The International Monetary Fund (IMF) has adjusted its projection for Egypt’s growth in fiscal year (FY) 2017/18 to 4.8% instead of the previously projected 4.5%, to reach 6% in the medium term. With regard to inflation, the IMF projects that it will decline to 12% in June 2018, and to reach single digits by 2020, according to the Egypt country report released by the IMF on Tuesday.
The report highlights Egypt’s economic outlook as favourable, though various risks may yet constrain growth, including corruption, increases in oil prices, or any reversals or slowdowns of reforms.
Egypt’s reforms and outlook in the eyes of the IMF
The IMF believes that Egypt’s economic outlook remains favourable, provided prudent macroeconomic policies are maintained, and the scope of growth-enhancing reforms is broadened, according to the report.
The report pinpoints some factors that could curb Egypt’s current account deficit to around 4.5% of GDP in 2017/18, and to about 3.5% of GDP by 2021/22, such as improved external competitiveness, reforms of the business environment, and tourism recovery.
Moreover, the IMF forecasts primary fiscal surplus to register at 0.2% of GDP in 2017/2018, as a result of the impact of the VAT increase, lower wages, and fuel subsidies cuts. In light of this, the report indicates that the government target to improve the primary balance by a cumulative 5.5% of GDP is attainable, and general government debt is projected to decline by about 17% of GDP by the end of the programme.
On the other hand, the IMF prioritises setting public debt on a downward path, which it believes is the fiscal anchor of Egypt’s reform programme. ِAccording to the report, Egypt has limited fiscal space, as a result of the country’s sizeable stock of debt and high gross financing needs.
Consequently, the authorities’ fiscal consolidation path aims to improve the primary balance by about
4% of GDP over the next two years, which if accompanied by achieving a strong growth in nominal GDP, will reduce general government debt from 103% of GDP in FY 2016/17 to 87% of GDP in FY 2018/19, and to about 72% of GDP by 2021/22.
With regards to the current account (CA) deficit, the report indicates that it remained stable at about 6% of GDP in 2016/17. Despite the fact that the liberalisation of the exchange rate strengthened inflows from tourism, remittances, and the non-oil merchandise trade, dollar GDP declined in line with the depreciation of the pound, resulting in a higher CA ratio.
Furthermore, since June, the Egyptian pound has appreciated by 2% against the dollar. The Central Bank of Egypt (CBE) has not intervened in the foreign exchange (FX) market directly. However, the CBE has supplied FX at market exchange rates to state-owned enterprises (SOEs) and portfolio investors through the repatriation mechanism.
The report indicates that there is no evidence of foreign exchange shortages in the market, but the repatriation mechanism has diverted FX liquidity from the interbank market and prevented the appreciation of the currency in response to portfolio inflows.
Challenges ahead
The IMF report highlights six main risks, which are ranked in terms of their likelihood. Tighter global financial conditions is a high likelihood risk factor, such as the strengthening of the US dollar and the euro vis-à-vis other currencies.,Ssuch tightening of global financial conditions could weaken the market appetite for the Egyptian eurobond.
Other risks include policy slippages by the authorities, such as premature easing of monetary policy, non-transparent interventions in the FX market to limit exchange rate movements, or fiscal slippages to increase social spending, which would damage credibility and undermine macroeconomic stabilisation. And any slowdown or reversal of reforms due to reform fatigue, opposition by vested interests, or a fear of escalating social tensions in the run up to the presidential election.
Moreover, geopolitical uncertainties and security challenges would weaken tourism inflows to Egypt, or any significant slowdown that might take place in key advanced economies, like China or other large
emerging markets/frontier economies, and persistently low inflation (the eurozone and Japan) would reduce demand for Egyptian exports. And finally, any further increases in global oil prices would weaken
the current account and increase the fuel subsidy bill, thereby undermining fiscal consolidation and debt reduction.
The way forward
According to the report, Egypt’s policy priorities should aim to raise potential output and promote inclusive growth to create jobs for Egypt’s young and growing population. This can be achieved by growth of the private sector, a stable macroeconomic environment, a friendly business climate, and efficient delivery of public goods.
Furthermore, further strengthening of social protection is essential to shield the most vulnerable. The report emphasises the importance of modernisation of the regulatory framework to create a level playing field for all; enhancing competition in input and product markets; supporting greater trade integration and the removal of non-tariff barriers; improving access to finance and land; strengthening governance, transparency, and accountability of state owned enterprises; and strengthening the labour market.
On the other hand, Egypt’s growth in the last two decades has been insufficient to improve the country’s living standards. Although real GDP growth averaged 4.2% per year from 1990 to 2017, per capita GDP growth was more modest at 2% annually on the back of strong population growth. The national poverty rate was 27.8% in 2015/16, the report indicates.
The IMF highlights the lack of competition, corruption, poor access to finance and land, and inadequate infrastructure as major obstacles to firms’ development and productivity improvement. The report indicates that the uneven playing field, and the time and cost of starting and operating businesses are cited by investors as key constraints.
Moreover, integrating women into the labour market and supporting youth employment is of extreme importance, as about one-third of young Egyptians in the labour force are unemployed and more than 75% of women are outside the labour force. The IMF staff analysis indicates that skill mismatches are among key obstacles for youth in finding jobs.
“Strengthening competition and addressing corruption are key to achieving greater economic efficiency. Work is also advancing on modifying the public procurement law to ensure transparency. The new law is in parliament and is expected to be approved by end-November 2018,” said the report.
Corruption in Egypt is perceived as high and widespread. Perceptions-based corruption indices show high levels of perceived corruption in Egypt compared to most regional peers and other emerging market economies, according to the report, which indicates that reduction in corruption levels can lead to between 0.59% and 0.86% growth in the GDP per capita.
The government’s goals include implementing a modern and effective tax regime for small and medium enterprises in FY 2017/18, supporting SMEs and entrepreneurship, encouraging the formalisation of the private business sector, and financially restructuring the Egyptian Electricity Holding Company in order to liberalise the
electricity market.
Furthermore, the government plans to promote competition and investment, and raise the quality of services in the transportation sector, especially regarding road transport.
