Lebanon continued to be negatively impacted by the geopolitical uncertainty in the region and the resulting refugee crisis.
The report added that inflation has been high and rising in several countries, noting that inflation in Egypt spiked following the November 2016 depreciation of the pound and subsequently moderated from the average rate of 29% in 2017 to the still elevated rate of 13% in March 2018.
“Serious security risks continue to exist in the Eastern Mediterranean but there have been significant efforts to stem these risks and mitigate their potential impacts,” the report said.
3.2% economic growth expected in EBRD operational region in 2019
The EBRD said that countries where it invests were suffering during the global financial crisis, but they initially struggled to get back on a path to growth, adding that recovery took hold in earnest during 2017.
The EBRD tracks economic trends in 37 economies across three continents, from Estonia to Egypt and from Morocco to Mongolia.
The EBRD’s new Regional Economic Prospects report is predicting average growth of 3.3% in 2018, an upward revision of 0.3% from the forecast last November and one of 3.2% for 2019.
The report said economic momentum remained strong but that growth might now have peaked, noting that the 2018 and 2019 predictions represent a slowdown from 3.8% in 2017, reflecting lower rates of productivity growth in advanced and emerging economies compared to levels seen before the 2008-09 crisis, as well as adverse demographic trends.
EBRD Chief Economist Sergei Guriev said that the lower productivity growth reflected the fact that most EBRD economies had exhausted the growth levers that had delivered rapid expansion until the onset of the crisis.
“In order to develop new sources of growth, these countries need to carry out structural reforms of product, capital, and labour markets. They need to improve governance, promote integration into the global economy, and invest in human capital and sustainable infrastructure,” added Guriev.
“The good news is that the current recovery provides a solid window of opportunity for such reforms,” Guriev noted.
The EBRD’s report said that its forecast was subject to several risks including a substantial rise in corporate debt levels which was a source of concern as the resilience of the corporate sector to a significant tightening of global financing conditions was as yet untested.
The report added that while high EBRD stock market levels were a sign of optimism, there was a risk of a sizeable downward correction if the mood changed.
“With constrained fiscal space and very accommodative monetary policy, governments may have limited ammunition to respond to a major dip in market confidence,” noted the report
An additional concern was a further possible rise in the attraction of populist parties in an environment of moderate growth, and high and rising inequality which means a challenging backdrop for deeper structural reforms, the report mentioned, noting that any further escalation of trade tensions may have significant repercussions for major exporters of manufacturing goods.
The report added that other risks include persistent security threats and geopolitical tensions as well as a high degree of concentration of sources of global growth, with China accounting for up to half of the total.
