Egypts economic prospects are expected to be negatively impacted by import controls, inflation resulting from a substantial weakening of the Egyptian pound, and the implementation of aggressive monetary policy tightening measures
These factors are likely to weigh on the domestic demand and investment, thus hampering the overall economic prospects of the country. Against this backdrop, the country’s economy is set to slow down from 6.6% in 2022 to 4% in 2023, forecasts GlobalData.
GlobalData’s latest report, 'Macroeconomic Outlook Report: Egypt', reveals that the Egyptian pound has experienced three devaluations in 2022 and remains under pressure due to a shortage of US dollars. As of April 2023, it had depreciated by more than 65% on an annual basis. With speculation of another devaluation growing, and inflation rate remaining above 30% in early 2023, the country had no choice but to float again and increase interest rates.
To control inflation, the central bank took decisive actions in 2022 by raising interest rates on four occasions, amounting to a total increase of 800 basis points. The most significant hike of 500 basis points took place in Q4 2022. In March 2023, the Central Bank of Egypt implemented an additional interest rate increase of 200 basis points during its meeting.
Maheshwari Bandari, economic research analyst at GlobalData, comments, “Increase in interest rates has raised the burden of servicing government debt. Gulf allies now demand significant economic reforms as a condition for providing aid, a departure from their previous unconditional support. The government's privatisation efforts to tackle the debt crisis have encountered obstacles, and the protracted crisis may have far-reaching economic and political implications, potentially exacerbating poverty levels.”
In terms of sectors, mining, manufacturing, and utilities accounted for 26.8% of the gross value added (GVA) in 2022, with wholesale, retail, and hotels contributing 16.8%, and agriculture contributing 12.0%. These three sectors are projected to experience nominal growth rates of 17.2%, 17.0%, and 18.2%, respectively, in 2023. Significant devaluation of the currency has contributed to the substantial growth of these sectors in monetary terms.
Egypt's heavy reliance on food imports makes it susceptible to the consequences of global food price increases and trade disruptions caused by the conflict between Russia and Ukraine. Egypt, being the largest global wheat importer, relies heavily on Russia and Ukraine for its wheat supply.
Bandari explains, “The combination of factors, including currency devaluation and supply disruption, is predicted to result in a substantial increase in the inflation rate from 13.9% in 2022 to 24.4% in 2023, which is expected to impact the domestic demand. Consequently, household consumption expenditure is projected to experience slower growth of 3.5% in 2023 compared to 6.3% in 2022.”
In December 2022, the IMF approved a US$3bn loan to support Egypt's struggling economy. However, the loan is conditional on Egypt implementing economic reforms and adopting a flexible exchange rate within the next four years. The IMF estimates a financial gap of around US$17bn for Egypt over the next four years, representing the foreign exchange required to meet debt obligations.
Egypt is categorised as a manageable-risk nation and ranked 90th out of 153 nations in GlobalData Country Risk Index (GCRI Q1 2023). The country’s risk score was higher in all parameters of risk including economic, political, legal, social, technological, and environmental when compared to the average of Middle East and North African region (MENA).
Bandari concludes, “The outlook for Egypt's economy relies on the country's commitment to implementing necessary reforms to secure loans from multilateral institutions. Furthermore, the planned offering of international tenders for oil and gas exploration, along with the drilling of 300 wells by 2025, is expected to bolster the economic prospects. Initiating a bid for gas exploration in the Mediterranean and Nile Delta regions, coupled with the government's intention to sell stakes in 32 companies across sectors, demonstrates efforts to stimulate economic growth in the medium to long-run.”
