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Egypt Economic Outlook
Real GDP growth was an estimated 5.3% in 2018, the highest rate in a decade. The growth was associated with a decrease in unemployment to around 10% from 12% in 2017. On the supply side, recoveries in tourism and in natural gas production sustained growth. On the demand side, net exports and investment rebounded, while private household consumption weakened due to inflation. With the ongoing broad fiscal consolidation effort, the fiscal deficit declined to 9.0% in 2018, and the fiscal balance excluding interest payments (primary balance) reached a modest surplus. The debt-to-GDP ratio decreased to 92.5% in 2018 from 103% in 2017. Following the 2016 devaluation, the nominal and real effective exchange rates dropped substantially, benefiting exports due to increasing price competitiveness and improving terms of trade.
Tailwinds and headwinds
Real GDP is projected to reach 5.8% in 2020. An improved business climate is leading to a major recovery in foreign direct investment, while better security conditions benefit tourism. Moreover, the natural gas production of the Zohr field should keep rising, allowing the country to reach self-sufficiency and become a net gas exporter.
Egypt undertook impressive structural reforms in 2017–18. Landmark policies eased starting a business, strengthened legal rights, improved the bankruptcy law, and enhanced access to credit. The energy sector has become more sustainable and competitive, with improved governance. A large public investment in power generation turned the country’s power supply from shortage to surplus, and the government is planning to establish the country as a regional energy hub. Egypt’s grid, currently being expanded, should absorb the new generation capacity and serve the growing number of consumers. Bold energy tariff reforms aim to remove subsidies over 3–4 years. Moreover, the new energy sector law should enable higher private investment and stronger competitiveness.
However, the country faces headwinds. Debt, above 90% of GDP, remains high though sustainable. Servicing the debt accounts for about 30% of fiscal spending almost 10% of GDP. Increased foreign currency denominated debt, the opening of the capital account, and rising foreign investment in the local currency sovereign debt market increase Egypt’s sensitivity to international capital market volatility. Nevertheless, a flexible exchange rate and rising net international reserves (currently 8.5 months of imports) provide buffers. Egypt would also be adversely affected by a sharp increase in oil prices or security risks.
Water and sanitation remain key challenges for Egypt, especially given the rapidly rising population of 96.7 million. Renewable water resources average 59.3 billion cubic meters a year, while water use is 100 billion cubic meters a year. Egypt fills the gap with desalinized seawater, reuse of drainage water, shallow ground water, and treated wastewater. The government has made considerable achievements in monitoring, controlling, and minimizing water pollution on the Nile. Moreover, over four years, 80 sanitation projects have been completed, covering 414 villages, at a cost of 9 billion Egyptian pounds. Expanding and upgrading mega-urban wastewater treatment remain a top government priority.
Poverty remains a key challenge exacerbated by high inflation. The government has beefed up its poverty eradication efforts, notably through improved targeting and cash transfers. But ongoing population growth precludes Egypt from benefiting from a demographic dividend over the medium term. Thus, private sector–led inclusive growth remains paramount.