What are the reasons for the slowdown in Egypt's economic growth?

The EBRD has lowered the forecast for the Egyptian economy. (Photo by Shutterstock) 

Egypt's economic growth is forecast to fall, according to the EBRD, writes Ahmad Abdel-Rahman.

The European Bank for Reconstruction and Development (EBRD) has lowered its forecast for the growth of the Egyptian economy for the fiscal year 2022/2023. It expects the economy to grow by 4.0 per cent in 2022/2023, down 0.7 percentage points from its last forecast three months earlier, the bank said in its latest report dated May 2023 on regional economic prospects. The forecast was lowered because of the foreign currency shortage and high inflation.

This is lower than the expectations of the Egyptian government. Expectations in the new budget expected a slowdown in economic growth  to 4.2 per cent in 2022/2023, from 6.6 per cent in the fiscal year 2021/22. 

Data shows that Egypt's economic growth slowed to 4.2 per cent during the first half of the fiscal year 2022/23, down by 9 per cent from the same period in the previous year. The EBRD said that the depreciation of the Egyptian pound against the dollar, high inflation and successive interest rate hikes negatively affected economic growth in 2022/23. The report suggested that the country's economy would grow by 4.8 per cent in the fiscal year 2023/2024, down from its previous forecast of 5.0 per cent.  

Headwinds

The positives mentioned by the EBRD, included the increase in gas exports, the growing position of Egypt as a regional energy centre, and the expected structural reforms within the framework of the International Monetary Fund (IMF) loan programme.

The report said that the negatives included further inflationary pressures, tightening monetary conditions, challenges in obtaining external financing, and a possible slowdown in the implementation of structural reforms, including delays in the sale of state-owned assets.

Egypt is expected to spend about 60 per cent of its revenues on debt servicing this year, and 70 per cent in 202024, according to the EBRD. The draft budget expects debt service costs to rise by 45 per cent year on year, to reach EGP1.12 trillion (USD36.245 billion) or an increase of 45 per cent year on year, this year, according to the report.

The Egyptian government also expects the budget to record the largest deficit in five years, since the 2018/2019 fiscal year. The reason for this is that public finances have been damaged by the economic crisis caused by the war in Ukraine. According to recent data included in the budget, for the the current fiscal year 2023/2024, the Egyptian budget deficit is expected to widen to 8 per cent of GDP in the fiscal year 2022/2023, compared to about 6.1 per cent during the previous fiscal year. The widening budget deficit is directly due to the rise in borrowing costs and the increase in spending to counter inflation. The government announced increases in public sector wages, pensions and social protection programmes in an effort to protect poor families from rising inflation.

Delayed reforms exacerbate the crisis

Analysts at the investment bank JPMorgan confirmed that further delays in currency and structural reforms would exacerbate pressures on liquidity and raise questions about the sustainability of Egypt's debt. In a recent research report, it stated that while Egypt is unlikely to default on its debt in the near term, the recent massive sale of Egyptian bonds indicates a growing state of concern about the outlook in the medium term, especially with a heavy debt repayment schedule in the coming years.

The report indicated that the Egyptian government would be able to conclude an expert-level agreement with the IMF in June or July, which puts it on track to obtain the approval of the IMF's Executive Board for the next loan tranche by the third quarter. Each review by Egypt and the IMF requires an expert-level agreement, which is then presented to the IMF's Executive Board for approval.