CAIRO – 21 March 2018: Assuming the election passes smoothly, Egypt should enjoy an upturn in growth over the next 2-3 years, a report by the London-based research group Capital Economics said Wednesday.
The report said that fiscal consolidation looks set to ease, inflation and interest rates are likely to fall sharply and Egypt should continue to benefit from the boost to competitiveness from a weaker pound.
Additionally, the economy will receive a leg up from the start of production at the giant Zohr gas field. Capital Economics predicts a 5.3-5.5 percent GDP growth in fiscal year 2018/19, up from 4.8 percent last year.
“Beyond the next few years, though, reforms will be needed to raise Egypt’s low investment rate, boost productivity and create jobs for the country’s burgeoning population,” the report said.
The report added that the election is likely to cause few ripples in local financial markets. That said, investors will probably welcome a victory for President Abdel Fatah al-Sisi in the hope that it paves the way for a continuation of the market-friendly shift in policymaking seen over the past 12-18 months.
On President Sisi’s first term in office, which began in 2014, the report split the term into two parts. It said that in the early years, Egypt’s economy was still suffering from the fallout from the two revolutions and economic reform took a backseat.
However, over the past 12-18 months, there has been a marked shift towards more orthodox policymaking, the report said, stating that under the auspices of the International Monetary Fund (IMF), this policy shift has started to bear fruit.
Sources: CEIC, Capital Economics
It explained that the 50 per cent drop in the pound’s value against the US dollar, following the flotation of the pound in late 2016, combined with a fresh round of subsidy cuts and the introduction of a value-added tax, pushed inflation up to 30-year high of 33 percent in July 2017.
But a weaker pound has made Egyptian assets more attractive and capital inflows have strengthened, enabling the Central Bank of Egypt (CBE) to rebuild its foreign exchange reserves. In addition, a weaker pound has boosted Egypt’s external competitiveness and this has supported a rebound in activity in the manufacturing sector, the report said.
The government has also started to make inroads into the budget deficit and is on course to record a primary budget surplus for the first time in a decade, it added.
Sources: CEIC, Capital Economics
The report, meanwhile, warned that many of the structural constraints facing Egypt’s economy have not been tackled.
It flagged Egypt’s growing workforce as a key issue that needs to be addressed, saying that whereas working-age populations in parts of Asia and Eastern Europe are shrinking, Egypt’s workforce is set to grow by 2 percent per annum over the next 10-15 years.
This implies that the country needs to create jobs to absorb its rapidly-expanding labor force.
“Of course, Egypt could create plenty of job opportunities in poorly-paid, low-productivity areas of the economy. But if Egypt is to experience sustained economic development and generate better-paid jobs, there will need to be a shift towards higher-productivity sectors, such as manufacturing,” the report said.
Other key issues that need to be redressed, according to the report, are Egypt’s low savings rate, which limits the pool of domestic resources available for investment, and has resulted in an extremely low investment rate, and the barriers facing businesses such as an inflexible labor market, restricted access to land and concerns about rampant corruption.
Egypt has embarked on a bold economic reform program that included cutting energy subsidies and introducing new taxes, with the aim of curbing the budget deficit.
The country’s foreign reserves have been increasing since it clinched a $12 billion three-year loan from the International Monetary Fund (IMF) in November 2016, restoring confidence in the Egyptian market.
Reserves were only $19.041 billion at the end of October 2016, just before Egypt floated its local currency in November, which was a milestone in the IMF-backed economic reform program.
The country’s reserves stood at $42.5 billion at the end of February 2018.
Egypt’s presidential elections are slated for March 26, 27 and 28.