The World Bank (WB) expected Egypt’s growth to hit 5.6 percent during fiscal year 2018/2019, supported by private consumption, a recovery in tourism sector and the operationalization of recently discovered gas fields.
WB also added that if the business environment reforms are effectively implemented, public investment will grow and private investment will recover. The expected increase in tax revenues as growth accelerates and further cuts in energy subsidies will help fiscal consolidation, WB stated.
“The large interest payments are expected to decline over the medium term, through debt repayment and the prolongation of the maturity structure,” WB disclosed.
Regarding the continued price hikes of regulated goods and services, the World Bank anticipated that it will affect households in the short term, especially the vulnerable: who live in rural Upper Egypt.
So, the bank recommended to implement adequate mitigation measures. The bank also anticipated the poverty rate to decrease to 15.3 percent in 2019, compared to an estimated 15.6 percent in 2017.
Risks and Challenges
The World Bank stated the risks and challenges the Egyptian economy is facing, saying “The challenge of kick-starting private sector led growth requires the alleviation of longstanding constraints, including fostering a level-playing field and facilitating access to key inputs (such as land and skilled labor force).”
It also clarified that domestic and foreign investments depend on the economic activities that Egypt expands. “Despite the announced program to divest minority shares in selected SOEs, the state is expanding in some areas, such as construction,” it added.
The bank expected the public investments' budget to be double the size of the government investments’ budget.
To reach a well-functioning market economy, it requires a clear demarcation of the role of the state, and its redirection towards the enabling and regulation functions, the bank stated, noting that it could be achieved through establishing the rule of law, reinforcing competition policies and improving basic service delivery.
The bank referred to the outflows of local treasury bills and bonds, recommending a sound macroeconomic policy framework to enable the economy to withstand such shocks.
The bank said that the budget of 2018/209 faces risks of increasing global oil prices or disorderly exchange rate spillover from contingent liabilities (including from sovereign guarantees).
A high level of public debt represents risks in the medium to longer term if the fiscal consolidation is discontinued, according to the bank.
The challenging socioeconomic conditions, including: double digit youth unemployment, a low labor force participation, difficult conditions of employment and the acceleration of population growth, are also sustainable risks that Egypt faces.
It clarified that high population exerts pressure on natural resources as water and public goods and services.
The World Bank reviewed the recent developments the Egyptian Economy witnessed during the last period, stating that real gross domestic product (GDP) hiked to 5.3 percent during 2017/2018, compared to 4.2 percent in the previous year.
It attributed the hike of GDP to public and private investments and private consumption. It also referred to the positive indicators of exports of goods and services, as well as the rebound of the Suez Canal and tourism revenues.
“A notable improvement has been achieved on the fiscal font, especially with the realization of a primary surplus of 0.1 percent in 2017/2018,” the bank stated. “Cuts in energy subsidies, containment of the wage bill and an increased VAT intake narrowed the overall deficit by more than 1 percentage points to 9.8 percent of GDP in 2017/2018.”
As per inflation, the bank said that headline inflation remained at high levels at 21.6 percent during 2017/2018, but started to recede significantly by the end of the year, adding that core inflation returned to single digits in July 2018.
It clarified that the increase of energy prices caused a temporary rise in headline inflation to 14 percent on an average during June to August.
According to the World Bank, structural reforms are still needed to attract non-oil foreign direct investments, despite the increase of foreign reserves to $44.4 billion by the end of August, in addition to a $12 billion held by the Central Bank of Egypt as other foreign currency assets.
“The overall balance of payments during the first nine months of 2017/2018 was 4.4 percent of GDP, down from 4.8 percent a year earlier,” the bank noted.
“As a part of the emerging markets’ selloff, foreigners’ holdings of Egyptian treasury bills have dropped by around $6 billion between March and July 2018, bringing them down to around $15.1 billion last July,” the bank said.
On a positive note, the bank said that the higher remittances, the surge in the services balance (Suez Canal and tourism) and the decline of trade deficit resulted in a lower current account deficit to 2 percent of GDP during the first nine months of 2017/2018, compared to 5 percent in the previous year.