Monday,16 July, 2018
Current issue | Issue 1266, (15 - 21 October 2015)
Monday,16 July, 2018
Issue 1266, (15 - 21 October 2015)

Ahram Weekly

Not out of the woods

Challenges abound for the Egyptian economy, says the IMF, not least the need for substantial external financing, reports Niveen Wahish

Al-Ahram Weekly

Egypt’s economy grew by 4.2 per cent last year and the International Monetary Fund (IMF) expects it to keep up this momentum, growing by 4.3 per cent in the current fiscal year.

Masood Ahmed, director of the IMF’s Middle East and Central Asia Department, called it “a second year of improvement in the economic outlook.” He was speaking at the organisation’s annual meeting in Lima this week.

Such growth has been possible due to improved confidence, policies aimed at reining in the country’s budget deficit and external support from the Gulf, Ahmed said. However, he pointed out that major challenges persist, including creating jobs to make the growth more inclusive, bringing down the budget deficit and debt level, and improving the country’s external position.

Looking forward, the IMF expects Egypt’s growth rate to increase towards five per cent in the medium term, the organisation said in a paper entitled “Arab Countries in Transition: Economic Outlook and Key Challenges.”

The Egyptian government is targeting a growth rate of 5.2 per cent to 5.5 per cent in the current fiscal year, said Ashraf Salaman minister of investment to members of the American Chamber of Commerce in Cairo this week.

“Reforms announced by the authorities, including in particular the planned elimination of most subsidies over the next five years and further measures to reduce the fiscal deficit over the medium term are expected to bear fruit,” it said, but added that the current account deficit would likely widen on the back of increased imports.

The report also said that despite improved tourism receipts and foreign direct investment, the country’s financing needs are expected to remain large due to the continued current account deficit and scheduled debt repayments. Egypt’s foreign direct investments came to a little over $6 billion in fiscal year 2014/15, substantially below the target $8 billion. The government is however targeting $10 billion in the current fiscal year, the minister of investment said.

It said the current account deficits are projected at around four per cent of GDP over the medium term and adequate external flows will be needed to protect the country’s reserves. Egypt’s current account deficit currently stands at around 2.5 per cent of GDP.

Egypt’s net international reserves fell to around $16 billion in September, down from around $18 billion in August, leading to tightened access to foreign currency and prompting calls for a devaluation of the pound. This prompted Moody’s, the international ratings agency described the retreat in Egypt’s foreign reserves as “Credit negative”.

Despite some nominal depreciation, the pound has appreciated significantly in real terms over the past year, the IMF paper said, adding that a more flexible exchange rate would bring the currency closer to its market-clearing value in the near term. This would also be important for preserving international reserves, supporting competitiveness and easing foreign exchange shortages.

Egypt will need some $20 billion in external financing to carry out development projects and to cover the overall needs of the budget and to build up its external reserve position, Ahmed said.

Earlier this week, Prime Minister Sherif Ismail said that Egypt is seeking $4 billion in external support, of which $1.5 billion will be through loans from the World Bank and African Development Bank. The rest will be from land sold to Egyptians living abroad.

These measures according to the minister of investment will help ease the foreign exchange problem before th e end of 2015.

“No negotiations on a possible programme [with the IMF] are currently underway,” Ahmed said, adding, “The Egyptian authorities have not asked for financial support from the IMF.” He said the IMF is currently offering technical assistance to Egypt on issues such as tax policies.

In the short term, the IMF paper recommended maintaining stability and reducing external and fiscal vulnerabilities. On the fiscal side, it said that meeting the government’s 2015-2016 target for a deficit of 9.5 per cent would require the “quick implementation of reforms that have been delayed, including the next stages of subsidies reform, the introduction of VAT and other tax measures.”

Egypt’s budget deficit has come in at 11.5 per cent, according to preliminary figures. The IMF paper warned that “possible setbacks in the economic reform agenda could also weaken growth and economic stability.”

Egypt, like other oil-importing countries, owes part of the pickup in its economy to lower oil prices. According to Ahmed, this is one of the reasons Egypt and other oil-importing countries in the region have gained some $12 billion this year.

He said these countries should make the most of this opportunity in order “to prepare for a period when there could be more risks ahead and to do this by reallocating their spending from consumption to investment, because investment will generate growth, and by improving the climate for private investment.”

Oil prices have seen record lows this year, with Brent crude trading at $53.15 a barrel on Monday. It fell to just above $42 a barrel in August, down from a peak of above $115 in June 2014, according to Reuters.

But despite the low oil prices, there are risks ahead for Egypt and other oil-importers, among them the slowdown in economic activity in the Gulf Cooperation Council (GCC) countries, which could lead to a reduction in remittances from the GCC.

The export earnings of oil-exporting countries in the Middle East and North Africa have gone down by $360 billion thus far in 2015 compared to 2014, according to Ahmed. Another risk is that the increase in international interest rates could lead to higher borrowing costs and tighter financial conditions. The slowdown in emerging markets could also affect exports from these countries.

For other parts of the region, Ahmed pointed to the horrendous human and financial costs of the conflicts in Iraq, Libya, Syria and Yemen, which are also being borne by neighbouring countries. The Syrian economy is now half the size of what it was before the conflict in that country started, Ahmed said, adding that the Yemeni economy has shrunk by a quarter over the last year.

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