Sharp slowdown in activity
The 2022-2023 budget forecasts that growth will slow markedly. Private consumption (88% of GDP) will suffer from the rise in unemployment and high inflation which reached 33.9% (39.5% for the underlying and 62.7% for food) on an annual basis in March 2023 and will be slow to ebb. The central bank, whose inflation target is 7% (plus or minus 2%), raised its key rate by a total of 10 percentage points to 18.75% between March 2022 and March 2023. The central bank is expected to continue its hikes, with the aim of bringing inflation back to its target by the end of 2024. Higher credit prices will also damp investment (12% of GDP), especially as the central bank is expected to cease its practice of directed and subsidized credit. In doing so, the transmission of its economic policy will improve. Monetary tightening, by compressing domestic demand, also aims to adjust the latter to production and import capacities. The public component of investment (8% of GDP), as with public consumption (7%), should be affected by fiscal tightening.
Conversely, the contribution of trade to the economy could be less negative, despite the weak state of the tourism industry due to the decrease in Russian and Ukrainian (and Western) visitors. The increase in deliveries of liquefied natural gas (LNG) resulting from the increase in liquefaction capacities and the reduced use of gas for domestic electricity production will be added to that of the Suez Canal revenues. The improvement in the terms of trade and the compression of imports resulting from both the lack of foreign exchange and the sluggishness of domestic demand will also have a positive effect. Manufacturing production (its added value represents 15% of GDP) will continue to grow slowly, faced with rising prices and a lack of imported inputs, contributing to inflation. Agriculture (11% of GDP and 23% of employment) will remain exposed to the high cost of inputs and the imposition of prices by the authorities. Construction (7% of GDP) will suffer from the high cost of materials and the downward revision of non-essential public investments.
IMF pushes for heavy debt reduction
In December 2022, Egypt obtained from the IMF a 46-month programme financed by an Extended Credit Facility of USD 3 billion, of which USD 347 million was immediately disbursed. This is significantly less than the amount (USD 12 billion) of the previous 2016 programme, but it should generate additional loans estimated at USD 6 billion from other multi- and bilateral partners. Fiscal tightening is part of the body of reforms recommended by the IMF and should make it possible to marginally reduce the overall deficit and increase the primary surplus (which does not take debt interest into account) over 2022-2023, more significantly from the following year. This will involve increasing revenue with, for example, the inclusion of companies linked to the army in the list of public companies that must publish accounts and pay tax. Spending will initially continue to increase with the temporary maintenance of subsidies on food, bread in particular, increases in public sector wages and pensions, and the revaluation of social transfers under the Takaful and Karama intended to soften the inflationary shock on households. Total public investment should stabilise but will continue to be involved in the formation of new capital, as well as housing and transport. However, the heavy debt burden should only begin to ease in 2023-2024 if economic growth rebounds. In the immediate future, the debt interest burden should increase considerably to represent 45% (18% for interest on the external portion) of public expenditure, and its servicing, also including amortisation, around 30% of GDP (26% of GDP for the local currency share and 11% for the external share, with the two partially overlapping). The deficit will remain largely financed by domestic sources.
The current account deficit should continue to narrow gradually. Expatriate remittances (8%) will benefit from the favorable economic situation in the Gulf. In addition, shrinking imports after the introduction of a requirement of a letter of credit in 2022, then to the persistent shortage of foreign currencies and the sharp slowdown in domestic demand in 2023, added to the moderation in food import prices should stabilise the trade deficit at 10% of GDP. The services surplus (more than 2% of GDP) should also stabilise as sluggish global activity will weigh on Canal and tourism receipts. Last, the repatriation of profits and interest by foreign investors will remain significant (4% of GDP). The current account deficit will be largely financed by FDI (2-3% of GDP), particularly for extraction, but also the sale (probably to Gulf countries) of stakes in public companies (another expectation of the IMF). The Egyptian pound has been floating after three massive devaluations in March and October 2022, and later in January 2023, but has been "accompanied" by the central bank since the end of January 2023, which was another IMF recommendation. There was a precedent in November 2016 when the previous IMF programme was launched, but which petered out with a return to an administered exchange rate with periodic adjustments from 2017, then the reintroduction in 2018 of a floating rate for only non-essential goods. This new regime allows the central bank to protect foreign exchange reserves that fell from USD 40 billion to 34 billion between February 2022 and January 2023, despite deposits from central banks of Gulf countries (USD 18 billion). The external financing requirement will remain high (USD 19 billion in 2022-23 and USD 24 billion in 2023-24, excluding an expected renewal in April 2023 of the Gulf countries' short-term deposits with the central bank) due to the current account deficit and debt amortisation.
Notwithstanding, foreign exchange reserves could increase with the sale of assets (USD 7 billion of privatisations would be envisaged by 2024, with a strong participation of the Gulf), the reduction of the current account deficit, as well as the reduction of pound overvaluation and higher interest rates in the wake of monetary tightening which are likely to prompt a return of foreign portfolio investors. In February 2023, Egypt already issued a sukuk of USD 1.5 billion at the rate of 11.625%. As such, it is difficult to say whether pound depreciation will smooth out and decelerate (which would moderate inflationary pressures) or whether further devaluation(s) will occur in 2023. The fact remains that disbursements under the programme concluded with the IMF are conditioned by the floating of the pound, irrespective of whether they are "administered" or not.
A president with an iron grip
President Abdel Fattah El-Sisi wields power with an iron grip, assisted by the army. He will do his utmost to stay in power, where necessary by sparing the army’s interests in the economy, even if it means taking liberties with the IMF programme. Despite the recent launch of talks with the opposition (excluding the Muslim Brotherhood), modest judicial reforms, the lifting of the state of emergency in 2022 and the release of political prisoners, government institutions remain repressive. Since the 2020 elections, with a turnout of less than 30%, the president's control over the House of Representatives has also increased. The re-election of President Sisi in 2024 is fast approaching. In order to reduce the risk of social unrest, public support measures for the population subsist through housing, school and health. Subsidies on basic food will be replaced by an increase in targeted aid. The financial and/or military support from the United States and the Gulf countries should persist given the country’s strategic importance.