Egypt's digital transformation progress could improve competitiveness and raise productivity, IIF says

The Arab world's third largest economy is set to expand 2.3% in 2020-2021

A Nile view of the Old Cataract Hotel overlooking the river in Egypt's southern city of Aswan, some 920 kilometres south of the capital. AFP.

Egypt's economy, North Africa's largest, is forecast to grow 2.3 per cent in the fiscal year 2020-2021 as it weathered the Covid-19 pandemic well, but deeper reforms are needed and a digital transformation process could help to raise productivity, the Institute of International Finance said.

The country will see growth moderate from 3.6 per cent in the last fiscal year, backed by accommodative monetary and fiscal policies and progress on pre-pandemic reforms, the IIF said in a report on February 10.

"Partial lockdowns and other restrictions may have less of a detrimental economic impact in the second half of the current fiscal year, as consumers and businesses have found ways to adapt and capitalise on the major progress made in digital transformation and FinTech," the report by the institute's chief Mena economist Garbis Iradian said.

However, the outlook is clouded by uncertainty, with risks depending on how the pandemic evolves, progress in vaccinations and whether the new coronavirus variants will trigger another surge in cases, it added.

The Arab world's third-largest economy was the only one in the Middle East and North Africa to avoid a contraction in 2020. Egypt had secured support from the International Monetary Fund, in the form of a Rapid Credit Facility and a Stand-by Arrangement, to boost health and social spending and to support the private sector.

The IIF expects Egypt's fiscal deficit to widen to 8.5 per cent of gross domestic product in the 2020-2021 fiscal year because of lower tax revenues and higher spending.

"Strong fiscal consolidation will be unavoidable once the Covid-19 crisis abates, to put public debt-to-GDP ratio back on a downward path," the institution said.

Its projections indicate that debt will edge up to 92 per cent of GDP by June 2021 and a minimum primary surplus of 2 per cent of GDP will be needed to reduce the debt.

Egypt's external funding position "warrants caution" as the country's current account deficit has widened and debt amoritisation will remain high in the coming years.

Revenue from tourism, which accounted for 10 per cent of GDP before the pandemic and is a key source of foreign exchange earnings, is projected to decline.

This drop in tourism income will widen the current account deficit to 4 per cent of GDP during the current fiscal year.

Estimates from the Central Bank of Egypt and the IIF suggest a plunge in tourism receipts from $7.4 billion in the first half of the 2019-2020 fiscal year to $1.1bn in the first half of this fiscal year.

Tourism is unlikely to recover fully before 2023 as pandemic-related travel disruptions are likely to continue for some time, the IIF said. However, remittance inflows from Egyptians abroad, a key source of foreign currency for Egypt, will remain broadly stable.

Foreign direct investment may continue to decline modestly to around $5bn and remain concentrated in the energy sector, though more FDI in manufacturing and the digital economy will be "sorely needed," the IIF said.

The institute expects Egypt to tap international debt markets to meet its financing requirements. Earlier this week, Egypt sold $3.75bn worth of bonds in an offer that was 4.4-times oversubscribed, the Ministry of Finance said in a statement.

Greater exchange rate flexibility may also help the Egyptian economy to better absorb the effects of further external shocks and improve competitiveness, with intervention limited to disorderly market conditions, the IIF said.

Looking ahead, the IIF said deeper reforms are needed for a post-Covid economic recovery.

Obstacles to local private sector investment need to be tackled while private sector participation in all sectors must be encouraged to reduce inefficiencies from relying on a few large players in the economy, it said.

The IIF also recommended that authorities look to reform public procurement to improve resilience, boost growth and deliver broader benefits for all citizens. This entails imposing reporting requirements for state-owned enterprises to improve transparency and financial disclosure.

It also recommended revising the competition law to support a level playing field for all stakeholders.

"Such reforms will raise total factor productivity (TFP) and boost the supply of highly qualified labour, which is needed to raise potential growth," it said.

Encouraging private investment, particularly in transportation and digital infrastructure, can also help to create more jobs and mitigate the domestic demand shocks due to the pandemic, which may have a long-term impact on Egypt’s growth trajectory, it said.

Still, the IIF said it is encouraged by the progress Egypt made in digital transformation, which could also improve competitiveness and raise the productivity of labour and capital.