Economic Analysis
Egypt

Egypt

Population 99.3 million
GDP per capita 3,044 US$
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Synthesis

Major macro economic indicatorS

  2018 2019 2020 (e) 2021 (f)
GDP growth (%)* 5.3 5.6 3.6 2.8
Inflation (yearly average, %)* 20.9 13.9 5.7 4.5
Budget balance (% GDP)* -9.5 -8.1 -7.9 -8.0
Current account balance (% GDP)* -2.4 -3.6 -3.1 -4.0
Public debt (% GDP)* 92.6 84.2 90.0 93.0

(e): Estimate (f): Forecast *Fiscal year from 1st July - 30th June. 2021 data: FY20-21

STRENGTHS

  • Large market: over 100 million inhabitants, young and growing population
  • Advantageous geopolitical situation; Suez Canal
  • Tourism potential
  • Gas (Zohr field) and mineral potential (gold, kaolin, potash, copper, zinc, lead, feldspar)
  • Political and financial support from Gulf monarchies and Western countries
  • IMF support programme
  • Limited external debt (29% of public debt)

WEAKNESSES

  • Poverty (one third of the population); low employment rate among young people, weak female participation
  • Low government revenues (20% of GDP) and informal economy (half of all jobs)
  • Jihadists active in Sinai region
  • Tensions between part of the Muslim majority and the Christian minority (10%)
  • Lack of water and dependence on the Nile
  • Public deficit and public debt: public financing needs exceed 30% of GDP
  • Banking system vulnerable to sovereign risk, with the public sector absorbing 2/3 of credit
  • High cost of credit
  • Meagre and low value-added manufacturing exports; food dependency
  • Non-transparency of military-controlled companies (30% of the economy)
  • Corruption, lack of competition and bureaucracy (including in foreign trade) detrimental to investment, particularly foreign

RISK ASSESSMENT

Limited impact of the COVID-19 crisis

With its harshest impact spread over fiscal years 2020 and 2021, the COVID-19 crisis did not prevent the Egyptian economy from posting moderate growth over these two years. Despite a lingering COVID-19, the economy should return to its pre-crisis pace in fiscal year 2022, helped by the ongoing loosening of health measures and the global recovery. Despite higher inflation, household consumption (85% of GDP) will rebound on still strong expatriate remittances and the new minimum wage for the private sector introduced in 2021. The resilient agricultural (12% of GDP and a fifth of workforce), construction and energy sectors partially balanced ailing services (55% of GDP in terms of supply), especially trade, transport and accommodation, which are now recovering, with their many family businesses supporting half of all households and informal jobs. Tourism (10% of employment and 6% of GDP) has only started a slow recovery with direct flights from Russia to Red Sea resorts. Investment (15% of GDP), affected by the withdrawal of local and foreign private-sector participants, is getting back on track, thanks to the development of gas and port facilities. Still supported by international financing, public investment in transport (rail and Suez Canal), seawater desalination, rural development, social housing, and the establishment of the new administrative capital east of Cairo is continuing. Exports fell from 17.5% to 11% of GDP, hit by the drop in hydrocarbon sales (1/4 of goods exports), weaker European and North American demand for clothing articles, reduced Indian demand for fertilisers, and the lack of tourists. Shipments of citrus fruits, vegetables, electronic and electrical appliances, and gold suffered from supply chain disruptions. A gradual export recovery is underway. The inflation target of the Central bank of Egypt (7% +/-2) enables it to maintain its monetary policy. Its reduced preferential rate for SME loans, from 10% to 8%, should be maintained over fiscal year 2022.

 

A break in fiscal consolidation

The already high public deficit has hardly budged during the crisis. The support plan, focused on the most disadvantaged members of society and the most affected sectors, was limited in size (less than 2% of GDP) by the lack of room for manoeuvre. It was mitigated by cuts to current expenditure and continued tax administration reforms. Interest on debt was already the largest expenditure item, absorbing nearly half of the meagre public revenues, and subsidies were second with 22%. Nevertheless, the substantial public debt has increased, but its non-resident and foreign currency portions account for 29% and 27% of the total, respectively. These are expected to increase with international financing. Moreover, the domestic debt became less onerous after the central bank cut its policy rate by 450 bps in 2020 to 8.25%. Although the last 12-month IMF programme with its USD 5.4 billion loan expired in June 2020, fiscal consolidation is resuming with the return of a rising primary surplus (i.e. excluding interest) and strong growth, but constrained by the high cost of debt. A medium-term revenue strategy defined with the IMF should ensure that consolidation does not obliterate the necessity to raise insufficient health, education and social protection expenses.

The moderate current account deficit slightly narrowed in the crisis’ climax. The large trade deficit (12.6% of GDP in 2019) shrank as the decline in imports (oil, capital and intermediate goods) outweighed that of exports. The surpluses in transfers (8%) and services (4%) decreased in line with expatriate remittances and tourism. Canal revenues resisted with the implementation of environmental standards encouraging shippers to abandon the Cape route. Thereafter, the current account deficit widened, as tourism receipts continued to plunge, while food and medicine fed imports. In fiscal year 2022, it should start to reshrink on recovering tourism, higher gas exports, lower energy imports, and still dynamic Suez canal revenues and remittances. Besides official and commercial loans, portfolio investments (bonds) will continue to finance the deficit, fuelling moderate external debt (36% of GDP). In this regard, the central bank is maintaining a prudent policy, offering high real rates, even if this means causing the pound to be slightly overvalued. Reserves are maintained at about six months of imports despite market injections. Regardless of the floating exchange rate introduced in 2016, the Egyptian pound has been quite stable.

 

Concentration of power

Re-elected with 97% of the vote in 2018, President Abdel Fattah al-Sissi saw his powers strengthened after the 2019 referendum led to the adoption of constitutional amendments including the extension of the presidential term from four to six years and allowing him to run for a third consecutive term in 2024. The referendum also gave the president control over judicial appointments and strengthened the role of the army. Elections to both houses of parliament in 2020 confirmed, albeit with a turnout below 30%, the dominant position of the Future of the Nation Party, which is close to the president. Externally, the Egyptian regime retains a pivotal role in regional stability and the fight against terrorism, enabling it to maintain close relations with Europe and the United States, but also with the United Arab Emirates and Saudi Arabia. Following the construction of the Grand Renaissance Dam, relations with Ethiopia continue to stumble on questions related to sharing water from the Nile, on which about 90% of Egypt’s drinking water supply depends. Relations with Turkey have been strained over Libya and gas development in the eastern Mediterranean.

 

Last updated: October 2021

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