CAIRO - 17 April 2017: Egypt’s macroeconomic scene has witnessed dramatic changes during the past couple of years, and FY2016/17, in particular, has witnessed the main bulk of changes. Subsidy cuts, fiscal reforms, currency flotation, and loans from international organizations are just to name a few. Yet, economic growth still faces considerable challenges some of which are caused by the short-run impact of the reforms themselves.
The “Great Expectations” Story: Egypt’s financial statement for state budget FY2016/17 has estimated FY2015/16 growth to be around 4.4%, and assumed 5.2% growth rate for FY2016/17. Well, this was before the implementation of some reform measures and, of course, the flotation master scene on 3 November 2016. More recently, government officials announced they revised growth figure for FY2016/17 down to 4%.
The “Hard Times” Story: The economic performance figures announced so far reveal a little bit different story. According to IMF loan statement, FY2015/16 economic growth is estimated at 3.8% (as opposed to 4%). And according to Egyptian official sources, the economy has grown in Q1 FY2016/17 (July – September 2016) by 3.4% YoY, down from 5.1% in the comparable Q in the previous year, and 3.8% in Q2 slowing from around 4% Q2 FY2015/16.
Between the two stories, we would like to highlight some key points in FY2016/17 macro-scene:
In general, economic growth in Egypt has been mainly driven by final consumption and more particularly household consumption. Capital formation historically has been modest, while net exports have been “biting” away growth figures as Egypt is a net importer with widening importing pattern.
The recent economic changes have hit the main growth driver hard, leading to lower contribution of final consumption in the GDP growth rate. Household purchasing power has faded due to inflationary wave—not to say Tsunami—following the flotation as well as the implementation of Value Added Tax (VAT) and decreasing fuel subsidies. While no detailed information are announced for the latest quarter (October-December 2016), data for Q1 (July - September 2016) show a decline in final consumption contribution in GDP growth to 0.97%, while investment expenditure amounted to 2.5% out of the total 3.4%.
We find the increasing contribution of investment expenditure as a healthy sign, yet we raise concerns regarding a less powerful final consumption and its impact on growth at least in the short run.
A significantly narrower trade deficit may impact growth figures positively. Given no further deterioration in final consumption’s contribution and given the same percentage of investment contribution to GDP growth, Egypt has to narrow its trade deficit YoY by at least 5.5% in real terms to achieve a growth of 4%.
Our Takeaway: We believe the diminishing purchasing power for households will put a lid on the “hoped” economic growth rate of 4%. A 0.97% contribution of final consumption to growth in Q1 FY2016/17—that was prior to flotation—raises some questions concerning expected GDP growth for the whole year. We find that Egypt’s economy has to significantly decrease trade deficit in order to achieve a 4% growth rate that we find a bit optimistic. Given Imports pattern during flotation-quarter discussed in our comment on BoP figures released recently, we believe that economic growth may hit around 3.5% to 3.8% in FY2016/17, and we find that 4%—in such a tremendous fiscal year—is some kind of “great expectations.”
The report above was produced by Mubasher Trade and it does not necessarily reflect Egypt Today's editorial policy.
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