Egypt's economy could stage a China-like rebound, analysts say

Economists expect the country to continue on its growth path if it moves forward with reforms and manages downside risks

This picture taken on May 26, 2021 from the Cairo Citadel overlooking the Egyptian capital shows a view of the new National Museum of Egyptian Civilisation (NMEC), which currently houses a collection of mummies dating to the New Kingdom period of Ancient Egyptian history.  / AFP / Amir MAKAR
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Egypt was the only Middle East economy to grow last year amid the Covid-19 outbreak and its government was lauded for its swift policy actions to mitigate the pandemic’s effects.

And though its investment in infrastructure and job creation provides a good springboard for a strong rebound, more needs to be done on implementing reforms to ensure the economy, which relies on millions of tourists and remittances, is able to chart its way forward, according to analysts.

“Yes, Egypt has no restrictions, no lockdowns per se and that’s why it’s one of the few economies that continued to grow throughout the pandemic. But Covid is still disruptive,” said Mohamed Abu Basha, managing director and head of macroeconomic analysis & research at EFG Hermes.

Tourism, which accounts for 12 per cent of Egypt’s GDP, was heavily hit by the pandemic with the number of visitors plunging more than 72 per cent in 2020 to 3.6 million from the previous year.

“Aside from tourism, it’s impacting consumption, impacting mobility, impacting demand. So it’s taking a bit more time than initially envisaged to recover,” said Mr Abu Basha.

North Africa's largest and the Arab world's third biggest economy expanded 3.6 per cent in the last fiscal year that ends on June 30, according to the International Monetary Fund. Growth in the Mena's region's most populous country will decelerate to 2.5 per cent this fiscal year, according to the lender, slightly above the World Bank's 2.3 per cent forecast.

It's taking a bit more time than initially envisaged to recover.

The slower growth in Egypt expected this coming fiscal year is well below the 5.5-6 per cent forecast the IMF had for the country prior to the pandemic.

The lower output "reflects damage to tourism, manufacturing and oil and gas extractives from the pandemic and the lingering impact of a decline in domestic demand, notably from a collapse in fixed investment", the World Bank said in its Global Economic Prospects report this month.

Looking forward, it is now crucial that the country implement a second batch of reforms that began in 2016 and focus on recovery in its most essential sectors, while also managing downside risks, including a slow vaccine roll out and the protracted effects of a third Covid wave that peaked in May.

The country has recorded over 274,000 infections, nearly 15,700 deaths and 202,650 recoveries, according to Worldometer. Only 2.9 per cent of the population has taken at least one dose of the vaccine and 0.6 per cent is fully vaccinated.

“Egypt is having the same challenge that I think almost all emerging, frontier markets have, which is the supply shortfalls and bottlenecks on the vaccine side,” Mr Abu Basha said.

The country has received about 5 million vaccine doses so far. Meanwhile, local production of Sinovac began this week and the health ministry has set a goal of inoculating half of the population of 100 million by the end of the year.

Aside from speeding up its vaccination programme, the government has taken further policy steps to address the effects of the pandemic. For example, the banking sector has continued with subsidised lending initiatives and the minimum wage for public sector workers will increase by 20 per cent starting in July.

The IMF expects to provide $1.6 billion in financing to Egypt after approval from its executive board by the end of this month.

The funds are part of a $5.2bn 12-month stand-by funding arrangement that was approved a year ago to help the country cope with the challenges posed by the pandemic, as well as meet its budget deficit and balance of payments shortfalls.

The assistance follows a three-year $12bn extended fund facility arrangement for the country approved by the IMF in 2016 to support the government’s economic reform programme.

“At the early signs of the crisis, the Egyptian authorities were quick to respond, both in terms of putting in place appropriate policies, but also in seeking financing in a very timely fashion,” Said Bakhache, the IMF’s senior resident representative for Egypt, said.

Said Bakhache, IMF’s senior resident representative for Egypt. Photo: IMF
Said Bakhache, IMF’s senior resident representative for Egypt. Photo: IMF

Egypt was able to maintain macroeconomic stability and meet the necessary benchmarks for its structural reform programme, according to the fund. Those targets included taking steps to reform fiscal transparency and governance, enhancing social protection and improving the business environment.

“We’re quite happy to see this kind of performance in spite of the difficult environment,” Mr Bakhache said.

But as the country looks to propel growth it needs to do more to boost exports, remove trade barriers, build a greener economy and allow for wider private sector participation, the IMF said.

“We would like to see a broadening and deepening of the structural reforms that are needed for Egypt to go back to this higher growth path,” Mr Bakhache said.

The Egyptian government began the second of three phases of its national programme for economic and social reforms in April. While the first phase focused on monetary and financial policies, the second will focus on improving the business climate, promoting social protection and developing human capital.

The government has been heavily investing in infrastructure in recent years, thereby creating jobs and combatting poverty, said Heba Handoussa, an economist and managing director of the Egypt Network for Integrated Development, a 10-year project under the United Nations Development Programme.

“We could have done much better with private sector investors from abroad, but the entire world is having a problem with FDI [foreign direct investment],” Ms Handoussa said.

“I think precisely because the government has spent so much on developing everything from railways to housing to infrastructure – all of this is a huge bill, but it is giving a big push to Egypt from the Suez Canal to fisheries, small things and big things,” she said.

Camel trainers ride camels awaiting tourists by the Pyramid of Menkaure (Menkheres) at the Giza Pyramids Necropolis on the western outskirts of the Egyptian capital's twin city of Giza on January 7, 2021. (Photo by Amir MAKAR / AFP)
The number of visitors to Egypt plunged more than 72 per cent in 2020 to 3.6 million from the previous year. Photo: AFP

The recovery of tourism will be "very important for growth,” said Mr Abu Basha. “That’s the biggest short-term catalyst that the economy can get.”

The country is targeting 8 million overseas visitors and tourism revenue of more than $8bn this year, according to the Minister of Tourism and Antiquities Khaled El Enany. The tourism sector is expected to fully recover by 2023, according to S&P Global.

“Once Covid insha’ Allah is over, I believe the growth rate will become very high. I think it will be as high as what we saw in China when it was booming,” Ms Handoussa said.

“What we’ve done is very much that recipe of ‘let’s give it all we have’.”