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The slow recovery of the Egyptian economy

THE devaluation has supported exports, but inflation isn’t helping internal consumption.

THE Egyptian economy is showing faint signs of recovery, but the country is not yet close to definitively overcoming the crisis that began with the revolution of 2011. In the fourth quarter of fiscal year 2016-2017, which ended 30 June, GDP showed a 5% increase, a value +4.5% higher than the same period in 2016.

Also in fiscal year 2016-2017, the balance of payments reached a surplus of $13.7 billion, of which $12.2 billion were recorded in the period immediately after the swing in the exchange rate. This is decisively better performance than twelve months ago (-$2.8 billion), but paid dearly for by consumers in terms of inflation. The devaluation supported exports but also raised consumer prices by 30%, and by as much as 43% at its peak in April. And the strong trend in exports has not been enough to balance the red in the current account, which decreased from $19.8 billion to $15.6 billion.

“Despite its economic challenges, the country has been able to raise the rate of economic growth and increase direct foreign investments,” said Minister of Planning Hala el Saed, commenting on the GDP data and explaining that the sectors that recorded positive figures were tourism, telecommunications and real estate.

Last November, the Egyptian government launched a series of reforms supported by the International Monetary Fund (IMF), including measures to control the instability of the exchange rate, through a $12 billion agreement to support fiscal reforms. So far, the IMF has delivered a $4 billion instalment. Thanks to this progress, on 18 August, the international rating agency Moody’s maintained a stable outlook on Egypt, assigning it a B3 rating that indicates a high risk of insolvency. “Very weak public financing will continue to influence the rating until there is more clarity about sustainability and the impact of the reform programme,” the US rating agency’s experts explained. “While Egypt’s external liquidity has improved significantly in the last 12 months, the increase in international reserves was mainly determined by the flux of debt creation, thus increasing the level of foreign debt and debt in foreign currency.” However, the stable outlook reflects the “impressive progress of the reforms” and an “improved political stability,” even if the measures adopted by the government could be affected by the presidential elections which will take place in May 2018.

Among the reforms that are still to be carried out, Moody’s emphasised the ones that affect small and medium businesses, based on a simplification of the tax system. The law should take effect by the end of the year. “We are now working on the law on small and medium businesses,” said Minister of Trade and Industry Tareq Qabil, “it is one of the most important laws. Most of all because it will allow smaller companies that are part of the underground economy to legitimise themselves and to work in compliance with the law.” In this attempt to raise the country up again, Egypt cannot but count on tourism, which has been one of the pillars of its economy until the internal disorder and terrorist attacks dissuaded foreign visitors from visiting its sites.

To deal with its chronic lack of earnings in foreign currency, which mainly came from tourists, Cairo decided to strengthen its links to Saudi Arabia, which is now its largest foreign investor with a volume of $6 billion per year, plus the $4.3 billion in commercial exchange.

The two countries are now ready to launch a strategy of industrial cooperation to achieve integration between various manufacturing sectors in both countries and to increase Saudi investments in Egypt. “The Saudi-Egyptian links are historical and strongly rooted at the political and economic level,” said Egyptian Minister of Trade Tareq Qabil. Only time can tell whether this will be enough to give relief to Egypt’s suffering current economy.

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