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Overview

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Economic Cooperation, Regional Integration & Trade

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Thematic analysis: Structural transformation and natural resources

Author: Charles Muthuthi

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  • The economic outlook for the rest of 2014 remains weak. Growth will remain fragile, the fiscal deficit unsustainably high, and public debt in excess of 100% of GDP, as Egypt continues to implement expansionary macroeconomic policies with the help of aid from the Gulf countries.
  • Against the backdrop of mounting political unrest and insecurity, socio-economic conditions continue to deteriorate: the unemployment rate is rising, especially among youth (39% of the 20-24 age group are unemployed), and rural-urban income disparities remain wide.
  • The approach of a new Constitution in January 2014 was a key milestone of the transition roadmap issued in July 2013 after the ouster of President Morsi. However, an uncertain political outlook in 2014 will continue to undermine economic recovery prospects.

After the ouster of President Mohamed Morsi in July 2013, one year after he took office, Egypt entered another phase of political uncertainty. Economic growth has moderated, standing at just above 2% in both the 2011/12 and 2012/13 fiscal years. In 2012/13, the resilience of private consumption (81.2% of GDP) and the munificence of government consumption (11.7% of GDP) kept the economy from sliding into recession, as investment (14.2% of GDP) and exports (17.6% of GDP) remained weak. Unceasing violent protests and political instability have adversely affected manufacturing (15.6% of GDP), trade (12.9%) and tourism (3.2%). Only traditional sectors such as agriculture (14.5% of GDP) and mining (17.3%) have remained relatively unscathed.

The budget deficit, at 13.7% of GDP in 2012/13, is unsustainably high, and the highest among all emerging economies. The fiscal deficit in 2013/14 is expected to exceed 12% of GDP, well past the government’s target of 9.1%, as fiscal reforms are off the table for the present. In 2012/13, Egypt’s total public debt reached 99% of GDP, a level last seen in 2006/07. Public domestic debt reached 87.1% of GDP in June 2013, up from 78.6% in June 2012, resulting in interest payments of 8.4% of GDP. For the first time in four fiscal years, Egypt’s balance of payments recorded a surplus (USD 237 million) in 2012/13, aided by about USD 16 billion in financial support from the Gulf countries. This has eased the pressure on the exchange rate of the Egyptian pound against the US dollar and increased reserves to USD 17 billion as of December 2013, up from USD 15.5 billion in June 2012.

International credit rating agencies have recently taken a favourable view of Egypt’s economic outlook because of the massive inflow of funds from the Gulf (United Arab Emirates, USD 7 billion; Saudi Arabia, USD 5 billion; and Kuwait, USD 4 billion). A longer-term solution to restore Egypt’s economic competitiveness would be gradual structural reforms of its wasteful energy subsidies and taxation. By targeting subsidies to the neediest segments of its society, Egypt will bolster its social justice agenda and provide room for its fiscal policies to work better to reduce poverty. Economic reforms, however, require a stable political dispensation.

To give hope to youth, many of whom are becoming poorer, Egypt needs to implement policies that will help its small and medium-sized enterprises (SMEs) to capture the benefits of global value chains, especially in the area of information and communication technology, given the country’s large market, language advantages and proximity to Europe, Asia and the Persian Gulf.

Table 1: Macroeconomic indicators

 20122013(e)2014(p)2015(p)
Real GDP growth2.22.12.13.6
Real GDP per capita growth0.50.50.42.1
CPI inflation8.56.911.59
Budget balance % GDP-10.6-13.7-13.1-11.3
Current account balance % GDP-4-2.1-1.1-1.8

Source: Data from domestic authorities; estimates (e) and projections (p) based on authors’ calculations.

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