What is keeping Egypt afloat?

The Nile and feluccas in front of the Tower of Cairo, Egypt

Ahmad Abdul-Rahman writes about the challenges facing the Egyptian economy and the prospects for sustainable growth this year. 

All economic sectors in Egypt are growing strongly, reducing the unemployment rate. However, many weaknesses such as high price sand high debt, along with many obstacles facing the private sector create great challenges for the Egyptian economy.

Despite the continuation of the Corona pandemic and its consequences, the Egyptian economy achieved a growth rate of 3.3 per cent, last year, according to the forecasts of Germany Trade and Investment (GTAI). The International Monetary Fund (IMF) and the Arab Monetary Fund (AMF) also expected the Egyptian economy to grow by more than 5 per cent. For the current year, the Egyptian Ministry of Planning and Development expects that the economy will grow by around 5.6 per cent, while the GTAI expects a growth rate of about 5.2 per cent.

These growth rates reflect the positive impact on economic developments in Egypt. The most prominent factor is the continuation of developing and expanding the gas industry, which includes extracting it and exporting it as liquefied natural gas (LNG) to Europe and other foreign markets. The price for LNG has more than doubled compared to the prices fetched in 2020.

Western generosity in providing loans

The government also continues to modernize and expand the infrastructure with huge projects in the areas of industrial and agricultural production. Among the most important infrastructure projects are railways, electric power, water, housing and petrochemicals. The state has allocated tens of billions of dollars to these projects through guarantees, private investments, and foreign loans. The loans to Egypt provided by the IMF and other Western financial institutions continue to be sent, despite Western criticism of President Abdel Fattah El-Sisi and his government in the field of human rights, political pluralism, and freedoms.

This is aided by central banks such as the US Federal Reserve and the European Central Bank as well as policies which make interest rates lower and debt servicing less expensive. With the stability of the Egyptian pound, the high interest rate offered by Egyptian banks and the high investment returns in government bonds, investments from abroad amounted to USD 6 billion during 2021.

Increasing exports and improving tourism

Another factor that boosted growth was the increase in the agricultural and industrial sectors' revenues. This includes a price increase such as iron, cement, aluminum, plastic, vegetables and citrus exports. This is because of an increase in domestic and global demand. Moreover, between 5 and 6 million foreign tourists visited Egypt in 2021, after severe damage to Egyptian tourism.

Poverty and its threat to sustainable growth

Undoubtedly, the good growth rates mitigated the consequences of the Corona pandemic and reduced unemployment by at least 2 to 3 per cent. However, the percentage of Egyptians below the poverty line is still at 30 per cent. This constitutes a risk factor for sustainable growth and for social and political stability, which is exacerbated by the increasing inflationary pressures locally and globally since late last summer , according to Ibrahim Mohamed, an expert on economic affairs at Deutsche Welle, Germany.

The risk of falling into the external debt trap. How to ensure that the private sector contributes more?

In addition to the inflationary pressures reinforced by the high rates of global inflation, the Egyptian trade balance deficit continues to deteriorate. For the past four year, the volume of exports is still less than half the volume of imports. The annual deficit rate exceeded USD 30 billion in 2021?, although there was still the revenues from the Suez Canal, remittances from expatriates, and foreign loans.

The importance of private sector funds for national projects

The policy of relying on foreign loans should be replaced in the future in favor of encouraging the Egyptian private sector to invest in government projects, including large projects that contribute to the modernization of infrastructure. Mohamed indicated that although the Egyptian government has stressed the need to encourage more growth from the private sector so that it contribution increases from 30 to 50 per, cent within the next three years. the question that should be addressed is how the private sector can contribute 50 per cent more to economic growth if its activity remains outside the main sectors?

The obstacles facing the private sector in its activity are not easy. There are many obstacles to enhancing the role of the private sector which competes how the public sector companies and military-affiliated companies obtaining privileges and exemptions that makes equal competition with them impossible. In light of this, the well-known Egyptian businessman, Naguib Sawiris, has called for limiting the state's role to regulating the affairs of the economy and not to owning its institutions and activities. "Companies owned by the government or affiliated with the army do not pay taxes or customs, which makes competition unfair with private sector companies and institutions," Sawiris said in a statement to Agence France-Presse. In addition, according to Sawiris, this frightens investors in general and foreigners in particular.

Thus, achieving equal competition between state and army institutions on the one hand and private sector institutions on the other is one of the most prominent challenges facing the Egyptian economy.

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Saturday, 30 September 2023