Strong fundamentals support Egypt's economic rebound

Egypt’s economy proved resilient during the Covid-19 pandemic, supported by structural changes associated with an ambitious economic reform programme in the years leading up to the crisis. The country was the only one in the MENA region to record positive GDP growth in 2020, reflective of the government’s emphasis on facilitating business continuity and targeting social support with health measures aimed at stemming the spread of Covid-19. Egypt’s robust fundamentals – supported by a diversified economy, sustained levels of consumer spending, and its large workforce including a significant number of youthful, educated and multilingual workers – have created a dynamic business climate and helped the country further develop its economy. Taken together, these factors place Egypt in an advantageous position as the global economy recovers from the pandemic.

Oversight

There are several government bodies involved in overseeing Egypt’s economy, including the Ministry of Finance (MoF), which formulates fiscal plans and policies, coordinates the national budget, and develops tax and other revenue systems. The Ministry of Planning and Economic Development (MPED) is tasked with developing sustainable development programmes, and facilitating the implementation of sector-specific strategies in line with national priorities. It lays out national, sectoral and geographical objectives and policies; proposes related legislative and regulatory changes to encourage growth; and establishes the overall goals of the economic development strategy.

The MPED is charged with leading the execution of Egypt Vision 2030, the nation’s roadmap to a competitive and diversified economy. The strategy outlines specific targets, including increasing annual GDP growth from a baseline rate of 4.2% in 2016 to 12% in 2030, and GDP per capita from $3440 to $10,000. Importantly, the framework identifies key projects to facilitate growth, including the construction of the New Administrative Capital, the formalisation of the informal sector, the development of a green economy, the improvement of cloud computing and other ICT infrastructure, and the promotion of public-private partnerships.

The General Authority for Investment and Free Zones (GAFI) is charged with regulating and facilitating investment. It also acts as an investment promotion agency, providing business matchmaking, investor outreach, and research and market intelligence services. Key to facilitating investment is reducing the financial costs and time associated with investing in Egypt. To that end, the authority offers several e-services, including company name reservation and incorporation services, as well as services targeting foreign investors. The Investors Services Centre, established in 2018, is a division of GAFI that acts as a one-stop shop for foreign investors throughout the business cycle, providing services such as legal and technical assistance.

Structure & Performance

While Egypt’s oil and gas sector has been a major source of investment – attracting $74bn between FY 2014/15 and FY 2019/20 – the economy is diversified, with opportunities across multiple sectors. Industry is the largest contributor to the economy, accounting for 16.3% of GDP in FY 2020/21. Other major drivers of economic growth were retail (14%), agriculture (12.5%) and real estate (11.4%). Oil and gas, for its part, accounted for 2.5% of GDP.

Before the pandemic, the economy had been experiencing a general upwards trend. GDP was valued at $332.7bn in FY 2014/15 and $333bn in FY 2015/16 before falling to $234.3bn in FY 2016/17, following currency depreciation. GDP recovered to $251.1bn in FY 2017/18, before rising to around $303.3bn and $363.1bn in FY 2018/19 and FY 2019/20, respectively. Egypt was successful in navigating the economic headwinds of the pandemic, with its GDP registering 3.6% growth in FY 2019/20 and 3.3% in FY 2020/21. Indeed, government assistance packages and efforts to support business continuity during the crisis helped the economy grow despite wider macroeconomic pressures, with GDP reaching $404.2bn in FY 2020/21. The government expected GDP growth to accelerate to 5.7% in FY 2021/22 and 5.5% in FY 2022/23, supported by a pickup in tourism and easing macroeconomic pressures.

Egypt’s growing economy has improved purchasing power, with GDP per capita rising from $1450 in 2000 to $3520 in 2016. Depreciation and subsidies associated with economic reforms caused this figure to decline to $2440 in 2017 and $2540 in 2018, before rising to $3020 and $3570 in 2019 and 2020, respectively.

While foreign reserves were at a high before the outbreak of the pandemic – at $45.5bn in February 2020 – the figure dropped to $36bn in May 2020 due to foreign outflows from the Treasury market, and the government rollout of support pandemic-related programmes. However, international reserves recovered to $40.9bn by December 2021, reflecting renewed investment activity as the global economy rebounded from the immediate effects of the pandemic.

Workforce

The country’s labour force was estimated at 29.1m at the start of 2022, up from 28.5m the previous year, according to the International Labour Organisation. As of early 2022 Egypt had a labour force participation rate of 48.2% among individuals over the age of 25. Meanwhile, the median age of the workforce was 36.4 years in 2019, the most recent year for which data was available. The majority of Egyptians are employed in services, with 52.4% of the workforce active in the sector in 2019, followed by industry at 27% and agriculture at 20.6%.

The unemployment rate has slowly ticked downwards since 2013, when it was 13.2%. In 2019 it stood at 9.7% before rising to 10.5% in 2020 as the pandemic caused economy-wide disruptions – especially to the tourism sector, which provides employment for millions of Egyptians and is an important source of foreign exchange (forex). However, recovery both at home and abroad helped to ease the pressure, and in the first quarter of 2022 unemployment had fallen to 7.2%.

Reforms

In past years Egypt has implemented wide-ranging reforms, the most recent of which aimed to correct imbalances and distortions in the market between 2016 and 2019. The process, backed by a $12bn loan from the IMF, started with a shift to a flexible exchange rate. Later, the government aimed to reduce the budget deficit – among the highest in the region at 10% of GDP – lifted subsidies and introduced more efficient social support mechanisms. In 2017 a new investment law was implemented that included guarantees for private companies such as equal treatment for foreign and Egyptian investors, protection against nationalisation or seizure of funds without a court order, and the right to transfer profits abroad.

Reform efforts have continued, with the government working to facilitate post-pandemic economic growth and build upon momentum gained from the IMF-supported programme. In 2020 the IMF provided Egypt with $8bn in support through two programmes to help it maintain progress on key structural reforms, as well as address its financing needs in light of the pandemic. In April 2021 the government launched the National Structural Reform Programme (NSRP), the second phase of the reform process that started in 2016. The NSRP is a three-year plan to support widespread and sustainable growth, with an aim to reduce the budget deficit to 5.5% and boost economic expansion to 6-7% by FY 2023/24. The framework – developed in partnership with the private sector and relevant ministries – aims to alter the structure of the economy to bolster its resilience in the face of external shocks, and identifies manufacturing, agriculture and ICT as key to economic diversification.

The NSRP includes six pillars: boosting labour efficiency; improving technical and vocational training programmes; cultivating a more supportive business climate and facilitating private sector development; making public institutions more efficient through digitalisation; enhancing financial inclusion; and developing human capital. Taline Koranchelian, deputy director of the Middle East and Central Asia Department of the IMF, said at a briefing in April 2021, “It is very important to improve governance and the business environment, remove trade barriers and continue to enhance the transparency of state-owned enterprises. This will help gradually reduce the state’s footprint, and provide equal opportunities for all.”

Ratings

Efforts to reform the economy have been successful in bolstering investor and business sentiment, a factor reflected in the country’s credit ratings. In April 2022 Fitch affirmed Egypt’s issuer default rating at “B+” with a stable outlook. “Egypt’s ratings are supported by its recent record of fiscal and economic reforms, its large economy with robust growth, and strong support from bilateral and multilateral partners,” the agency noted in a press release at the time. The stable rating was supported by the fact that Egypt has continued its reforms, despite challenges, as well as the fact that while the government debt-to-GDP ratio remained high – at around 91% in FY 2021/22 – it was on a downward trend. The same month Standard & Poor’s reaffirmed the country’s “B” rating for the fifth time since the beginning of the pandemic, highlighting the role that the reforms played in creating an economy resilient in the face of external shocks. Specifically, the ratings agency noted that the authorities’ policy response and significant external support is expected to “prevent a material deterioration in external and fiscal positions due to rising commodity prices”. However, in May 2022 Moody’s kept Egypt’s rating at “B2”, but changed the outlook from stable to negative. It cited the impact of inflation on living standards and the authorities’ constrained ability to absorb external shocks due to narrowing foreign exchange reserves attributed to external debt service payments.

National Budget

The FY 2021/22 budget aimed to achieve four key principles: maintain financial stability and control over debt; support economic activity and exports; increase incomes of and the quality of life for citizens; and improve human capital, particularly in health and education sectors. The LE1.8trn ($114.4bn) national budget forecast revenue of LE1.4trn ($89bn), and to maintain financial stability, the budget targeted a deficit of 6.7% of GDP (see analysis). It also included a primary surplus of 1.5% of GDP to ensure that debt remains relatively level – at around 90% of GDP – similar to figures seen in FY 2020/21. Interest payments received the largest allotment, at LE566bn ($36bn), accounting for 33% of the total national budget. Wages received the second-largest portion of public funding – at LE355bn ($22.6bn), or 19.6% – followed by subsidies and social support (LE326.3bn, $20.7bn), public investment (LE280.7bn, $17.8bn), the purchase of goods and services (LE100.2bn, $6.4bn), and other expenditures (LE105bn, $6.7bn).

In early January 2022 the government released a first look at the FY 2022/23 budget, targeting 5.5% economic growth and a 6.1% budget deficit for the year. The budget will include financing for projects that bolster economic activity, as well as local production and inputs. It also aims to stimulate exports, support small and medium-sized enterprises, and encourage investment. According to Mohamed Maait, the minister of finance, health and education spending is expected to ramp up, with the government aiming to promote investment in human capital and the delivery of efficient basic services. While a government statement at the time did not include specific spending figures, the MoF announced it would begin public consultation on the budget, before referring the spending package to the House of Representatives for approval.

Input Costs

Price pressures eased on non-oil businesses in December 2021, according to research and analytics firm IHS Markit. The purchasing managers’ index (PMI) rose from 48.7 in November of that year to 49 – below the 50-point threshold that separates growth and contraction – and above the country’s average of 48.2 points since April 2011. While the score denoted the thirteenth month of tightening in a row, the contractions had weakened since August 2021, showing a trend towards stabilisation.

Indeed, as countries around the world moved to reopen and ease supply chain disruptions, business activity in Egypt moved closer to its pre-pandemic normal. The improved performance was reflective of a slowdown in increases in purchasing costs and wages, and in December 2021 Egypt saw the most significant reduction in input inflation since October 2018. Even so, price pressures continued to affect the market, and business confidence was subdued by the transmissive Omicron variant and rising prices.

With around 23% of firms reporting a positive outlook, IHS Markit underscored the continued effect of the pandemic on the economy. “Firms highlighted a weaker impact from raw material costs as step-downs in global commodity prices helped suppliers to adjust their own fees,” David Owen, economist at IHS Markit, wrote in a January 2022 briefing. “That said, higher selling prices continued to hinder new business volumes, which declined for the fourth month in a row.”

Monetary Policy

While the reforms of 2016-17 were necessary to address macroeconomic imbalances, the swift currency devaluation led to a sharp increase in inflation. In 2015 inflation was recorded at 10.4%, rising to 13.8% in 2016 and 29.5% in 2017 – the latter being the highest annual rate in over five decades, causing the Central Bank of Egypt (CBE) to tighten policy. While high levels of inflation put pressure on consumer spending and slowed business growth, in the years since Egypt has been able to bring inflation within the 5-9% target range set by the CBE. In 2018 the inflation rate more than halved from the previous year to 14.4%, before falling to 9.2% in 2019 and 5% in 2020.

In 2020 the CBE cut interest rates by a combined 400 basis points (bps) in response to the pandemic, cutting the ending rate from 13.25% to 10.25% and the overnight deposit rate from 12.25% to 9.25% in March. Cuts of 50 bps followed in September and November of that year, with the overnight lending and deposit rates reaching 9.25% and 8.25%, respectively. The CBE maintained these interest rates – among the world’s highest when adjusted for inflation – throughout 2021, citing lower levels of inflation, positive real GDP growth, a sustained pick-up of economic activity and the wider global recovery as factors supporting their decision.

Inflation

In December 2021 headline consumer price inflation was 5.9%, up slightly from 5.6% in November 2021 and 5.4% in December 2020. Core inflation, which excludes items that are regulated by the government, was 6% in December 2021, up from 5.8% in November and 3.8% in December 2020, according to the central bank. While the prices of fresh vegetables fell and those of many food core items were stable, these factors were offset by an increase in the prices of rent, private health care services, cafes and restaurants. Rising fuel prices also contributed to inflation, with the costs of electricity, gas and other fuels rising by 1.4%, the highest rate among the inflationary sectors. Egypt closed 2021 with an average urban inflation rate of 5.2.% – recording its lowest monthly rate that year in April (4.1%) and highest in September (6.6%).

Amid rising food and energy prices, as well as logistics challenges attributed to Russia’s invasion of Ukraine in February 2022, headline inflation reached 10.5% in March of that year. The CBE then raised key policy rates by 100 bps and devalued the Egyptian pound by 16% on March 21, 2022, allowing a greater level of exchange rate flexibility. The inflationary trend continued into the second quarter, with headline inflation reaching 13.5% in May 2022. That same month, the CBE again raised interest rates, this time by 200 bps.

Trade

While the authorities had hoped the 2016 devaluation would reduce Egypt’s trade deficit, it has instead trended upwards in the years since. In 2016 the deficit was valued at $46.9bn, and while it fell to $40.3bn in 2017, it increased again to $52.6bn in 2018, according to the Central Agency for Public Mobilisation and Statistics. An emphasis on local added value helped the value of Egyptian exports grow in 2020, with finished goods representing 47.9% of the value of all exports. This, combined with a decline in the value of imports, helped push the trade deficit down to $42bn.

Total merchandise exports have increased in recent years, from $4.2bn in 2000 to $25.5bn in 2020, as have imports, from $14.6bn to $59.8bn over the same period. The country’s main exports are petroleum products, worth $5.9bn in FY 2020/21, followed by crude oil ($2.6bn), gold ($2bn), phosphates and mineral fertilisers ($1.2bn), and organic and inorganic compounds ($1.1bn). The country also exports substantial amounts of agricultural goods and textiles. In FY 2020/21 the top imported good was petroleum products ($5.16bn), followed by crude oil ($3.44bn), passenger vehicles ($2.50bn), wheat ($2.13bn) and maize ($2.12bn). The country’s top-five trading partners are China, accounting for 8.9% of total trade volumes in FY 2020/21, followed by the UAE (7.8%), the US (6.6%), Saudi Arabia (5.9%) and Germany (5.6%).

The Egyptian government aims to nearly double the value of its exports, from $31bn in 2021 to $60bn by 2025. These efforts include an initiative that began in November 2019 to settle overdue payments owed to the Export Development Fund. Under the programme – implemented in three phases – companies receive overdue subsidies in a single payment, but waive 15% of their dues. During the first and second phases, which ran from November to December 2020 and February to June 2021, respectively, exporters received LE28bn ($1.8bn), helping them meet their obligations towards their customers and manage supply chain disruptions associated with the pandemic. The third phase began in July 2021 and was slated to end in mid-November that year. However, the fund extended the end date until late December 2021 in order to ensure that all businesses had received their funds.

Investment

The government has sought to bolster the country’s reputation as a destination for investment, largely through a series of reforms aimed at improving the business climate. These include the 2017 investment law, new companies and bankruptcy laws in 2018, and a new Customs law in 2020. The Customs legislation aimed to streamline import and export procedures by facilitating electronic payments, expediting clearances for authorised firms and creating a single window. Despite these efforts, investment levels as a percentage of GDP remain sluggish. In FY 2020/21 domestic investment was valued at 12.3% of GDP, down from 13.7% the previous fiscal year, according to the MoF. Foreign direct investment (FDI), meanwhile, was recorded at 3.4% of GDP in FY 2016/17, with this figure falling in each subsequent fiscal year to 1.3% in FY 2020/21. While Egypt attracted under $2bn in net FDI inflows each year between 2000 and 2004, a concerted effort to attract investment helped to increase this figure to $5.4bn in 2005 and an all-time high of $11.6bn in 2007. FDI inflows slowed in the years to 2011 – when social unrest disrupted business activity and deterred investment. That year, the country recorded an FDI outflow of $482.7m. Inflows recovered in the years leading up to the pandemic, reaching $2.8bn in 2012 and $9bn in 2019, but a sharp decline in global FDI and low commodity prices caused the figure to drop by over 30% to $5.9bn in 2020. Even so, that year Egypt was the top FDI destination in Africa.

GAFI identified several sectors with notable potential for investors, including agriculture and land reclamation, ICT, financial services, health care, mining, pharmaceuticals and medical industries, real estate and textiles. As part of the 2017 investment law, GAFI created an investment map identifying specific opportunities for investors, highlighting investment opportunities in mega-projects such as the Suez Canal Economic Zone, the Ain Sokhna Port, the New Administrative Capital and New Al Alamain City.

Of the LE922.5bn ($58.6bn) invested in FY 2018/19, commodities attracted LE406.3bn ($25.8bn), or 44% of the total, followed by social services (LE263.2bn, $16.7bn) and production services (LE195.8bn; $12.4bn), according to a January 2022 report from the MoF. Broken down by sector, electricity and water attracted the most investment at LE221.3bn ($14.1bn), or 24% of the total; followed by transport and transportation at LE155.5bn ($9.9bn; 17%); crude oil, mining and natural gas at LE120.2bn ($7.6bn; 13%); and manufacturing industries and petroleum products at LE109.4bn ($7bn; 12%). Historically a major source of jobs and forex, tourism attracted LE8bn ($507m; 0.9%) in investment.

Outlook

While the pandemic had adverse effects on the economy, Egypt managed to avoid some of the more severe repercussions seen in other countries. The country was one of the few to register positive GDP growth, a trend that is expected to continue. According to IMF forecasts, the economy is expected to expand from $364bn in 2021 to $402.8bn in 2022, later reaching $584.9bn in 2026. Much of this growth will be driven by the country’s dynamic agriculture, construction, retail and financial services industries. While the IMF expects inflation to rise from 4.5% in 2021 to 7.5% in 2022, the rate is well below that seen in 2019, when inflation reached 13.9%. Meanwhile, economic growth – combined with a primary surplus, which was valued at LE3.2bn ($203.3m) in the first half of FY 2021/22 – is expected to ease the debt-to-GDP ratio from 79.2% in 2020 to 68.2% in 2026. This is especially important, as general government debt accounted for 88.1% of GDP and nearly 460% of government revenue at the close of FY 2020/21. Indeed, government net borrowing is expected to ease on a yearly basis, from a recent high of 8% of GDP in 2019 to around 6.1% of GDP in 2026.