Egypt’s economy is projected at 5.5% growth in 2020, the Institute of International Finance (IIF) announced in its latest report.
It explained that Egypt has successfully completed the 3-year Extended Fund Facility (EFF) arrangement with the IMF, which included a move to a flexible exchange rate regime, reduction in fuel and electricity subsidies, enhancement in tax revenue, and improvement in the business environment.
Notably, the final disbursement was approved by the IMF’s executive board last month.
The IIF believes that the programme achieved its key objectives of macroeconomic stability. Growth has accelerated, unemployment has decreased, the twin deficits have narrowed, core inflation has fallen, and the public debt ratio has started to decline
The unemployment rate declined to 8.7% in the fiscal year (FY) 2018/19, down from 11.8% in FY 2016/17.
The deficit in FY 2018/19 narrowed to 8.2% of GDP, and the primary balance registered a surplus of 1.7% of GDP.
The IIF further explained that the fiscal consolidation is on track to reduce the deficit further, and keep public debt on a steady declining path.
Meanwhile, the FY 2019/20 budget assumes a 15% increase in revenues and 10% increase in spending, leading to a further narrowing of the deficit to 7.2% of GDP and a primary surplus of 2.5% of GDP.
Subsidies on energy have declined from 2.8% of GDP in FY 2017/18 to 1.8% of GDP in FY 2018/19.
“Fuel and electricity subsidies are expected to decrease from 1.7% of GDP in FY 2018/19 to less than 1% of GDP in FY 2019/20. This appears to be feasible with the recent decrease in global oil prices,” according to IIF.
“However, more needs to be done to raise the tax revenue ratio to support much-needed social spending,” the IIF expressed its opinion.
It further stated that the monetary policy stance has been adequately tight, helping to reduce core inflation from 33% in July 2017 to 5.9% in July 2019, expecting that such achievement, in addition to the recent move toward easing in several emerging and advanced economies could lead to lower rates in Egypt.
The central bank of Egypt (CBE) has kept its overnight lending rate at 17.75% since March 2018 to anchor inflation expectations.
The IIF mentioned that the comfortable level of reserves and continued narrowing of the deficits leave Egypt well-positioned to face global financial volatility and risks of capital outflows.
Likely, the IIF pointed out that foreign investors consider Egypt as one of the most attractive emerging markets.
“Unlike most emerging economies, the exchange rate of the Egyptian pound has appreciated by about 7% since end-2018, supported by an increase in portfolio inflows,” the IFF unveiled.
The report mentioned that Egypt has made a great progress on structural reforms in the past three years, including the implementation of regulatory reforms, while the foreign direct investment (FDI) is still strong, noting that much of it is concentrated in the energy sector.
It also talked about the discovery of the giant Zohr field in 2015, which holds an estimated 30 tr cubic feet of gas, expecting that it is likely to shift Egypt from a net importer to a net exporter of natural gas in FY 2019/20.
“We see growth at 5.5% in 2020, but risks are titled to the downside due to a less supportive external environment,” the IFF forecasts.
The IIF suggested some deeper reforms including, creating more freedom and space for private sector initiative, facilitating growth of SMEs, in addition to growing by 5-6% on a sustained basis.