Egypt’s real GDP growth will reach 6.5% in fiscal year (FY) 2021/22, according to an International Monetary Fund (IMF) staff report on the country’s $100bn pandemic aid package.
The extensive report covered a variety of analysis on almost all aspects of Egypt’s finances. This included the IMF’s analysis on the country’s measures to confront the novel coronavirus (COVID-19), to the Egyptian government’s commitment to continue the economic reform programme, and the fund’s expectations for the country’s macroeconomic indicators.
While there is considerable uncertainty regarding the outlook, and projections vary significantly, the global pandemic is behind the IMF’s downward revision of Egypt’s growth, declining from 5.5 % to just 2% in FY 2019/20. The outlook for FY 2020/21 has also been revised downward, from 5.2% to 2%, particularly to reflect the sharp slowdown in tourism and supporting industries. The revision also takes into account the general downturn in manufacturing, real estate, and trade, despite Egypt’s construction, oil refinery, and agriculture sectors remaining fairly robust.
“Assuming that macroeconomic stability will be maintained, a strong rebound of 6.5% is expected in FY 2021/22 as domestic activity starts to normalise, although a full recovery in tourism to pre-crisis levels could take longer given public health concerns may continue to weigh on international travel,” the IMF explained.
The fund added that inflationary pressures are expected to remain contained, with annual headline inflation increasing from just under 6% on average in FY 2019/20 to about 8.2% in FY 2020/21. This has been affected mainly by unfavourable base effects and macroeconomic developments due to the coronavirus outbreak.
In terms of the current account deficit, the IMF said that it is projected to widen from 3.6% of GDP in FY 2019/20 to 4.2% of GDP in FY 2020/21. It will then further increase to 4.5% in FY 2021/22 and improve thereafter.
“While Egypt experienced large capital outflows, particularly in March and April 2020, up to around $15.6bn, the capital flows have stabilised since then,” the IMF said.
It mentioned that the fiscal position is likely to come under pressure due to weaker revenues and increasing spending needs.
“As a result, public debt is likely to rise in FY 2019/20 and FY 2020/21,” the report noted. “Revenue is expected to be lower than projected prior to the COVID-19 crisis. Thus, primary surplus will be less than the budgeted 2%, at around 1.4% of GDP in FY 2019/20, and at least 0.5% of GDP in FY 2020/21.”
The IMF added, “Based on the outlook in the current baseline, our aim is to return to a primary balance of 2% of GDP and resume the downward trajectory of the debt path starting from FY 2021/22.”
Reflecting the shock to growth and the fiscal pressures, debt is expected to rise to around 93% of GDP in FY 2020/21 before resuming a declining path once again.
The IMF said that prior to the pandemic, Egypt was one of the fastest growing emerging markets worldwide, having achieved macroeconomic stabilisation after a successful economic reform programme.
The fund praised the Egyptian authorities’ response to the coronavirus crisis, having put in place a comprehensive package to contain the health and economic impacts of the shock. The IMF stressed, however, that the economic impacts of the coronavirus shock have already been significant.
In March, the government announced that EGP 100bn, or about 1.8 % of the country’s GDP, would be allocated for health, fiscal, monetary, and financial sector responses. The Central Bank of Egypt (CBE) reduced its policy interest rate by 300 basis points (bps) to 9.25%, to support economic activity while undertaking several initiatives to support borrowers.
The authorities have also scaled up the country’s testing and healthcare capacities, whilst introducing containment measures to facilitate social distancing and slow the spread of the virus.
Noting the impact of the pandemic on Egypt’s economy, the IMF explained that the fallout was immediately felt through a sudden stop in tourism, which ordinarily accounts for around 12% of GDP. The country’s tourism sector also contributes 10% of employment, and about 4% of GDP in foreign exchange (FX) revenues and its associated activities. Lockdown measures have resulted in a sharp slowdown in domestic activity.
Remittances, which stood at 8.2 % of GDP FY 2018/19, are expected to drop as the global recession disrupts this important source of FX inflows, particularly from countries in the Gulf Cooperation Council (GCC). Receipts from the Suez Canal Economic Zone could also fall as restrictions and constraints on trade and travel persist.
In addition, Egypt saw more than $15bn of portfolio outflows in March and April, as investors pulled money out of emerging markets in a flight to safety. The Egyptian authorities have requested a 12-month Stand-By Arrangement (SBA) from the IMF to support the country’s macroeconomic stabilisation plans.
The IMF said that the authorities’ $2.8bn purchase under the Rapid Financing Instrument (RFI), approved on 11 May, has helped address the urgent financing needs earlier in the crisis. The RFI, along with the request for a SBA, have already helped catalyse additional market financing.
The 12-month SBA would focus on supporting a balanced policy framework to maintain macroeconomic stability amid the heightened uncertainty from the pandemic, and catalyse further external financing.
Given the importance of unlocking Egypt’s growth potential, the programme will also address selected critical structural reforms, including debt management, transparency of state-owned enterprises (SOEs), and the business climate.