OECD Economic Outlook, Volume 2023 Issue 1

Egypt

Against the backdrop of a series of global shocks, the Egyptian economy is facing a cost-of-living crisis and balance of payments adjustments. Economic growth slowed in 2022 and is projected to recover only gradually. Consumption will remain weak for some time due to high inflation, despite fiscal support. In the face of tight financial conditions and uncertainty, business investment will remain subdued, while public investment is being scaled back. Egypt remains particularly vulnerable to abrupt changes in capital flows and currency fluctuations.

The authorities should continue to fight inflation and provide targeted support to the most vulnerable. The government should focus on and credibly commit to reducing public debt in the medium term. This would help restore investor confidence, thereby reducing financing costs and currency depreciation pressures. Finally, the government should push ahead with its structural reform agenda, including the recently announced divestiture programme, which needs to be clarified further and implemented effectively. This would unleash private sector activity and pave the way for more sustainable growth.

The economy has suffered from a dual crisis

Economic activity has slowed since the outbreak of Russia’s war of aggression against Ukraine. Egypt has been hit particularly hard by rising food prices in international markets, given its reliance on food imports including those from Russia and Ukraine. Inflation has surged since early 2022. It was initially driven by food prices but has spread since, pushed up by substantial currency depreciation. Both headline and core inflation have reached record highs, with the costs of soaring food prices being borne disproportionately by poor people. Nonetheless, consumption has been sustained by a series of fiscal support packages. Notwithstanding the slowdown in economic activity, the unemployment rate (according to the ILO definition) has barely changed over the past year, while the share of informal jobs remains important.

Egypt: Inflation and fiscal indicators

1. General government gross debt.

Source: Central Agency for Public Mobilization and Statistics; and IMF, World Economic Outlook database.

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Egypt: Demand, output and prices

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The war also affected capital flows. Large capital outflows amounting to USD 20 billion (4.7% of GDP) occurred upon the outbreak of the war. Investor confidence was significantly undermined, against the backdrop of Egypt’s chronic current account deficit and its general government debt, which stood at 85.3% of GDP as of June 2022. The country has faced very tight financing conditions in international markets. Currency depreciation pressures remain, and shortages of foreign currency have disrupted business operations. Businesses have also faced tighter financing conditions. Business sentiment has weakened, with the PMI falling over the past year, and investment has declined in recent quarters.

The government needs to ensure fiscal sustainability

Egypt has started to undertake macroeconomic policy reforms under the IMF Extended Fund Facility Arrangement, which was put in place in late 2022. While the authorities still manage the exchange rate, it has been devalued, with a view to moving to a market-determined exchange rate system. The policy interest rate has been raised by 10 percentage points since early last year to 18.25%, but should be lifted further if inflation expectations rise. The government aims to increase the primary surplus to 2.5% of GDP in the forthcoming fiscal year. It intends to improve tax collection and widen the tax base, in line with the Medium-Term Revenue Strategy, which needs to be implemented effectively. Broad-based fiscal support, notably in the form of energy subsidies, has significantly decreased since the mid-2010s. The government should continue to improve targeting, in particular for food subsidies, while ensuring that social benefits reach the most vulnerable. Debt service costs are expected to remain high, as 10-year government bond yields approached 25% in the secondary market as of late April. Restoring investor confidence is essential to reduce the interest payment burden, as the government will continue to have significant financing needs.

The recovery will be fragile with significant risks

Growth is projected to regain momentum over the projection period. Inflation is expected to decline, as the effects of currency depreciation dissipate, which will help household consumption to recover. Business investment will gather pace once uncertainty is reduced and financing conditions normalise. Exports will pick up on the back of a weaker currency and incentives to support exporters. Concerns about fiscal sustainability may cause further capital outflows or affect the balance sheets of domestic banks whose exposure to domestic sovereign debt is substantial. Slower-than-expected progress on structural reforms would further undermine investor confidence. In contrast, tourism and Suez Canal receipts have increased over the past year and may continue to outpace expectations.

Fostering a stronger, more inclusive and sustainable recovery

Raising productivity and employment is key to improving growth prospects durably and would also help to restore fiscal sustainability. The effective implementation of the State Ownership Policy programme would improve the government’s balance sheet but also promote competition and business investment, including foreign direct investment. The government is working on streamlining regulatory procedures and post-establishment administrative requirements. Among others, it is to set up a unified digital platform, which is meant to speed up approvals and to add more certainty to the investment climate in Egypt. This would also help create better quality jobs and increase the employment rate for youth and women while reducing informality, one of the main targets of Egypt’s Sustainable Development Strategy (Vision 2030). Other recent efforts to integrate the informal sector include the ratification of the 2020 Law on the development of micro, small and medium enterprises, and the roll-out of an electronic invoice system. The National Energy Plan aims to increase the supply of electricity generated from renewable sources to 42% by 2035 and the 2022 National Climate Change Strategy lays the ground for achieving lower emissions and sustainable growth. The government has started to invest in transmission infrastructure and grid connections, including energy interconnectors with neighbouring countries.