Estudios Económicos
Egypt

Egypt

Population 99.3 million
GDP 3,044 US$
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Synthesis

Major macro economic indicatorS

  2018 2019 2020 (e) 2021 (f)
GDP growth (%)* 5.3 5.6 3.5 2.8
Inflation (yearly average, %)* 20.9 13.9 5.0 6.0
Budget balance (% GDP)* -9.5 -8.0 -9.0 -10.0
Current account balance (% GDP)* -2.4 -3.6 -3.5 -3.2
Public debt (% GDP)* 92.7 83.8 87.0 91.0

(e): Estimate (f): Forecast *Fiscal year from 1st July - 30th June. 2021 data: FY20-21

STRENGTHS

  • Large market
  • Advantageous geopolitical situation; Suez Canal
  • Tourism potential
  • Gas (Zohr field) and mineral potential (gold, kaolin, potash, copper, zinc, lead, feldspar)
  • Political and financial support from Gulf monarchies and Western countries
  • IMF support programme
  • Limited external debt (less than 20% of public debt)

WEAKNESSES

  • Poverty (one third of the population); low employment rate among young people
  • Low government revenues (19% of GDP) and informal economy (half of all jobs)
  • Jihadists active in Sinai region
  • Tensions between part of the Muslim majority and the Christian minority (10%)
  • Lack of water and dependence on the Nile
  • Public deficit and public debt
  • Banking system vulnerable to sovereign risk, with the public sector absorbing 2/3 of credit
  • High cost of credit
  • Low and low value-added manufacturing exports; food dependency
  • Non-transparency of companies controlled by the military (30% of the economy)
  • Corruption, lack of competition and bureaucracy, including in foreign trade

RISK ASSESSMENT

Limited impact of the COVID-19 crisis

With its impact spread over fiscal years 2020 and 2021, the COVID-19 crisis will not stop the Egyptian economy from posting moderate growth over these two years. However, it will take until the second half of 2021 for the economy to return to its sustained pre-crisis pace, as, despite the short-lived and moderate nature of the measures introduced to fight the pandemic, household consumption (85% of GDP) still suffered. Expatriate remittances fell as the Gulf experienced an economic downturn and many low-skilled workers’ employment contracts were terminated. Tourism (10% of employment and 6% of GDP) evaporated. Services (55% of GDP in terms of supply), especially trade, transport and accommodation, were hardest hit, with many family businesses, supporting half of all households, folding. Informal jobs have become scarcer. It will be necessary to wait until the second half of 2021 to see a rebound in private consumption. Investment (15% of GDP) was impacted by the withdrawal of local and foreign private-sector participants, but should get back on track within the same timeframe, owing to the development of gas and port facilities. Conversely, public investment held up, thanks to international financing, with the continuation of projects in transport (rail and Suez Canal), seawater desalination, housing and the establishment of the new administrative capital east of Cairo. The budget support plan, of which the economic and health measures focused on the most disadvantaged members of society and the most affected sectors, mitigated the shock. The central bank imposed a six-month moratorium on loan repayments, reduced the preferential rate for SME loans from 10% to 8% and guaranteed bank loans up to 1.7% of GDP. Exports were hit by the drop in hydrocarbon sales, weaker European and North American demand for clothing articles, reduced Indian demand for fertilisers, and the lack of tourists. Shipments of citrus fruits, vegetables and electronic and electrical appliances suffered from supply chain disruptions. However, unlike services, industrial (35% of GDP) and agricultural (12%) activity is not expected to have declined. While these negative factors should reverse in 2021, at least partially, tourists will be slow to return. Meanwhile, even though imports of consumer products fell, capital goods imports remained stable, such that trade’s negative contribution to growth was maintained, but did shrink.

 

A break in fiscal consolidation

The already high public deficit increased with the crisis, due to the adoption of a support plan, although the plan’s size (nearly 2% of GDP) was limited by the lack of room for manoeuvre. The deterioration was mitigated by cuts to current expenditure and continued tax administration reforms. The substantial debt increased further. Interest was already the largest expenditure item, absorbing half of the revenue. However, its foreign currency portion accounts for less than 20% of the total and is 70% made up of bilateral and multilateral loans. This portion is expected to increase with international financing. Moreover, the domestic debt became less onerous after the central bank cut its policy rate by 400 bps in 2020 to 8.75%. In the framework of the IMF programme, fiscal consolidation should be resuming from fiscal year 2022 onwards with the return of a primary surplus (i.e. excluding interest) and strong growth, but should be constrained by the high cost of debt.

The current account deficit is expected to have narrowed slightly due to the crisis. The large trade deficit (12% of GDP in 2019) shrank as the decline in imports (crude oil, capital and intermediate goods) outweighed that of exports. The surpluses in transfers (8%) and services (4%) decreased in line with expatriate remittances and tourism. Canal revenues resisted with the implementation of environmental standards encouraging shippers to abandon the Cape route. The income deficit (4%) fell slightly. Since the deficit could not be financed through weakened foreign investment alone, it was necessary to tap the market, regional banks (Emirates NBD Capital, First Abu Dhabi Bank) and multilateral organisations (IMF with its Rapid Financing Instrument and a Stand-by Arrangement, EIB and Afreximbank), which fuelled moderate external debt (35% of GDP). Portfolio investments, which vanished at the height of the crisis, were drawn back by the high real rates on offer. In this respect, the central bank is maintaining a prudent policy, even if this means causing the pound to be slightly overvalued. Reserves were maintained at about six months of imports despite market injections.

 

Concentration of power

Re-elected with 97% of the vote in 2018, President Abdel Fattah al-Sissi saw his powers strengthened after the 2019 referendum led to the adoption of constitutional amendments including the extension of the presidential term from four to six years and allowing him to run for a third consecutive term in 2024. The referendum also gave the president control over judicial appointments and strengthened the role of the army. Elections to both houses of parliament in 2020 confirmed the dominant position of the Future of the Nation Party, which is close to the president. Poverty and a lack of freedom of speech may combine to stoke social unrest. Externally, the Egyptian regime retains a pivotal role in regional stability and the fight against terrorism, enabling it to maintain close relations with Europe and the United States, but also with the United Arab Emirates and Saudi Arabia. Following the construction of the Grand Renaissance Dam, relations with Ethiopia continue to stumble on questions related to sharing water from the Nile, on which about 90% of Egypt’s drinking water supply depends. Relations with Turkey have been strained over Libya and gas development in the eastern Mediterranean.

 

Last updated: February 2021

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