Is Egypt's growth threatened?

Daily News Egypt
6 Min Read

CAIRO: The Egyptian economy posted its biggest growth rate of the past 20 years, but a slowing European economy combined with inflation are casting a shadow over future GDP expansion.

GDP grew by 7.2 percent in the fiscal year ending June 30, Minister of Finance Youssef Boutros-Ghali announced recently. The record figures underline the continued success of Egypt s move towards economic liberalization, initiated by the 2004 reformist cabinet and led by Prime Minister Ahmed Nazif.

This is the third year in a row that GDP growth has hit above 7 percent, compared to just 3.2 percent in 2002/2003, the last year before the new reformist cabinet took office.

The growth in GDP has been particularly spurred by large income increases from some of the country s biggest economic earners, notably the tourism sector and the Suez Canal. Tourism, which accounts directly and indirectly for 11.3 percent of GDP, saw a 32 percent increase in revenues, bringing $10.8 billion into the economy. Likewise, revenues from the Suez Canal rose by 23.6 percent to a record $5.2 billion, local media reported.

Other sectors of the economy experienced significant growth rates as well, such as the construction and telecommunications sectors, at 14.8 percent and 14.2 percent, respectively.

Additionally, the steady inflow of foreign direct investment (FDI) into the Egyptian economy has contributed to GDP growth. The Central Bank of Egypt stated that FDI jumped from $11.1 billion in the previous financial year to $13.2 billion in 2007/2008. Around half of this went into greenfield investments, a third of which were directed towards the energy sector, according to local media. The real estate sector has also seen a surge in growth, and received $400 million in foreign investment this year.

FDI is expected to remain strong. The industry sector alone is attracting various new foreign operators, as Egypt s geographical location and lower input costs continue to be an advantage.

There is a huge interest in industrial investment in Egypt, Minister of Trade and Industry Rachid Mohamed Rachid told OBG in a recent interview. We are still getting applications for new factories at a rate of about 200 a month.

The minister added that investment was directed into various sectors, including petrochemicals, fertilizers, consumer goods, paper, glass, furniture and textiles.

Yet, despite the record numbers, signs hint at slower growth to come. After an average growth rate of 7.3 percent during the first nine months of the 2007/2008 fiscal year, Egypt saw economic growth dwindle to 6.8 percent over April, May and June.

Beltone Financial, a regional investment bank, issued a report on Sept. 10 that revised its growth expectations from 7.5 percent to 6.6 percent for the financial year of 2008/2009, and from 7.8 percent to 5.8 percent for 2009/2010.

Some analysts are looking at the European economic downturn as a major threat to the Egyptian economy. About 40 percent of Egyptian exports of goods and services are bought by European countries, so if there is a slowdown there, it will be a big thing, Cyrus Sassanpour, representative for the International Monetary Fund in Egypt, told OBG.

Sassanpour believes that a slowdown in the European economy could impact Egypt in two related ways. First, it could potentially reduce imports of Egyptian products, as European consumers look elsewhere for cheaper goods. Secondly, the Egyptian pound could strengthen versus the euro. This would not only make Egyptian exports more expensive, but could affect areas such as tourism, by making Egypt more expensive for European holidaymakers. As prices go up, European travelers might be spurred to pursue other, cheaper Mediterranean locations.

Additionally, inflation has been taking its toll on the Egyptian economy, reaching a 16-year high at 22 percent last July. Every country has a certain normal level of inflation … but with the economy growing at such a pace, it becomes very hard to keep inflation down. You see this in several emerging economies, said Sassanpour.

In any case, given the European slowdown, Egypt may attempt to sustain a reasonable level of GDP growth through diversifying trade partners, thereby reducing its dependence on traditional export destinations. Over the past few months, members of the Egyptian government have met with officials from countries such as Brazil, Malaysia and India to increase trade and investment relations with these countries. In the future, Egypt s economic development may become increasingly linked to other fast growing, emerging economies, depending less on the European and US markets.

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