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Egypt’s Economic Outlook

July 22, 2018

Egypt’s Economic Outlook

 

The Egyptian Economic Outlook

 

In the immediate aftermath of Egypt’s 2011 Arab Spring revolution, the ensuing climate of uncertainty and instability in Egypt paved the way for a challenging macro-economic climate characterized by diminishing foreign direct investment, plummeting foreign exchange reserves as well as a credit rating downgrade 16 times between May 2013 and the 2011 revolution by Standard and Poor’s. Against this backdrop, Egypt took a series of serious measures in 2016 to rectify some of the structural economic woes. In addition to floating its currency, Egypt also launched an ambitious economic reform program in tandem with the IMF, which provided Cairo with a loan of $12 billion dollars to shore up its macroeconomic stability and growth. Ever since, a series of improvements have been noted in the Egyptian economy. The economic growth in Egypt is slated to reach 5.2% for 2018 and 5.5% for 2019% according to the IMF’s World Economic Outlook report.

 

Foreign Direct Investment and Investor Confidence

 

After a period of instability, Egypt’s FDI has been picking up. While total private investment increased by 47%, the FDI picked up by 15% in a year. The FDI reached $9.5 billion in 2017/2018, up from 7.8 billion, as noted by the IMF. A new law passed in 2017 aims to increase FDI by giving potential investors tax breaks and rebates while also dealing with bureaucratic problems and promising simplification of procedures along with providing guarantees for investments.

 

One of the key goals of IMF’s 2016 reform initiative has been to increase Egypt FDI by shoring up investor confidence. The optimism amongst Egyptian businesses has been noted in a survey amongst 100 top-level executives in the country from across sectors from mid-2017 to early 2018. Accordingly, more than 90% of the respondents said they have positive or very positive expectations of local business conditions in the next 12 months, up from 79% a year earlier.

 

Inflation

 

In line with the IMF’s 2016 economic reform program, Egypt has aimed to achieve significant subsidy cuts in a bid to maintain a tight monetary policy. Yet, the slashing of subsidies has also created worries of inflation, exhorting the IMF to warn that the Egyptian central bank “should retain its restrictive stance to counter second-round effects of fuel and electricity price increases”. Subsidies have been one of the major contributors to the budget deficit in Egypt.

 

The inflation for May was down to about 11% after having reached a peak of 30% following the floatation of the Egyptian pound in November 2016. The average inflation is predicted to reach 14.4%, down from 20.8% in 2017-2018.

 

Exchange Rate

 

As part of the IMF reforms of 2016, Egypt started floating its currency in a bid to avoid a fiscal crisis, which gave rise to a significant currency devaluation. This move has given rise to an uptick in Egypt’s exports, bringing down Egypt’s trade deficit, while also creating higher inflation and eroding Egyptian’ purchasing power, although inflation has been reduced ever since. The results of these policies aiming at increasing exports have also prominent in Egypt’s non-oil exports. The country’s non-oil exports increased 14% during the first half of 2018, recording $12.75 billion, compared to $11.21 billion during the first half of 2017. While 1 USD is worth 17.77 Egyptian pounds today, in July 2016 1 USD was worth 8.85 Egyptian pounds.

 

Vahid Yucesoy for iStrategic