Research and analysis

Egypt: economy update - October

Published 9 October 2014

This research and analysis was withdrawn on 8 August 2016

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 This article is no longer current.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 This article is no longer current.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

Egypt’s sees a pickup in economic activity but it has yet to trickle down to unemployment and poverty indicators which are still high at 13.3% and 26% respectively. The government is preparing for the introduction of smart cards for the distribution of gasoline and diesel in January and a new fully-fledged VAT system by April. New feed-in tariff for solar and wind energy developers has been announced and the government is offering low-cost debt financing packages for small-scale producers. Suez Canal investment certificates attract LE64 billion, 42% of which were unbanked funds. Gulf funds help stabilise Egypt’s external accounts which saw a $1.5 billion surplus in FY2014.

0.3 Detail

The government’s bold move to cut energy subsidies last July and introduce a number of tax reforms have boosted confidence in the economy, which has seen a pickup in economic activity in the second half of FY2014 but it has yet to trickle down to unemployment and poverty indicators which are still high at 13.3% and 26% respectively. Real GDP growth stood at 2.5% in January-March 2014 and 3.5% (est.) in April-June, compared with 1.2% in the preceding six months. Annualised growth in FY2013/14 (July-June) is estimated at 2%. Growth was fuelled by investment driven stimulus spending as well as an improvement in sentiment. The government is forecasting growth rising to 6% by FY2019. Speaking at the Euromoney conference which took place in Cairo in mid-September, Finance Minister Hany Dimian emphasised that the current regime had the political will to implement real and serious change.

After cutting energy subsidies, reforming food subsidies, and introducing a number of tax reforms, the government is preparing for a new round of reforms. These include the introduction of smart cards for the distribution of gasoline and diesel by January and a new fully-fledged VAT system to replace the current sales tax by the second quarter of the year (with technical advice from the IMF). The new VAT will allow an immediate full tax refund on capital goods and broader tax credit system as well as applying a single unified rate, and extending to a wider range of goods and services. A new simplified tax regime for small and medium-sized enterprises is also in the pipeline. The fiscal deficit is put at 12.6% of GDP in the financial year that ended in June. The target is 10-10.5% of GDP in FY2014/15 and 9% by FY2018/19 as Egypt presses ahead with fiscal consolidation, including phasing out 80-90% of energy subsidies within five years.

A number of legislative reforms aimed at improving the investment climate are also in the pipeline. These include a new investment law to simplify land acquisition and licence approvals, a bankruptcy law, a mining law, and a labour law. The government has amended the laws regulating the renewable energy sector and announced the introduction of financial incentives designed to support the expansion of the renewable energy sector which currently produces only 547MW of wind energy and 20MW of solar energy. New feed-in tariffs are now available to solar and wind energy developers supporting projects up to 50MW of capacity. For small-scale project, the government is offering low-cost debt financing packages. Commercial and household producers will supply the government, which will redistribute electricity through the national grid. Investors will be offered reduced custom duties and land will be provided through usufruct agreements in return for 2% of the electricity produced – 25 years land use rights for solar energy projects and 20 years for wind energy projects. Egypt is preparing to auction 2.3GW of solar energy and 2GW of wind energy.

In parallel with fiscal consolidation and legal reform, the government is working on stimulating growth and investment through a number of mega projects. The flagship of the government’s investment recovery programme is the Suez Canal Development project, which includes deepening and expanding the Suez Canal and developing the area around the canal into an international industrial and logistics hub. Investment certificates issued to finance the digging of the canal and associated tunnels, which is expected to cost LE60 billion ($8.4bn), attracted LE64 billion in just eight days, of which unbanked funds amounted to LE27 billion (42%) and 82% of buyers were individuals, a sign that Egypt has cash available that, under the right conditions, could be deployed to finance investments. Engineering Consultancy Dar Al-Handassah is now working on the master plan for the development of the area around the canal into an industrial and logistics hub with investments estimated at $220 billion over 15 years. Other mega projects include the development of the Northern Coast west of Alexandria and the Golden Triangle, covering the area extending from Upper Egypt governorate of Qena to Safaga and Al-Qusayr on the Red Sea cost, which has been found to contain a high concentration of metals and minerals. The winner of the project master plan will be announced later this month.

Gulf funds helped stabilise Egypt’s external accounts in FY2014. The balance of payments recorded a surplus of $1.5 billion (against $237 million in FY2013). The current account deficit narrowed to $2.4 billion (from $6.4 billion in FY2013) thanks to the significant increase in official transfers (commodity and cash) at close to $12 billion. Tourism revenues declined by 48% during the year to $5.1 billion as both the number of visitors and tourist nights fell to half their levels in FY2013. However, there are signs that tourism is picking up since July with tourist numbers up 16% in July on the corresponding months last year after several European countries lifted their ban on travelling to Sharm Al-Sheikh. The capital account saw a net inflow of around $4.9 billion, about half the previous year, mainly due to the fall in net portfolio investment and the repayment of Qatari deposits held by the Central Bank. Net FDI increased to about $4.1 billion (from $3.8bn), driven by inflows into the oil sector ($1.6bn) but net inflow into Greenfield investments declined by 6.7% to $2.2 billion. The coming period may see an increase in oil investments if the government honours its commitment to repay $2-3 billion to international oil companies before the end of 2014. Several non-oil investors operating in Egypt are also looking at expanding their businesses with an eye on exports. But Egypt has yet to see an influx of new investors into the country. The government is hoping to use the economic summit in February to tell the Egypt story and attract new investments. They are targeting FDI of $10 billion in FY2014/15.

0.4 Disclaimer

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