The outlook for the Egyptian economy is positive. Why?

The Egyptian tourism sector suffered a great deal because of the Covid pandemic (photo by Shutterstock)

The Egyptian economy overcomes the shock of the Covid-19 pandemic and continues to grow, writes Ahmad Abdul-Rahman.

Egypt was one of the few emerging economies that saw a positive growth rate in 2020. This is a result of the government's quick and cautious policy response to Covid which included a short period of general lockdowns, coupled with support from the International Monetary Fund (IMF) and a relatively diversified Egyptian economy. As a result, it has been resilient in the face of the pandemic.

Like the situation in most emerging markets, the COVID-19 pandemic was a massive shock to the Egyptian economy. The effects of the pandemic were quickly reflected through the sudden cessation of tourism, which, at the beginning of the crisis, contributed about 12 per cent to GDP, and provided 10 per cent of job opportunities, and 4 per cent of foreign income. Precautionary measures to contain the virus and prevent its spread, including partial lockdowns and restrictions on the capacity of public places, led to a temporary decline in local activities. The government's budget also come under pressure as slowing economic activity resulted in lower tax revenues. Egypt also witnessed large capital outflows. In previous statements made by the Governor of the Central Bank of Egypt (CBE), Tariq Amer, indicated that foreign clients' investments in government treasury bills declined with the onset of the Covid-19 pandemic, causing Egypt to lose about USD 20 billion.

What measures has the government put in place to address the crisis?

Egypt entered into the COVID-19 crisis equipped with many positive yielding tools, thanks to the reforms it implemented since 2016 to settle macroeconomic imbalances. For example, it  implemented agreements such as the Extended Fund Facility (EFF) for 2016-2019. These reforms included floating the exchange rate to eliminate currency overvaluation, fiscal consolidation to reduce public debt, reforming energy subsidies to address one of the main financial risks, and creating space for social spending. The country also implemented structural reforms to strengthen the business climate, attract investments and increase employment opportunities, especially for youth and women.

As a result, the government was able to respond quickly with a comprehensive support plan while maintaining economic stability. For example, financial support included helping businesses and workers in the hardest-hit sectors such as tourism and manufacturing, deferring tax payments, and expanding cash transfer programmes to poor families and informal workers.

In addition, the Central Bank of Egypt reduced its key interest rates by 400 basis points during 2020 – reducing the overnight deposit rate from 12.25 per cent to 8.25 per cent – ​​to help support economic activity and ease pressures in domestic financial markets. The bank also launched several initiatives to relieve pressure on borrowers and ensure the availability of liquidity for the most affected sectors. These initiatives included increasing access to credit at preferential interest rates, and postponing the payment of existing credit benefits for a period of six months. These measures across the financial sector were important to ensure the smooth flow of credit in the economy in the wake of the COVID-19 crisis.

What role has the IMF played in supporting Egypt's recovery?

The IMF provided financial support of USD 8 billion through a two-pillar plan to help Egypt meet the financial needs that resulted from the pandemic. The IMF's Rapid Financing Instrument (RFI) provided emergency financial assistance of USD 2.8 billion in May 2020 to ensure that the government had enough foreign exchange to finance imports and other necessary needs. The IMF's Stand-By Arrangement (SBA), approved in June 2020, gave the government access to resources totaling USD 5.4 billion over the next 12 months.

The Stand-By Arrangement helped Egypt maintain economic stability, rebuild international reserves to restore margins that were withdrawn from them in order to address the crisis, and progress in implementing the most important structural reforms, including measures to enhance public resources, increase public financial transparency and governance, and make progress in laws to improve the environment business, in order to put Egypt on a path to a robust recovery. Economic policies under the programme have struck a balance between supporting the economy to help cushion it from the shock of COVID-19 and ensuring that debt remains at sustainable levels to maintain investor confidence. Thanks to the government's timely and cautious policy action, coupled with support from the IMF, the economy has been resilient.

Based on those driving factors, the government announced that "the economic growth rate is expected to continue rising during the 2021-2022 fiscal year, reaching a rate ranging between 6.2 to 6.5 per cent (by the end of 2021)," compared to 3.3 per cent during the 2020 fiscal year. This rate is higher than the expectations of the World Bank  by 5.4 percent, and the IMF by 5.6 per cent.

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Friday, 29 September 2023