On August 6 Egypt received the sixth and final tranche of a three-year, $12bn loan programme from the IMF, and the country is now set to build on its legacy.
The extended fund facility supported wide-ranging reforms and addressed inconsistent policies that had resulted in fiscal imbalances, high inflation and public debt. Another target was dwindling foreign exchange reserves, a result of the fixed exchange rate between the Egyptian pound and the dollar.
A key goal of the package was to make the economy more dynamic, sustainable, inclusive and, above all, private-sector driven. With these ends in mind, Egypt cut fuel subsidies, floated the currency and increased interest rates to limit associated inflation.
A number of macroeconomic indicators have improved since the start of the programme in 2016.
The country met the IMF’s fiscal target of a primary surplus of 2% of GDP for FY 2018/19, while foreign exchange reserves reached an all-time high of $44.4bn by the end of June. Additionally, unemployment decreased to 8.1% in the first quarter of this year, the lowest rate in 20 years.
Inflation has also fallen significantly, from a high of around 35% in 1986 to a four-year low of 8.7% in July 2019. Of all emerging markets, Egyptian bonds are providing investors with the highest returns this year, at 25.9%.
See also: The Report – Egypt 2019
Despite these positive results, the loans’ successes were not evenly distributed among the population.
In a statement published in April, the World Bank noted that the programme “took a toll on the middle class, who face some higher costs of living as a result of the reforms”.
Average household income in 2018 stood at LE58,900 ($3550), down 20% compared to 2015 levels when adjusted for inflation. Meanwhile, government figures released in late June show that 32.5% of the population are living below the poverty line, compared to 27.8% in 2015.
However, both the IMF and Hala El Saeed, the minister of planning, monitoring and administrative reform, argue that poverty rates would have been higher had the social elements of the loan package not been implemented.
These include the cash transfer programme Takaful and Karama (“Solidarity and Dignity”), which was significantly expanded from 200,000 to 2.3m households under the reforms, benefitting around 10m people.
Reforms have also had an impact on consumer habits. “Initially, consumers became more conscious about spending, and moved away from discretionary purchases,” Mohamed Shelabya, CEO of PepsiCo Egypt, told OBG. “However, we are now beginning to see a reversal of this trend, and expect consumer spending to pick up gradually.”
Continued appetite for reform
Nevertheless, more remains to be done in terms of both fiscal and wider public policy. “The measures taken with regard to the financial sector as well as to the broader economy have had the very positive consequence of improving the macroeconomic picture, so now the priority will be to continue reforms at the sector level, as a foundation for future growth,” Tarek Fayed, chairman of Banque du Caire, told OBG.
In a statement released at the end of July, the IMF highlighted two priorities: “First, to cement the hard-won gains in stabilising the economy. And second, to accelerate reforms to unleash the economy’s potential, making the private sector the engine of growth.”
Mohamed Maait, the minister of finance, told international media in July that Egypt was seeking to reach a two-year, non-financial agreement with the IMF by October, to replace the previous loan.
Any subsequent programme would follow on from where the initial deal left off, Maait said. It would look to enhance growth and structural reforms, and emphasise human development.
As of late August, however, the IMF had not confirmed that negotiations for a new deal were taking place.
Implications for industry
Looking ahead, analysts predict the Egyptian pound will continue to strengthen against the dollar, increasing in value by 3.5% to reach LE16:$1 by the beginning of 2020. This would not only provide investors with greater returns, but also boost spending power in the energy and industrial sectors, both of which are heavily import-reliant.
Observers point to oil and gas discoveries in the eastern Mediterranean earlier in March and July as key to reducing the import burden for sectors such as the chemical and plastics industries.
Greater emphasis on industries that are not so reliant on imported materials should accelerate growth among various manufacturing segments, among them ready-made garments and food and beverage manufacturing.
Indeed, the government plans to increase manufacturing’s share of GDP from 17.1% in 2016 to 20% in 2020. “The banking sector is very stable and there is a lot of liquidity among Egyptian banks, which are ready to support the growth of companies, particularly those in industry and looking to export,” Fayed told OBG.