Written By Islam Yusri
According to the World Bank’s latest Macro Poverty Outlook, Egypt’s growth in Fiscal Year 2018-2019 increased to 5.6% (up from 5.3% the previous year), a rate that was sustained through the first quarter of Fiscal Year 2019-2020. Growth was driven by a macroeconomic stabilization program that was largely successful, generating a solid primary budget surplus, reducing the debt-to-GDP ratio, and replenishing reserves. Additionally, the wholesale, retail trade, agriculture, and manufacturing sectors contributed to the increase in growth.
Vulnerabilities persist however, including underperformance in exports and foreign direct investment, which may be aggravated by the disruptive repercussions of the COVID-19 pandemic. The situation underscores the urgency of resolving structural challenges to safeguard a sustained recovery, which should focus on addressing business environment constraints, while enhancing revenue-mobilization to create the fiscal space needed to invest more in people.
Growth is expected to be undermined by COVID-19. Despite the expected gradual recovery of private consumption and investment, the pandemic is expected to hamper growth through its effect on production and exports. Key sectors, such as tourism and natural gas, are expected to experience a slowdown due to restricted international travel and the crash in oil prices. Policy responses are already being put in place, including the 300-basis point monetary policy rate cut, forbearance measures on credit, and signals of fiscal stimulus in the Fiscal Year 2020-21 budget. In case of prolonged disruptions, the impact is expected to affect the availability of final products and lead to a new wave of inflation, thereby challenging the recovery of households’ purchasing power. The poverty rate, projected to remain elevated at 27% (using the international poverty line of US$ 3.20), could rise further.
The pandemic risks putting a strain on the country’s health care system, in addition to other important implications on the economy through several channels. The trade deficit may deteriorate with the disruption of global trade, as travel is restricted and supply chains are disrupted. Sectors that are more export-oriented, with a large concentration in Europe and GCC countries, will be the most affected. Further, the sharp decline in oil prices, coupled with recent restrictions on travel to GCC countries, may adversely impact remittances. The capital and financial account surplus may decline with increasing outflows from Egyptian treasuries amidst turbulent global financial markets.