Egypt’s real GDP growth is expected to record 3% in 2021, because of continued decrease in net exports, according to the African Economic Outlook 2021 report issued by the African Development Bank (AfDB).
This year’s figure compares to the 5.6% in 2019, and is expected to be mainly driven by tourism receipts. The AfDB projected that the country’s GDP is likely to record 4.9% in 2022.
The report said that tourism earnings, which totalled 25% of exports in 2019, are likely to have declined in 2020 due to the closure of international airports and restrictions on local travel.
It further added that the tourism sector, which accounts for about 5.5% of GDP and 9.5% of employment, was shut down from mid-March to 1 July 2020 due to the novel coronavirus (COVID-19) pandemic-related restrictions.
Despite pandemic-related expenditures and revenue shortfalls, the fiscal balance excluding the cost of government debt is expected to remain positive, at 0.5% of GDP.
Overall, exports, which decreased in 2020, should remain subdued in 2021 due to the weak external environment, especially in Europe. The continent accounts for 35.5% of Egypt’s exports and is the main source of tourists, the report noted.
Similarly, private investment could remain subdued in 2021, but benefit from the improved investment climate over the medium term. Private consumption will remain the main growth driver.
Egypt must maintain its reform momentum to make the private sector more dynamic, and enhance inclusive growth. Monetary policy should remain accommodative in 2021, as inflation is expected to increase only moderately, the report read.
The outlook highlighted that Egypt’s economic growth has been strong and resilient since the economic reforms initiated in 2016. It is one of the few African countries expected to record a positive growth in 2020, at 3.6%, despite the adverse impact of the COVID–19 pandemic.
The economy grew at a slower rate than in 2019 (5.6%) but did not enter a recession, thanks to high domestic consumption.
“This fiscal buffer, a consequence of the fiscal consolidation reforms, helped keep the overall deficit broadly unchanged at 8% of GDP in 2020, compared with a 7.9% deficit in 2019 that benefited from a primary surplus of 2%,” the AfDB said, “Public debt was estimated to increase to 90.6% of GDP in 2020 from 86.6% in 2019, reversing three years of continuous decline.”
The bank also noted that, during the first half (H1) of 2020, exports dropped by 6%, whilst imports fell 21%. This helped narrow the current account deficit to 3.1% of GDP in 2020 from 3.6% the year before. The smaller current account deficit also reflected the strength of remittances, estimated at 8% of GDP in 2020.
The report said that, following the move to a flexible exchange rate regime in 2016, Egypt experienced a period of double-digit inflation, but inflationary pressures have been trending downward since the summer of 2017.
In 2020, price pressures were muted, especially on food products, and inflation declined to 5.7%, from 13.9% in 2019, which allowed monetary policy to be accommodative. To stimulate economic activity, the Central Bank of Egypt (CBE) cut the overnight lending rate by 300 basis points on 16 March 2020.
This was followed by a cut of another 50 basis points on 24 September, and still further to 9.25% on 12 November.
Additionally, the report disclosed that liberalisation of the capital account in 2016 attracted foreign investors to the domestic debt market. However, the COVID-19 pandemic caused a significant reversal of capital flows, which put pressure on reserves and the current account.
“The pandemic also exacerbated Egypt’s already large refinancing needs, with 60% of the country’s public debt at a maturity of one year or less, and to bridge the financing gap, Egypt accessed funding from COVID–19-related facilities,” the report said, “Credit facilities from international financial institutions and bond issuances boosted foreign exchange reserves to $40.06bn at the end of 2020.”
It added that external debt rose to 36% of GDP, but the new borrowing helped lengthen the average debt maturity. Total public debt is projected to increase to 90.6% of GDP in 2021, before steadily declining to 77.2% by 2025, according to African Economic Outlook 2021.
Egypt has seen it debt ratios stabilise and even decline in the recent past because of the favourable real interest-growth differential. However, debt ratios have not stabilised for an increasing number of African countries.
The AfDB recommended Egypt to further lengthen the maturity of its debt and diversify its investor base, to manage its refinancing risk and mitigate its rollover risk. Moreover, the country needs to continue implementing structural reforms to catalyse private sector development and enhance domestic resource mobilisation.
The country has received $8bn from the International Monetary Fund (IMF), of which $2.8bn was received as part of the coronavirus rapid financing initiative and $5.2bn in a one-year stand-by arrangement.
The AfDB provided $300m, whilst the World Bank provided an additional $450m. On 21 May 2020, the country also tapped the international capital market, issuing a $5bn bond, its largest issuance to date, that was largely oversubscribed.
