Egypt’s economy is expected to grow by 4% in fiscal year (FY) 2023/24, according to FocusEconomics panellists, down by 0.1 percentage points from one month ago. The economy is also expected to expand by 4.6% in FY 2025.
The report, “FocusEconomics Consensus Forecast Middle East & North Africa – August 2023,” was published on Tuesday.
It indicated that the continued shortage of foreign currency and the steep weakening of the Egyptian pound, which has lost around 20% of its value against the USD so far this calendar year, have fueled headline and core inflation, which both hit record highs in June.
This has eroded purchasing power and living standards. The Central Bank of Egypt (CBE) has responded aggressively, hiking interest rates by 200 basis points in March, which restrained investment and activity.
In fiscal news, parliament approved an EGP 3 trillion (around $97.1bn) budget for FY 2024, which started on 1 July. The budget projects a deficit of 7% of GDP and allocates $4.1bn for food subsidies.
Moreover, they believe that GDP growth is set to remain largely unchanged from FY 2023 to FY 2024. The IMF and World Bank’s combined $10bn loan programs will help shore up investor sentiment and support the implementation of reforms. The fallout from the collapse of the Black Sea grain deal and the evolution of the currency and inflation are factors to watch.
Inflation hit record high in June
Inflation hit an all-time high of 35.8% in June (May: 32.7%), moving further beyond the upper bound of the CBE’s 5.0–9.0% target range. Similarly, core inflation climbed to a record high of 41.0%. In CY 2023, headline inflation will more than double from 2022. It is not seen returning to target before 2025. Steeper-than-anticipated currency depreciation is an upside risk. FocusEconomics panellists see consumer prices rising 32.2% on average in CY 2023, which is up by 1.2% points from one month ago, and rising 16.4% on average in CY 2024.
CBE holds fire on interest rates
At its latest meeting on 22 June, the CBE met market expectations by holding fire for a second meeting in a row as inflation surged—in line with its forecasts. The overnight deposit, overnight lending and main operations rates were left unchanged, at 18.25%, 19.25% and 18.75%, respectively.
The next meeting is set for 3 August. FocusEconomics panellists see more hikes in CY 2023. FocusEconomics panellists see the overnight deposit rate ending CY 2023 at 19.00% and ending CY 2024 at 15.06%.
Egyptian Pound expected to weaken
The Egyptian pound traded at EGP 30.9 per USD on 28 July, unchanged month on month. The pound has been largely stable since it plunged in February. Nonetheless, it has lost around 20% of its value against the USD so far this year.
FocusEconomics panel expects the currency to weaken markedly from current levels by the end of CY 2023 amid the foreign currency crunch. FocusEconomics panellists see the Egyptian pound ending CY 2023 at EGP 35 per USD and ending CY 2024 at EGP 36.5 per USD.
MENA should grow less this year than it did on average in the preceding decade. A confluence of factors will drive this: Lower OPEC+ quotas, higher interest rates, a weak global economy and soaring food prices in some countries as a result of drought and the end of the Ukraine grain deal. Changes to OPEC+ quotas and Saudi oil output are key factors to watch.
FocusEconomics panellists see inflation in MENA rising this year compared to last. Just four countries will drive the acceleration—Egypt, Iran, Lebanon and Tunisia—with the rest seeing stable or lower inflation rates. However, our panellists are likely to revise their inflation forecasts upwards after Russia nixed its grain deal with Ukraine on 17 July.
Accordingly, they expect that most MENA central banks have currency pegs and thus do not have an independent monetary policy. As a result, they raised rates in lockstep with the Fed in late July. These central banks— like the Fed—are likely near the end of their hiking cycles. Among those countries without a peg, Israel’s Central Bank stood pat.