Africa > North Africa > Egypt > Egypt Economy Profile

Egypt: Egypt Economy Profile

2015/09/05

Egypt econo;y-globserver

Domestic stability in Egypt has improved markedly and the economy is showing timid signs of recovery. The government has engaged in bold reforms. Generous aid from the Gulf Cooperation Council (GCC) nations gives it the financial space to gradually implement those reforms.

Author: Jan-Willem van Tongeren (trainee)

Strengths (+) and weaknesses (-)

(+) Geopolitical importance ensures financial support

Egypt’s strategic importance, derived from the economic significance of the Suez Canal and the country’s key role in regional diplomacy, facilitates financial support in times of crisis.

(-) Dependence on food and fuel imports

Egypt imports additional than half of the 19m tons of wheat it consumes each year and the majority of the fuel it needs, rendering the country highly susceptible to energy and food price fluctuations.

(-) A large welfare national that is difficult to reform

Costly food and fuel subsidy programs (fuel subsidies amounted to approximately 6% of GDP in 2014) which were by presently in place during the Mubarak regime strongly contribute to a high fiscal deficit. The high reliance of the people and small businesses on this system makes it difficult to reform without causing a backlash. Nonetheless, the government intents to almost fully eliminate fuel subsidies in the coming 5 years.

(-) High level of unemployment

Unemployment has remained chronically high in Egypt, even as it has declined somewhat recently, while the number of young people entering the labour market each year is still growing rapidly. This combination strongly adds to political and social tensions. 

Key developments

1. Political stabilisation has continued but remains vulnerable

Although the peaceful constitutional referendum and presidential elections in 2014 had a positive result on stability, the Egyptian authorities have made little evolution in transitioning to democracy in the completed few months. No broad reconciliation effort and, despite before public pronouncements, no large security sector reforms have taken place. The parliamentary elections have been postponed to the second half of 2015, next the supreme court ruled that a law governing upcoming elections was unconstitutional. However, this is not expected to lead to any major disruptions.

Furthermore, the opposition is and will remain weak. The Muslim Brotherhood is disoriented; its leaders are jailed or out of the country. Similarly, the revolutionary activists are confronting a hostile people that wants to avoid political uncertainty. While a slow transition to democracy is not a problem for the authorities in the short term, it is potentially a major problem for El-Sisi’s government if the government does not make demonstrable economic evolution over the next few years. In general, the improved political stability bodes well for the Egyptian economy and as well positively affects tourism, as Egypt is perceived as being less risky.

2. Government implements reforms, while economy has started to recover

To support domestic request, in 2013/2014 the El-Sisi regime raised infrastructure (second Suez Canal) and social spending, increased the minimum wage for government workers by 70% and raised wages of teachers and doctors. In 2014/2015, the government implemented measures to decrease the budget deficit. These include an elimination of all energy subsidies over the next five years (with the exception of those for LPG, which are targeted to the poor), an introduction of taxation of dividends and capital gains, additional taxation of high incomes, increases in excises on tobacco and alcohol, inclunding the reintroduction of a property tax. For the next five years the authorities aim to raise the economic increase rate to 6% per year, bring down the fiscal deficit and public deficit to 8% and 80-85% of GDP respectively and increase FX-reserves to an import cover of 3.5 months (currently 2.5 months). This seems ambitious. However, it is expected that this package could indeed improve confidence, increase foreign investments, decrease the budget deficit and lead to higher economic increase.

Figure 1: Growth is picking up

Figure 1: Growth is picking up

Meanwhile, economic increase rebounded to 3.7% year-on-year in Q4 2014, mainly supported by the improved performance of the tourism and manufacturing sector. Particularly the tourism sector experienced a remarkable recovery in the second half of 2014. Tourist arrivals increased by nearly 70% year on year in Q3 2014, helped by the lifted and eased travel advice of European nations. In 2015 as a whole, the economy is expected to grow by about 4%, against 2.2% in 2014. While the economy has started to recover, this recovery could be derailed if the stability and security situation deteriorated.

Figure 2: Substantial budget deficits

Figure 2: Substantial budget deficits

3. Government declines that it is seeking an IMF loan, but government may still turn to IMF

In May 2015, Egypt’s International Cooperation Minister declared that the country will not opt for an IMF loan in the short term, because it considers the required pace of reform not compatible with maintaining social stability in the country. Instead, Egypt will undertake economic reforms at its own pace and rely on external financing from the GCC nations as a backstop. In recent years, GCC nations have by presently provided tens of billions of USD in assistance. However, reliance on external financing from these nations is widely seen as a temporary solution. Furthermore, Egypt seems to intent to issue a Eurobond and it is expected that the credibility provided by an IMF package could boost bond investor interest. Therefore, Egypt may still apply for an IMF program in the near next.

Economic indicators of Egypt

Economic indicators of Egypt-globserver

Background information

97% of Egypt’s territory is a vast desert plateau. The remainder is made up by the Nile valley and delta, where most economic activity takes place. The Nile is very significant for the Egyptian economy, as it provides the necessary water for agriculture, 98% of fresh water needs and 10% of energy supply. Though the river flows through 10 additional nations, colonial agreements granted water rights to Egypt and Sudan only (of which the lion’s share to Egypt). However, the situation may change as these rights have been challenged in recent years, leading to increased tensions. Egypt used to be a fairly closed economy, but the development of the oil and gas sector boosted the price of exports. Mining, mainly oil and gas exploitation, is the major sector (roughly 15% of GDP in 2012). However, its share has been declining as public arrears to exploring companies hindered investment . Wholesale and retail trade account for the major share of output in services, but tourism and the Suez Canal transit fees are the major FX- earners.

The current account is as well structurally supported by remittances inflows (7% of GDP in 2013). Ever since independence from the UK in 1952, the Egyptian army has played a prominent role in politics, albeit mostly behind the curtains. The military facilitated both the ousting of Hosni Mubarak and of Mohammed Morsi - both events representing de facto coups backed by a sizeable part of the Egyptian people. The ouster of Mubarak in 2011 was as well backed by the international community, while Morsi’s ouster was additional controversial. The military’s influence is as well visible in the national economy, in which it has an estimated stake of 40% (2009). It is therefore expected that the army could continue to intervene to protect its economic interests.

Factsheet EgyptFactsheet Egypt-globserver