Egypt: no pain, no gain
Egypt has remained a challenging environment for the past few years, but in the face of the authorities’ willingness to implement reforms increasing optimism can be found.
Since 2011 the political situation in Egypt has caused significant problems for the country’s economy. The political transition, in combination with underlying challenges facing the Egyptian economy, has led to macroeconomic imbalances including a significantly overvalued currency, weakening revenues and a growing public sector bill. Measures to address these issues began in 2014/15 with the Central Bank of Egypt (CBE) devaluing the Egyptian pound by five per cent and increasing interest rates to constrain inflationary pressure.
As part of Egypt’s reform programme, the CBE decided to move the EGP to a completely floating currency in November, which is now trading at its genuine exchange rate, noted the IMF. However, in the process the pound lost about half of its value, with prices increasing at the fastest rate in 12 years in December 2016.
However, reforms such as these have increased the frustration and struggle for the Egyptian people. Fitch Ratings has that noted key challenges for the economy lie in combating social unrest—which the government is trying to address with increases in social spending and other measures, including improvements in electricity provisions. Furthermore, the agency added that even if the reform process continues smoothly, gross general government debt will take several years to reduce to more sustainable levels.
The reform process has been welcomed by international institutions, however. The Executive Board of the International Monetary Fund (IMF) approved a three-year extended arrangement under the Extended Fund Facility (EFF) for Egypt with a value of approximately $12 billion to support the authorities’ in their economic reform programme.
The Executive Board’s approval allowed for an immediate purchase of $2.75 billion, with the remaining amount to be phased out over the duration of the programme, subject to five reviews. The first review of the IMF programme is set to complete before end-June, which would release an additional $1.25 billion. Fitch believes that the outcome for this is likely, as the authorities appear to have broadly met monetary, policy and budgetary targets.
On the subject of the EFF, Christine Lagarde, Managing Director and Chair of the IMF, said, “The Egyptian authorities have developed a home-grown economic programme, which will be supported under the IMF’s Extended Fund Facility, to address longstanding challenges in the Egyptian economy. These include: a balance of payments problem manifested in an overvalued exchange rate, and foreign exchange shortages; large budget deficits that led to rising public debt; and low growth with high unemployment. The authorities recognise that resolute implementation of the policy package under the economic programme is essential to restore investor confidence, reduce inflation to single digits, rebuild international reserves, strengthen public finances, and encourage private sector-led growth.”
Positivity in FX
Foreign exchange (FX) reserves have continued to rise for the Egyptian economy, reaching $26 billion as of end-January 2017, up by more than $10 billion from the low seen in July 2016. Fitch noted in March that it has seen anecdotal evidence of progress being made in clearing the backlog of FX demand in the economy. The agency continued that these positive developments for the economy are largely a reflection the inflows from multilateral and bilateral institutions—particularly the IMF and World Bank, the resumption of foreign portfolio inflows and remittances after the authorities floated the pound, and improving export activity in conjunction with import compression.
Fiscal consolidation, in combination with Egypt’s continued progress in external rebalancing noted in rising foreign exchange reserves, a return of private capital inflows and currency appreciation, suggest that there is groundwork for an improvement in sovereign credit metrics in 2018, added Fitch. For 2017 and 2018 the government is targeting growth rates of 5.2 and 4.6 per cent respectively.
Inflation reached a multi-decade high in February reaching 30.2 per cent. This marked an increase over the 28.1 per cent inflation level seen in January and is notably the highest inflation level the country has experienced since November 1986.
Inflationary pressures have been amplified by the flotation of the pound, the scrapping of subsidies on goods such as fuel, and the introduction of a new value added tax. The exceptionally weakened EGP has eroded Egyptians’ purchasing power, said FocusEconomics, whilst also increasing the prices of imported goods. Furthermore, subsidy removal has prompted increased social unrest, supply shortages and discontent, whilst conversely improving investor confidence in Egypt, with international reserves rising.
In early April, Lagarde lent further support to Egypt’s reform programme following a meeting with Egypt’s President Abdel Fattah El Sisi in Washington. “Egypt is implementing a strong economic reform programme to help the economy return to its full potential, achieve more growth and create more jobs. We recognise the sacrifices made and the difficulties faced by many Egyptian citizens, especially due to high inflation,” said Lagarde in a statement.
“The IMF is working to help the government and the Central Bank bring inflation under control and supports the steps the Egyptian authorities are taking to protect its poorest and most vulnerable citizens.”
Overall, Egyptians are likely to continue to feel the pain of economic reform for some time. The outlook for the country’s economy remains positive in the long-term however. Strong support for the IMF’s reform programme from Egypt’s authorities, noted in the achievements of the country in meeting objectives set out by the IMF, provides further positivity.
We can look for an improving macroeconomic situation to continue throughout 2017, with further improvements likely in 2018 barring any significant social unrest in protest of increasing reforms.