OECD advises Egypt to boost private sector and combat corruption

Bringing inflation under control is vital to spur consumption and strengthen growth, says organisation's first survey of the country

A market in Cairo. Record high inflation has caused a widespread cost of living crisis in Egypt. EPA

Egypt needs to bolster economic reform to encourage private sector activity that will help drive investment, create jobs and increase growth, which is slowing amid high inflation, according to the Organisation for Economic Co-operation and Development.

The OECD's first survey of Egypt, in collaboration with government agencies, think tanks and academics, was launched on Friday as a comprehensive road map for the cash-strapped country’s emergence from its worst economic crisis.

The report's recommendations included reducing public spending, tackling rampant corruption, streamlining procedures for the formation of new businesses and restoring lost investor confidence.

Record high inflation has caused a widespread cost of living crisis in Egypt where rampant shortages of essential goods, including medicines, have been worsening since the start of the year.

“Bringing inflation under control is now a key near-term priority to spur consumption and strengthen growth. Monetary policy needs to remain restrictive until inflation comes back to target,” OECD Secretary General Mathias Cormann said while presenting the survey alongside Minister of Planning and Economic Development Dr Hala El Said.

Egypt's economy is contracting due to the record inflation which has driven down consumption, the OECD survey explained.

This month, Egypt's central bank raised its overnight interest rates by 200 basis points, a move some analysts said might indicate a currency devaluation is on the way. The lending rate was raised to 22.25 per cent and the deposit rate to 21.25 per cent

Restrictive monetary policy, while highlighted in the survey as an effective way of bringing down inflation, has also resulted in a weak investment climate.

“The recovery of investment is set to be subdued as financing conditions will remain tight for some time,” the survey noted.

Massive capital outflows in early 2022, an economic repercussion of the Russia-Ukraine war, caused a foreign currency crunch that has crippled much of the country’s import-reliant industries and driven up unemployment.

The crunch has, in turn, led to repeated devaluations of the Egyptian pound – which has lost more than 50 per cent of its value since March 2022 – in unsuccessful bids by the government to increase foreign investment, which remains weak, the survey said.

“A comprehensive consolidation strategy is needed to improve investor confidence in public finances and ease financing conditions,” Mr Cormann said.

Egypt’s exports, another vital source of foreign currency, fell by 22 per cent year-on-year during the first nine months of 2023.

They were then hit hard by Houthi attacks in the Red Sea in response to Israel’s war on Gaza, with traffic through the Suez Canal halving in January, according to the waterway's authority.

“Exports are expected to regain momentum if the disruptions to tourism and Suez Canal traffic end,” the survey predicted.

However, the OECD conceded that the situation is far too volatile to predict and that the “risks surrounding this outlook are substantial and skewed to the downside”.

“They include, among others, further losses in investor confidence, which would result in further depreciation and deeper foreign currency shortages, and lead to additional tightening in financing conditions.”

One of the main obstacles to economic prosperity in Egypt remains public spending, according to the survey, which recommended halting national construction projects, especially ones that don’t have immediate economic benefits, in addition to maintaining social support and cash transfers to the country’s poorest.

The survey also highlighted increasing public debt, which is expected to reach 92 per cent of gross domestic product at the end of the current fiscal year.

High external debt will inevitably widen Egypt’s budget deficit, one of the main reasons investors have stayed away from its markets since 2022, according to the survey, which recommended additional scrutiny of public investment programmes to ensure efficiency.

It also stated that the “domineering presence of state-owned enterprises has hindered private sector activity and investment. It has reduced business dynamism, reflected in low firm entry and low efficiency of resource allocation.”

The withdrawal of state-owned companies from the country’s economy to make way for a private sector participation of 65 per cent by 2030 was highlighted by Ms El Said, during her address on Friday, as a cornerstone of the government’s plan for the economy.

Ms El Said explained that due to political instability between 2011 and 2014, the state had to step in to build infrastructure, boost foreign investment and ensure citizens were fed and employed.

“Then we started in 2021 launching with the private sector what is needed from the state. The state has to exit and give more of a role to the private sector,” she said.

The survey also noted the growing role of the Egyptian military in the economy and their operations, which are entirely unchecked by the public.

“Ownership and management selection processes in Egypt’s state-owned enterprises lack transparency. This is particularly the case for military-owned firms that are outside the competence of the 2006 Corporate Governance Code.

“Opaqueness of public ownership undermines the activity of private firms, because it harms the confidence of business owners and investors,” the survey added.

To boost the private sector and ensure that more Egyptians choose to work in the country’s formal employment sector, the government must also lower labour taxation which boosts the casual sector where citizens aren’t forced to split their earnings with the state, the OECD recommended.

Rampant corruption and procedural hurdles that continue to prevent more Egyptians from starting businesses and participating in the economy need to be removed, it advised.

A more serious implementation of climate change adaptation and mitigation policies was also recommended, as Egypt faces rapid desertification of its arable lands and water scarcity.

The survey projected Egypt's GDP [gross domestic product] growth to ease to 3.2 per cent in the 2023-24 fiscal year, before increasing gradually to 5.1 per cent by 2025-26, provided the country follows the proposed guidelines.