Egypt Economic Outlook
Economic performance and outlook
In 2016/17, real GDP grew an estimated 4.1%, slightly underperforming the 4.3% in 2015/16. Growth is driven mainly by investment and private and public consumption, as well as by net exports, which contributed positively for the first time in two years. This positive performance reflects the government’s reform efforts to achieve fiscal consolidation, more inclusive growth, and an improved business environment. The approval of a three-year International Monetary Fund (IMF) program in November 2016 showed the success of those efforts. Growth is projected to be 4.8% in 2017/18 and 5.5% in 2018/19, boosted by restored investor confidence but partially diluted by high inflation. Inflation rose to an estimated 23.3% in 2016/17, from 10.3% in 2015/16, and is projected to decline to 21.2% in 2017/18 and 13.7% in 2018/19.
After facing important imbalances that led to high public debt, a widening current account deficit, and declining official reserves, Egypt embarked on a major IMF-backed economic reform initiative. It consists of exchange rate liberalization; fiscal consolidation, including energy subsidy cuts and reduction of the wage bill; and business climate improvement, including easier access to financing for smalland medium-size enterprises, mainly through targeted cash transfers for the most vulnerable. Macroeconomic conditions show signs of improvement. On the demand side, the Ministry of Finance’s July 2016–March 2017 data indicate year-on-year growth of 17% for investment, 4.4% for private consumption, and 2.4% for public consumption. The 72% increase in exports was partly offset by the 47% increase in imports. On the supply side, eight key sectors, representing about two-thirds of GDP, led growth: telecommunications (grew 9.3%), construction (grew 8.5%), wholesale and retail trade (grew 4.7%), nonoil manufacturing (grew 4.7%), natural gas (grew 4.6%), real estate (grew 4.3%), agriculture (grew 3.1), and general government (grew 2.9%). Tourism declined 6.7%.
The IMF-supported homegrown reforms, backed by the World Bank and the African Development Bank through budget support of $4.5 billion over three fiscal years, are paying off. Currency depreciation boosted foreign direct investment, the economy is considered more competitive, and business confidence has improved. Public investment, through a series of megaprojects, boosted growth in 2016/17. Better markets conditions have been a main factor in the return to growth, particularly benefitting exports, led by mining products, especially gold and oil (mostly crude petroleum). The program’s fiscal consolidation aspect—which includes increasing tax revenues 2.5% from 2015/16 to 2018/19; reducing public expenditure by slashing subsidies, notably to fuel; and containing the government wage bill—has improved the macroeconomic environment. The government will implement the ongoing IMF–World Bank–African Development Bank program to consolidate the positive impact to date and enhance future prospects.
Moving the exchange rate to a floating regime resulted in depreciation of the Egyptian pound by 44% between October and November 2016. Inflation reached 31.9% in August 2017, after averaging 23.3% in 2016/17. Real interest rates remain negative despite steady increases in nominal interest rates. However, inflation is expected to decline to 21.2% in 2017/18 and 13.7% in 2018/19, as the Central Bank tightens monetary policy to support the Egyptian pound and reduce inflation. Another impact of the currency depreciation was the sharp increase in the stock of foreign currency–denominated debt, from 17.3% of GDP during the first quarter of 2016/17 to 41.2% a year later. Another aspect affecting growth is the security situation in the northeastern part of the country, as well as warnings that affect the tourism sector, which has yet to return to its pre-2011 levels.