There is an optimism about the economic future of the biggest economy in North Africa, according Jason Tuvey, who has been writing forecasts about Egypt’s economy for almost five years in the London based consultancy Capital Economics.
Daily News Egypt sat down for an interview with Tuvey, who said that Egypt’s economy is about to recover, but challenges remain as the govern- ment still has to maintain its reform programme to keep the growth alive.
“ The economy in the current stage will offer mouth-watering opportunities to investors,” Tuvey said.
He also expected that the Central Bank of Egypt (CBE) to leave rates on hold until further signs of taming the rampant inflation begin to appear. The transcript for which is below, lightly edited for clarity:
What do you of Egypt’s economic performance at current stage?
I think the economy is on track to- wards revival at present, with reform measures starting to pay off. Fiscal consolidation has begun; however, progress will be slow-going.
How do you see fiscal progress, if it meets IMF goals?
Egypt’s budget deficit has narrowed sharply over the past year and the high public debt-to-gross domestic product (GDP) ratio should start to fall back soon. However, authorities have already missed some of the fiscal targets outlined by the International Monetary Fund (IMF) back in January. For now, Egypt has managed to secure a reprieve, but further slippage could yet see tensions between Egypt and the IMF come to the fore.
Improvement in the budget position can be attributed to expenditure restraint, rather than higher government revenues. Indeed, government receipts have been broadly stable as a share of the GDP. The introduction of a value- added tax late last year, which replaced previous goods and sales tax, has supported a pick-up in tax revenues, but this has been offset by a drop in non- tax revenues.
In contrast, government spending has dropped by around 2% of the GDP. This has been supported in large part by weaker spending on public sector wages. (See Chart 2.) As part of its IMF programme, the Egyptian authorities agreed to trim the size of the public sector workforce and start indexing bonuses. There were doubts about whether the government would be able to stick to its commitments given its concerns about potential social unrest, so these data are encouraging.
What about business climate currently?
Egypt’s New Investment Law is a positive step towards improving the dire business environment. But greater efforts, particularly in raising domestic savings, are needed if investment is to reach the levels that historically have supported strong and sustained growth in other emerging markets.
Egypt is one of the toughest places in the world to conduct business. The country ranked 122 out of 190 in the World Bank’s latest Doing Business survey. The poor business environment is one factor behind the country’s extremely low investment rate of just 15% of the GDP. Low investment is a concern as it results in poor infrastructure and means that the country is slow at adopting new technologies, all of which hinders productivity growth and increases in living standards. Over the past decade, labour productivity (or output per worker) in Egypt has fallen.
Overall, the new law appears to be a move in the right direction. “Certification offices” will be set up to review applications and supporting documents for licences, allowing investors to side- step the slow bureaucracy. Meanwhile, authorities have granted investors the right to repatriate profits without restriction and to establish private free zones (private projects which enjoy the benefits of free zone status). Nonetheless, I don’t think the New Investment Law goes far enough. The establishment of “certification offices” merely masks the bloated bureaucracy, which investors are still likely to come up against. Meanwhile, the right to repatriate profits and establish private free zones merely reverses previous policy decisions which prevented these.
Moving to inflation, what about your expectations?
There are good reasons to think inflation will fall further. For one thing, the period of weak growth since the Arab Spring revolution appears to have created some spare capacity in the economy. That should keep a lid on wage and price pressures. At the same time, overall, inflation should continue to fall over the coming quarters. The effects of the previous currency weakness should continue to unwind. And we think that spare capacity in the
economy will cause underlying price pressures to soften further. We see inflation returning to single digit rates next year.
Then, how should Central Bank of Egypt react to falling inflation?
This in turn should allow the CBE to loosen its policy. We expect the easing cycle to be resumed at the monetary policy committee meeting in September and that overnight deposit rates will be cut to 13.25% by the end of this year and to 11.25% by the end of 2019. This is a quicker pace of easing than the consensus currently expects.
How do you see performance of Egypt’s tourism sector?
Egypt’s tourism sector has embarked on a recovery. The government is overly optimistic. But rebound should help to narrow current account deficit and boost the GDP growth. The past six years have been a terrible time for Egypt’s tourism sector. Civil unrest surrounding the Arab Spring revolution in 2011 and the second revolution in 2013, combined with a multitude of terrorist attacks, drove tourists away from the country. At their trough late last year, visitor arrivals were 65% below their peak and at their lowest level since 2003.
