OECD Economic Outlook, Volume 2023 Issue 2

Egypt

GDP growth will remain just under 4% this fiscal year, but is projected to pick up to 4.8% in FY 2024 and 5.1% in FY 2025. Egypt faces high inflation and balance of payments difficulties, but fiscal support has sustained private consumption, which will gradually gain momentum as inflation moderates. In contrast, business investment has contracted sharply due to tighter financial conditions and increased uncertainty, and is projected to recover only gradually.

The authorities should continue to fight inflation by keeping monetary policy tight and restraining public investment projects that are not urgently needed. A reinforced commitment to reducing public debt in the medium term would help restore investor confidence, thereby reducing financing costs and currency depreciation pressures. At the same time, the government should push ahead with its structural reform agenda, including its divestiture programme announced in late 2022, which needs to be clarified further and implemented fully and effectively.

The economy has weakened

The economy has slowed markedly since early 2022. Initially driven by sharp global food price increases in 2022, inflation has surged and become broad-based, boosted also by successive devaluations of the Egyptian pound. Core inflation stood at 38.1% in October 2023. Household consumption held up thanks to energy price controls and food subsidies as well as a series of fiscal packages. In contrast, private investment has contracted over the past year, as businesses have suffered from tighter financial conditions, currency shortages and increased uncertainty. While domestic demand has slowed, exports have surged, driven by tourism and Suez Canal receipts, and imports were restrained further due to temporarily strengthened restrictions in 2022. Overall, GDP growth is expected to remain largely unchanged at 3.9% in fiscal year 2023.

Egypt: Interest rates and fiscal indicators

Source: LSEG; and Ministry of Finance, Monthly Finance Report, September 2023 and Budget FY 2023/24.

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Egypt: Demand, output and prices

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Business prospects have worsened amidst balance of payments difficulties. Increased stress in international financial markets has affected Egypt, particularly due to its high public debt, which stood at 95.7% of GDP in mid-2023. Investor confidence in Egypt has suffered, with rising government bond yields and CDS spreads. The cost of market funding has gone up and the government faces large financing needs in the coming years. Domestic banks are heavily exposed to domestic sovereign debt. The associated deterioration of the quality of bank assets is affecting financing conditions for businesses, as reflected in rising spreads between average rates on deposits and outstanding loans.

The authorities struggle to tackle the cost-of-living crisis

The exchange rate has remained virtually flat since early 2023, after the Egyptian pound was devalued in steps, losing around 50% of its value against the US dollar since early 2022. The authorities still manage the exchange rate and restrict some foreign exchange transactions. As a consequence, demand for foreign currency is partly directed to the parallel market, where the rate has substantially weakened since mid‑October, generating additional inflationary pressure. In the face of surging inflation, the Central Bank of Egypt raised the policy interest rate in steps to 19.75% by August 2023, 1100 basis points above its early 2022 level. As inflation is projected to remain well above target, the central bank is expected to maintain its restrictive policy stance over the projection horizon. Budget FY 2023/24 foresees an improvement in the primary surplus to 2.5% of GDP from 1.6% in the previous fiscal year, but a worsening of the budget deficit to 7.0% of GDP due to high debt servicing costs. The government plans to reduce untargeted energy subsidies and broad-based food subsidies, while it continues to expand the cash‑transfer programmes targeted to the most vulnerable. Despite the government’s aim to contain its expansion, public investment, including self-financed investments by public entities, is projected to increase significantly in FY 2023/24. In October 2023, the government announced increases in public sector wages and pensions as well as personal tax exemptions.

The recovery will be fragile and surrounded by risks

GDP growth is projected to recover only moderately over the next two years. Consumption will hold up despite a gradual withdrawal of fiscal support, as inflation moderates (based on the technical assumption that the exchange rate remains unchanged). In contrast, the recovery of business investment is set to be subdued as funding conditions will ease only gradually. Exports will gain ground thanks to improved competitiveness. The sovereign-bank nexus can be a source of financial disruption, which could aggravate financing conditions further and destabilise the economy more generally. In contrast, tourism and Suez Canal receipts may continue to outpace expectations, which would boost exports. However, both may be negatively affected by the geopolitical tensions in the region.

Restoring public finance health would support stronger and sustainable growth

Restoring public finance health remains key to ensure macroeconomic stability and improve long-term growth prospects. The government should stick to its Medium-term Debt Strategy, aiming to reduce the debt-to-GDP ratio to around 80%. In this respect, committing to a credible medium-term consolidation plan would improve investor confidence and reduce debt servicing costs. Inefficient tax expenditures need to be cut, which would also help remove market distortions. The Ministry of Finance should publish its first tax expenditure report before the end of 2023 as scheduled. Also, fiscal risks can be reduced by severing financial links with state-owned enterprises (SOEs). A recent law that aims to remove all preferential tax treatments and exemptions for SOEs needs to be fully implemented by adopting the associated executive regulations. These measures would also help ensure a level playing field, which could be reinforced by fully empowering the newly established Competitive Neutrality Committee. While containing overall public investment, the focus should be shifted from large-scale construction projects to those promoting the green transition. These include investing in the necessary infrastructure, such as a grid adapted to renewables, and the facilities required to produce green hydrogen, which would promote private sector investment.