Research and analysis

Egypt - economic update - December 2014

Published 17 December 2014

This research and analysis was withdrawn on

This publication was archived on 5 August 2016. This article is no longer current.

0.1 This publication was archived on 5 August 2016. This article is no longer current.

0.2 Summary

Many of Egypt’s economic indicators reflect an increasing bounce back from the turmoil of the past three years. Growth continues to pick up and the IMF revises upwards Egypt’s projected growth for the current financial year to 3.8%. An IMF mission visits Egypt to conduct an evaluation for Egypt’s economic performance under Article IV consultation. Inflation slows in November led by food prices. Foreign reserves drop by $1bn to $16bn a result of Egypt repaying $2.5 billion to Qatar and Kuwait transferring a $1 billion grant pledged in July 2013. The petroleum authority borrows $1.5 billion to repay another tranche of the debt owed to international oil companies. The fall in international oil prices will shave 20% off Egypt’s petroleum subsidy bill this financial year if prices remain at their current level. Egypt moves up 20 places on Transparency International’s Corruption Perceptions Index; however, its score remains below the global and MENA averages. Egypt issues its first law regulating microfinance.

0.3 Detail

Signs of recovery

Egypt’s economy is continuing to show signs of recovery, with a rise in business confidence and a pickup in growth. Preliminary indicators for the first quarter of FY2014/15 (Jul-Sep) show that the economy grew by 6.8% year on year, due to a significant increase in manufacturing activity. The sharp rise in growth was partially due to base effect (growth was 1% in the comparable quarter last year). There was a small dent in unemployment which declined to 13.1% in July-September (9.6% among males and 24.5% among females) compared with 13.3% the previous quarter. The government and the IMF have both revised upwards the country’s GDP growth projection for the full year 2014/15 (Jul-Jun) to 3.8% (from 3.5%).

IMF Mission

An IMF mission visited Egypt from 11 to 25 November to conduct an evaluation of Egypt’s economic performance under Article IV consultation; the first since 2010. Based on the findings of this mission, staff will prepare a report that will be presented to the IMF’s Executive Board for discussion. The IMF mission was encouraged by the growing national consensus on the need for economic reform. The authorities recognise the challenges the country is facing and have set appropriate economic objectives, including raising growth and steadily reducing inflation. The government is seeking to reduce the budget deficit to 8-8.5% of GDP and the budget sector debt to 80-85% of GDP by 2018/19, while at the same time increasing spending on health, education, and scientific research as mandated by the constitution, as well as on infrastructure. Structural reforms planned by the authorities focus on improving the business climate, promoting investments and financial sector development, while addressing poverty and social gaps. The authorities are also seeking to improve Egypt’s external position, though additional external financing will still be needed through the medium term. IMF staff welcomed the reforms already undertaken by the government to achieve their objectives; including subsidy and tax reforms. However, the IMF noted the need for greater social protection to cushion the impact of the cuts on the poorest and a more flexible exchange rate policy focused on achieving a market-clearing rate. The exchange rates at which banks are allowed to trade dollars are determined by the results of central bank auctions, giving the Central Bank effective control over official exchange rates. The Egyptian pound has held steady at the Central Bank auctions at LE7.14/$1 since May 2014, while it has weakened on the black market to LE7.70/$1.

Inflation

Headline consumer price inflation decreased by 1.53% (m/m) in November compared to an increase of 1.71% (m/m) in October, which is the slowest monthly pace in several years. The monthly decline is mainly due to the deceleration in the prices of fresh vegetables together with the fall in the prices of some food items. On an annual basis, CPI inflation stood at 9.1% in November (y/y), compared with 11.8% in October, partly on the back of the favourable base effect from last year. Inflation was exceptionally high in October – an 11-month high – due to a rise in school tuition fees and private lessons at the start of the academic year as well as the increase in price of water.

Repayment of loans

Egypt has repaid $2.5 billion to Qatar on 28 November, following the repayment of another $500 million deposit in October. The repayment has put some pressure on Egypt’s net international reserves (NIR), which had been propped up earlier in the month by Kuwait’s payment of a $1 billion grant that had been pledged in July 2013. NIR declined by $1 billion in November to $15.9 billion, about 3.1 months of imports. Egypt will face more pressure on foreign currency as the country starts importing natural gas to cover the decline in output and increase in consumption. Egypt has agreed to import six cargoes of liquefied natural gas from Algeria between April and September 2015 with the contract expected to be signed at the end of the month. The first floating storage and regasification terminal is expected to begin operating by the end of March.

Egyptian General Petroleum Corporation

A consortium of state-owned National Bank of Egypt, National Bank of Abu Dhabi, and HSBC has won a tender to lend $1.5 billion to the Egyptian General Petroleum Corporation to repay part of the arrears owed to international oil companies operating in Egypt. Egypt owes IOCs $4.9 billion, following the repayment of $1.5 billion in October. The authorities hope to fully repay the dues to IOCs by mid-2015. IOCs have been reluctant to invest until the government pays its dues, which has led to a decline in output forcing the government to import gas.

Fall in oil prices

The fall in international oil prices can shave 20% off Egypt’s petroleum subsidy bill if oil prices remain below $80 a barrel for the rest of the financial year, according to the authorities’ estimates. The government had cut the allocation for petroleum subsidies in FY2014/15 to LE100 billion ($14bn) following the increase in fuel prices last July. Petroleum subsidies stood at LE126.2 billion ($17.7bn, 6.3% of GDP) in FY2013/14. The impact of declining international oil prices on the balance of payments will be minimal since it is expected to affect oil exports and imports by similar amounts. However, a drop in oil prices may negatively impact Suez Canal revenues as well as remittances of Egyptians working in the Gulf.

Corruption index

Egypt moved up 20 places on Transparency International’s 2014 Corruption Perceptions Index (CPI) to rank 94th out of 175 countries. Egypt’s score improved five points to 37 points out of 100; with 100 being the most clean. Egypt saw one of the highest levels of improvement worldwide; however, it remained lower than the global average of 43 points and the MENA region’s rate of 38 points. Egypt’s leadership admits the problem. In a recent public address, President Abdel Fattah al-Sisi said that Egypt had a long way to go in its fight against corruption but they were determined. Last week, the government announced a national strategy to combat corruption, which would be run by a committee headed by the Prime Minister. A new law against conflict of interest has been enacted, while new codes for reforming the state civil service and re-launching one-stop shops to facilitate investment procedures are in the pipeline.

Microfinance

Egypt has issued the country’s first law regulating microfinance. The law regulates micro-lending by non-bank entities including companies and non-governmental organisations and puts them under the supervision of the Egyptian Financial Supervisory Authority. Banks will continue to be regulated by the Central Bank. The World Bank and the IFC have provided technical assistance through Deauville Transition Fund to which the UK is the largest contributor. There is large unmet demand for microfinance services in Egypt but the lack of a regulatory framework had prevented the sector from growing. The number of borrowers is roughly 1 million. The sector is estimated to be at only 8% of its potential.

0.4 Disclaimer

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