Egypt: Economic recovery gathers speed in April–June period
August 28, 2017
GDP increased 4.9% year-on-year in the April–June period (which is Q2 of calendar year 2017 and Q4 of Egypt’s 2017 fiscal year) according to the Ministry of Planning, up from the 4.3% expansion in the January–March period and higher than the 4.5% increase observed in the same quarter of the previous year. As a result, GDP growth for the 2017 fiscal year came in at 4.1%, down slightly from 4.3% in FY 2016.
Although comprehensive data has yet to be released, the significant uptick in the April–June period was likely underpinned by greater investment. Since last November, the government has implemented several structural reforms as part of the IMF’s financial assistance program, including subsidy cuts, tax rises and new investment and industrial licensing laws. As a result, investor sentiment has warmed, as demonstrated by a doubling of international reserves over the past 12 months. However, private consumption growth likely remained subdued. Egyptian households have borne the brunt of the cost of reforms, and high inflation is eating into purchasing power. Growth in public expenditure is also likely to have been meager, with the government taking a cautious fiscal approach in order to reduce the budget deficit in line with the objective set out in the 2017 budget.
The external sector has seen a sharp reversal of fortunes since the start of the year, and the depreciation of the Egyptian pound fueled strong export growth in the April–June period, as firms reaped the rewards of improved competitiveness. At the same time, imports dropped sharply on the back of government efforts to improve the country’s external position, which included a hike in customs duties at the end of 2016. According to the Ministry of Trade and Industry, the trade deficit plummeted 46% in H1, with the net contribution of the external sector to GDP growth improving as a result.
Looking ahead, the country’s economic panorama is increasingly positive. In mid-July, the IMF completed its first review of the Extended Fund Facility (EFF) program and signed off on a USD 1.25 billion disbursement, after praising reforms taken to date. Investment should be buoyed by this continuing IMF support, as well as the swift implementation of structural reforms designed to improve competitiveness and strengthen the fiscal position. In addition, private consumption should begin to show more signs of life as the effects of successive subsidy cuts wind down and inflation drops. The recently-announced hike in social spending should provide further impetus to consumer spending.
Author: Oliver Reynolds, Economist