Executive Summary
Growth has held up better in Egypt until recently than in neighbouring countries in the face of a series of major exogenous shocks, and reform efforts have been stepped up in several areas. However, growth slowed in 2022, as inflation surged and massive capital outflows occurred, which led to foreign currency shortages and devaluations of the Egyptian pound.
Egypt was hit hard by the surge in global food prices. Inflation took off, even though energy prices were kept in check via price controls. It has become broad-based and, coupled with currency depreciation, reached very high levels in 2023. Fiscal support, including the expansion of targeted cash-transfer programmes, has sustained private consumption. Business activity has weakened due to tightened financing conditions, limited access to foreign currency, and increased uncertainty, following large-scale capital outflows of around USD 20 billion (4.7% of GDP). Egypt was particularly vulnerable to such outflows, due to its large current account deficit and high public debt (Figure 1), which had been increasingly financed from abroad. IMF financial assistance was put in place in late 2022, the fourth package in six years. Under this IMF programme, Egypt has expanded the scope of policy reforms to reduce public debt and macroeconomic imbalances.
Source: Central Bank of Egypt; Ministry of Planning and Economic Development; IMF World Economic Outlook October 2023 database.
GDP growth is projected to decline to 3.2% in FY 2023/24 but to pick up thereafter (Table 1). Provided inflation subsides, consumption will recover despite gradual withdrawal of fiscal support. The recovery of investment is set to be subdued as financing conditions will remain tight for some time. Exports are expected to regain momentum if the disruptions to tourism and Suez Canal traffic end. The risks surrounding this outlook are substantial and skewed to the downside. They include, among others, further losses in investor confidence, which would result in further depreciation and deeper foreign currency shortages, and lead to additional tightening in financing conditions. The geopolitical tensions in the region, if prolonged, would further affect tourism and Suez Canal receipts.
The government faces large near-term financing needs. International market funding has been limited since early 2022, although the government has sought to diversify its debt portfolio and instruments. Restoring investor confidence in the public finances is essential to bring down debt service costs, with 10-year government bond yields having risen to close to 27% in early February 2024. This would facilitate fiscal adjustment and help achieve the Medium-Term Debt Strategy objective to reduce the debt-to-GDP ratio to around 80%. Although the initial Budget FY 2023/24 aimed at increasing the primary surplus to 2.5% of GDP, the overall budget deficit will remain large due to high interest payments.
Commitment to fiscal consolidation over the medium term is key, as is improving public financial management. Fiscal support targeted to those most in need should continue, but untargeted energy subsidies should be gradually reduced, which would also contribute to reducing emissions. Public investment has expanded substantially since the early 2010s. The government has recently limited new projects by Prime Ministerial decree. This should be complemented by a thorough review of the efficiency of public investment projects. Such spending cuts will not only help to reduce public debt but also create the fiscal space to finance priority policies including health and education. While pursuing the Medium-Term Revenue Strategy to enhance tax collection, the government should examine the numerous tax exemptions and eliminate inefficient ones. In this respect, it is key to abolish all preferential tax treatments granted to state-owned enterprises (SOEs) by implementing a 2023 law. Despite some recent initiatives, budget transparency is limited and large contingent liabilities and budget transfers to SOEs can endanger the sustainability of public finances. They should be scrutinised and reduced.
Monetary policy should continue to combat high inflation and bring it down towards the 7 ±2% target. Control of the exchange rate should be reduced gradually, while avoiding abrupt fluctuations.
Egypt is highly vulnerable to the consequences of climate change and suffers from air pollution. Its updated Nationally Determined Contributions include some sector-specific emission reduction targets for 2030, subject to additional funding, and some adaptation measures, but efforts need to be stepped up.
Private investment and development partner support should play a key role in promoting green growth. Current efforts to scale up green investment need to be pursued. Renewables only accounted for just under 6% of total energy supply in 2021 (Figure 2). To achieve the National Energy Plan’s goal to raise the share of electricity generation from renewable sources to 42% by 2030, major efforts are required, including mobilising financing, through the use of green bonds and concessionary loans, as well as attracting private investment with long-term power-purchasing agreements. The government has started to invest in transmission infrastructure and grid connections. Further private sector involvement is called for, notably in low-emissions industrial and green hydrogen projects, as well as in climate adaptation strategies, such as better management of scarce water resources.
Source: OECD, World Energy Balances database.
Egypt has ample scope to increase private investment and productivity. Recent reform efforts should be intensified. Strengthening competition and reducing market distortions are key to reinvigorate productivity growth.
Regulatory barriers hindering firm entry and expansion should be reduced and external barriers lowered (Figure 3). The current efforts to reform the licensing regime, including steps to reduce approval times and the one-stop “Golden Licence” for investors, should be continued to further simplify procedures for all businesses. Digitalisation of invoices and tax returns should help ease administrative burdens, which are a contributing factor to informality and create opportunities for corruption. While openness to trade and FDI is essential to promote competition, trade barriers remain high, depriving Egypt of the full benefits of global trade. Tariffs should be lowered, simplified and streamlined while unnecessary non-tariff barriers should be removed.
Source: World Economic Forum, Global Competitiveness Index 4.0.
Perceived corruption is high and undermines business activity, despite recent measures to improve public procurement. Fully implementing the 2018 Public Procurement Law, including removing procurement exemptions for SOEs, will reduce opportunities for corruption and build confidence to help attract more investment.
The domineering presence of SOEs has hindered private sector activity and investment. It has reduced business dynamism, reflected in low firm entry and low efficiency of resource allocation. The State Ownership Policy programme, aiming at cutting back overall government ownership across most business sectors and redefining its role in the economy, has progressed slowly since its announcement in December 2022. More clarity regarding its execution is needed, with a well-specified timeline and greater transparency in the choice of firms to be sold, the sequencing of sales and the future role of the state. As the state will likely remain a significant player in the economy, the principles of competitive neutrality need to be fully adhered to and implemented.
Expanding access to finance would support firm creation and expansion, while digital diffusion is necessary to boost productivity. This should be supported by, among others, liberalising the digital services market.
The working age population is expected to grow fast, and educational attainment to rise further. However, the employment rate is low, particularly among youth and women, and the share of informal jobs is high. The poverty rate has trended up, with many working poor.
Job opportunities need to be expanded, while reducing informality. Still high social security contribution rates (Figure 4) are a driver of informality, depriving workers of benefit entitlement. The government should examine the effects of the 2019 reform and consider reducing business costs further, including compliance costs. While expanding targeted social benefits, job-ready beneficiaries should be encouraged to engage in paid work, by strengthening assistance for job search. Expanding childcare facilities and promoting flexible work arrangements would help raise female labour force participation.
Education and skills are essential to ensure better job opportunities and boost productivity, and to facilitate school-to-work transition. EDU 2.0, an ongoing reform agenda to shift the focus from rote learning to developing critical skills, requires long-term strategic allocation of resources and support structures. The new qualification accreditation system should help to provide skills required in the labour market. To ensure better job-skill matching, identification of labour market needs should be developed further by improving the information system.