Egypt: The economy is back on its feet, growth increases in January-March period
May 20, 2017
GDP increased 3.9% year-on-year in the January-March period (which is Q1 of calendar year 2017 and Q3 of Egypt’s 2017 fiscal year) according to the Ministry of Planning, up from the 3.8% expansion in the October-December period and higher than 3.7% increase the same quarter of the previous year.
Although comprehensive data has yet to be released, the slight improvement was likely underpinned by greater investment, as foreign investors venture back to the country following the swift implementation of reform measures as part of the IMF’s financial assistance program. Renewed confidence in the economy is evidenced by a significant increase in the Central Bank’s international reserves in recent months. However, Egyptian households are taking a hit due to skyrocketing inflation as a result of the currency depreciation and fuel subsidy cuts, meaning private consumption likely remains depressed. Public spending is also likely to be subdued, as the government takes a prudent 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 dramatic turnaround since the start of the year, with a surge in exports in Q1 as firms reap the rewards of a substantial jump in price competiveness thanks to the weaker pound. At the same time, imports have plummeted, as firms and consumers switch to domestic alternatives, with the overall trade deficit narrowing markedly compared to the same period of the previous year. In addition, after taking a severe battering due to a spate of terrorist attacks and political insecurity in recent years, the tourism sector finally showed signs of life in the first quarter. Tourist arrivals were up in Q1, thanks in large part to the lifting of travel bans by most European countries and concerted promotional campaigns.
Looking ahead, the country’s economic panorama is increasingly positive. The implementation of measures announced in the 2017 budget should pare back the fiscal deficit and put public debt on a sustainable path, which together with a predicted decline in inflation and continuing IMF support should increase macroeconomic stability and be conducive to investment. The recent approval of a new investment law to cut red tape and improve the ease of doing business should further boost investment and exports. However, private consumption growth will remain paltry as consumers continue to weather the storm of elevated inflation, while government spending will remained constrained by fiscal consolidation measures.
Author: Oliver Reynolds, Economist