Egypt: Year in Review 2018

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Egypt’s economy maintained a strong rate of growth throughout 2018 on the back of increased gas production, with ongoing fiscal reforms helping to reduce the budget deficit and provide a strong platform for future expansion.

The IMF, in a report issued in November, forecast GDP would expand by 5.3% in 2018, an increase on the 4.2% expansion of 2017 and the highest rate of annual growth since 2008.

This was supported by figures released by the Central Bank of Egypt (CBE), which put year-on-year (y-o-y) GDP growth at 5.3% in the first half of the year.

Expansion was driven by strong performances in the extractive industries (9%), manufacturing (4.2%), wholesale retail and trade (4.2%), and real estate (4.1%).

See also: The Report – Egypt 2018

Foreign currency reserves increase as government halts LNG imports

The stronger economy was also reflected in a rise in foreign currency reserves, which totalled $42.5bn at the end of December, up 15% on the $37bn at the close of 2017, according to CBE data issued on January 8.

This increase in reserves could be further bolstered by an expected drop in Egypt’s import bill in the future, with the government halting inward shipments of liquefied natural gas in September after meeting gas self-sufficiency.

It is estimated that the country will save around $3bn per year as a result; however, imports could be resumed in the coming years following investment aimed at increasing downstream capacity, which could allow for the processing and re-export of gas sourced from other countries.

Domestic gas production is expected to total around 60bn cu metres in 2018, up from 49bn cu metres in 2017, with the figure forecast to rise to 72bn cu metres 2019.

This will not only increase the gas available for domestic consumption, but could also provide additional opportunities for export, with limited shipments of around 2m cu metres sent to Jordan in 2018.

Fiscal reforms continue amid budget progress

The economy also continued to benefit from external support, with both the IMF and the World Bank backing the government’s reform programme.

In late October the IMF announced the release of a further $2bn of Egypt’s $12bn loan deal, taking to-date disbursements to $10bn.

This followed the completion of the IMF’s fourth review of Egypt’s economic reform programme, with the fund saying the country’s economy was performing well.

The three-year agreement, brokered in November 2016, saw the government commit to a series of fiscal reforms – including tax increases, spending cuts and the removal of fuel subsidies – designed to improve the budget balance and stimulate economic activity in return for the loan.

The reforms have helped reduce the fiscal deficit from 12.5% of GDP in FY 2015/16, which ends June 30, to 9.8% in the most recent financial year, according to government officials, with ongoing measures expected to lower this figure to 8.4% by the end of FY 2018/19.

Meanwhile, the IMF credited the fiscal measures with reducing government debt from 103% of GDP in FY 2016/17 to 93% in 2017/18, while the fund expects the economy to gain further momentum in 2019 with GDP growth of 5.5%.

As a result of such progress, the government announced in December that it expects to receive its fifth tranche of the loan in January.

The economic reform programme received further support from the World Bank in early December with the signing of a $1bn loan aimed at promoting growth in the small business segment, building on earlier WB-funded reform programmes supporting Egypt’s regulatory and economic environment.

Inflation falls as rates remain stable

On top of improving budgets, inflation continued its downward trend across 2018, supported by the CBE’s monetary policy.

Headline inflation began the year at 17.1%, with the CBE’s decision to lower its benchmark interest rate from 18.75% to 16.75% over the course of February and March coinciding with a drop to year-low inflation levels of 11.4% in May. While the figure rebounded to 17.7% in October, it fell again to 12% in December.

Controlling inflation has been a key challenge of Egypt’s in recent years following the government’s decision to float the pound in November 2016 – a decision that saw the currency lose almost 50% of its value against the dollar before stabilising.

This led inflation to jump sharply to three decade-high levels of 33% in July 2017, placing pressure on businesses and private consumers.

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