Egypt's economy rebounds with tighter fiscal management and increased capital inflows

The economy notably improved in FY 2016/17, with GDP growth averaging 4.6% in the second half of the period – the fastest expansion since FY 2009/10, according to the Central Bank of Egypt (CBE).

Growth Drivers

Tourism was a key contributor to economic recovery. The CBE reported that the sector went from a 25.5% contraction in FY 2015/16 to post 3.9% growth in FY 2016/17. This has been supported by more arrivals from traditional source markets, such as Western Europe, and by visitors from new markets, including China and the Gulf. The most-improved sector in FY 2016/17 was communications, growing by 12.5%, followed by construction and transport, expanding by 9.5% and 5.3%, respectively. Agriculture and manufacturing – traditional mainstays of the economy – gained 3.2% and 2.1%, while extraction industries declined by 1.8%.

An increase in investment flows also helped build momentum: net foreign direct investment reached 3.4% of GDP during the period, according to the Ministry of Finance (MoF). Energy exports – up 15.4% over FY 2016/17 – coupled with a 16.2% rise in non-oil exports, also contributed to the improved economic performance and were a reflection of the positive impacts associated with the 2016 liberalisation of Egypt’s exchange rate. Going forward, Amr El Garhy, the minister of finance, projected GDP growth of 5-5.25% for FY 2017/18, up from earlier estimates of between 4.6% and 4.8%.

Deficit Falls

The strengthening economy has had a positive impact on state finances: the fiscal deficit dropped to 2% of GDP by the end of September 2017, down from 2.2% at the same time in 2016, according to the MoF. The account deficit also saw a reduction of 21.5% in FY 2016/17 and 65.7% year-on-year between July and September, while capital inflows strengthened, with $29bn and $6.2bn coming from external sources over the respective periods. This led to an improved balance of payments, as the country recorded a $13.7bn surplus in FY 2016/17, up from a $2.8bn deficit in the preceding 12 months.

Optimistic Markers

The price of goods have reduced throughout 2017, as inflation dropped to 26.7% in November, the lowest level since December 2016. While prices of some goods, like food and beverages, remained above the average at 32.4%, others such as transport and utilities were well below 20%. This helped bring down the index, according to the Central Agency for Public Mobilisation and Statistics.

Despite waning inflation, the CBE maintained its hold on rates, keeping key benchmarks unchanged during its December 2017 review. The bank left the overnight deposit rate at 18.75% and the overnight lending rate at 19.75%, remaining confident of meeting a projected inflation rate of 13% by August 2018.

Furthermore, unemployment continued to ease amid economic improvements, with the jobless rate falling from 12.5% at the beginning of 2017 to 11.9% by the end of September, its lowest rate since 2011.

Release Of Loans

Egypt’s positive economic performance looks set to continue in 2018, after the IMF agreed to release a $2bn tranche of funds as part of its $12bn loan programme. The decision means Egypt has received $6bn from the three-year programme, signed in November 2016. The initiative has seen the government introduce a series of tax reforms and spending cuts to stimulate GDP growth.

Further international support for the reform process came from the World Bank, which agreed to provide $1.15bn in loans to strengthen public finances in December 2017. The granting of the loan has been tied to efforts to scale back subsidies and lift revenue, along with strategies to drive job creation, boost energy security and enhance business competitiveness, especially in the small and medium-sized business segment. The credit brings the bank’s total loans to $3.15bn, with the funding likely to support further growth and reforms in 2018.