It’s the fastest-growing economy in the Middle East and a darling among emerging-market investors, yet poverty has climbed and companies are struggling.
As Egypt concludes a three-year International Monetary Fund program designed to help pull the Arab world’s most populous nation out of economic turmoil, the indicators shown in the following charts are a vivid snapshot of the disparities.
Inflation is finally slowing, the budget deficit is being whittled down and its bonds are among the world’s best performers. At the same time, businesses are cautious and there’s little fresh foreign investment beyond oil and gas. Most Egyptians have been hit hard by a devaluation that saw the pound lose more than half its value and subsidy cuts that sent prices soaring, adding to President Abdel-Fattah El-Sisi’s challenge of containing social unrest.
Economic growth has picked up since the government began enacting the steps in late 2016 to seal a $12 billion IMF loan and end a crippling shortage of foreign exchange. The Washington-based lender has hailed Egypt’s subsequent macroeconomic progress, but is calling for more changes to boost the private sector and reduce the government’s role in business. Inflation is down from a high of almost 35%, potentially reviving consumer demand and investment — although the impact of a recent fuel-price hike has yet to materialize.
“The reforms in 2016 were essential,” said Omneya Ramadan, a senior consultant at Cairo-based Dcode Economic and Financial Consulting. “If the government hadn’t done them, the situation would’ve been much worse. You would have really seen economic chaos.”
All the same, “everyone knows they are not enough to sustain growth, despite the numbers we are seeing now,” she said.
Slashing food and fuel subsidies helped clean up the government’s finances and reduce its debt burden. The fiscal deficit is forecast by the IMF to fall below 5% of gross domestic product in the 2021-22 financial year, which would be less than half what it was in 2017-18. The debt ratio has been cut to about 87% of GDP, after peaking at more than 100% in 2017, and is expected to drop every year through 2024.
Those reforms have turned Egypt into one of the most profitable plays in emerging markets. Cairo’s main stock index has slipped since April, but is still up 13% in dollar terms so far this year. Even higher gains have come in the debt market. Egyptian-pound bonds have returned investors 26% in dollars in 2019, more than any of the other 24 countries in the main Bloomberg Barclays index for developing nations’ local-currency securities.
Analysts at Societe Generale SA see the pound appreciating another 3.5% by the start of 2020 to 16 against the U.S. currency. If they’re right, that may fuel even greater returns for holders of Egyptian assets.
Ordinary Egyptians, by contrast, are finding it tough. Almost one-third of the population lives in poverty, about double the figure at the start of the century, according to the government, which sets the threshold at $45 a month. While average annual household income climbed 33% from 2015 to 58,900 pounds ($3,560) last year, it actually fell 20% when adjusted for inflation.
Planning Minister Hala El-Saeed said last week that measures to boost social spending have helped limit what could have been even higher poverty rates. There have been greater improvements since then that weren’t reflected in the recent survey, she said.
“Insecure informal jobs still make up the bulk of jobs created,” said Salma Hussein, a senior researcher at the Cairo-based Egyptian Initiative for Personal Rights. “Poverty is addressed by programs, not with appropriate policies.” She described the winners in the current economy as “the 1%,” including those who hold Egyptian debts.
Confidence among private companies, hindered by red tape and bad infrastructure, seems shaky. Business activity has contracted in all but two of the past 11 months, according to the Markit Egypt Purchasing Managers’ Index.
Still, there was an improvement in July. And the investment component of gross domestic product rose 12% year-on-year in real terms in the second half of 2018, according to data from the central bank.
“The broader goal of these reforms is to ensure that the economy becomes increasingly market-oriented, where the role of the state becomes more of a facilitator rather than as a driver of growth,” the IMF said in June. “Egypt needs at least 700,000 new jobs annually to absorb its young and growing population, and that can only come from the private sector.”
Improvements in the business environment and public-service delivery, along with interest-rate cuts, would spur further growth, according to Ramadan.
“If done right, the social dividend would be very high,” she said.