Egypt’s Economy is Recovering, After Years of Declining Growth

Economic growth in Egypt is expected to reach 5.8 per cent in 2020 driven by an economic reform programme that has seen the liberalisation of the exchange rate, the rationalisation of energy subsidies, and increased social protections for the poor, a new World Bank report has said.

The report, entitled “A New Economy for the Middle East and North Africa”, said Egypt would outperform other oil-importers in the region, attributing its burst in growth to a recovery in consumption and private investment and a rebound in merchandise exports and tourism.

It expects that growth in Egypt’s GDP will reach 5.6 per cent in the 2018/2019 fiscal year, supported by private consumption, a further recovery in the tourism sector, and the operation of recently discovered gas fields.

Egypt is enjoying a continued rebound in tourist arrivals, with a 33 per cent increase in the first quarter of 2018, the report says. Public investment is expected to grow, and a recovery of private investment is envisaged if business-environment reforms are effectively implemented, it adds.

It expects Egypt to attract $11 billion in foreign direct investment in the 2018-2019 fiscal year, up from $7.4 billion a year ago.

Egypt’s economy is thus recovering, after years of declining growth, rising debt, and widening fiscal and current account deficits, the report says. The recent reforms have strengthened growth and helped to accumulate adequate foreign reserves.

However, the report laments that much economic activity is still driven by state-led projects, as evidenced by large-scale public investments.

The challenge of kick-starting private-sector-led growth requires the alleviation of long-standing constraints, including fostering a level playing field and facilitating access to key inputs, such as land and skilled labour, it says.

“A pick-up in domestic and foreign investment hinges on the nature of state-led activities in the economy,” the report says.

It adds that despite the announced programme to divest minority shares in selected state-owned enterprises, the state is still expanding in some areas, such as construction. It notes that a well-functioning economy requires a “clear demarcation of the role of the state and its redirection towards the enabling and regulation functions”.

The report also refers to risks in the 2018/2019 budget, given potential increases in global oil prices or disorderly exchange-rate spillovers form other emerging markets.

It adds that high levels of public debt pose sustainability risks in the medium to longer terms if fiscal consolidation is discontinued. Brent crude oil prices have surged to more than $80 per barrel, making it more challenging for the government to reach its fiscal targets. In the 2018/2019 budget, the government assumed an oil price of $67 a barrel. Every $1 increase in the price of a barrel of oil costs the government LE4 billion.

While rising oil prices will be putting pressure on the budgets of oil-importers, they will be a blessing to oil-exporters and will drive a modest rebound in growth in the Middle East and North Africa (MENA) region, amounting to two per cent in 2018 and an average of 2.8 per cent by the end of 2020, the report says.

However, though the rebound in growth reflects the impact of modest reforms and stabilisation efforts in some countries in the region, the slow pace of growth will not generate enough jobs for the region’s large youth population.

High unemployment rates among young people and women still exist, and if they are not addressed they could deter economic recovery and hamper long-term growth prospects in the region, the report says. New drivers of growth are needed to reach the level of job-creation required.

“The 2.8 per cent growth in GDP in 2020 is not enough to create enough jobs for the millions joining the labour market,” Rabah Arezki, World Bank chief economist for the Middle East and North Africa said in a press conference in Cairo last week.

He said that all the countries in the region lacked inclusive private-sector-led growth. “The region needs an open private sector to produce sustainable growth and create jobs,” Arezki said. He added that that the region needed to focus on transitioning to a digital economy, saying that this still faced obstacles such as affordability and Internet speeds and facilities.

He thus agreed with the report that the MENA region needed broader and bolder reforms as well as critical investments in digital infrastructure.