ing. The primary budget balance is close ARAB REPUBLIC to surplus (-0.3% of GDP) for the first half Recent developments of FY18. Tax revenues increased to 6.8% of GDP in H1-FY18, up from 4.8% during the OF EGYPT Egypt’s economy grew by 5.2% in H1- FY18 (July/June), compared to 3.7% a year first half of the previous year, driven mainly by the increase in revenues from earlier, mainly driven by investment, ex- the VAT, but also from corporate and per- ports and consumption. On the sectoral sonal income tax. Efforts continue to con- Table 1 2017 side, the gas extractives sector has been a tain the civil servants’ wage bill and ener- P o pulatio n, millio n 95.2 main contributor to growth, notably since gy subsidies, savings from the latter al- GDP , current US$ billio n 235.7 the recent operationalization of the large lowing the government to scale up the Zohr gas field. The improvement in ener- allocations to the food subsidy as well as GDP per capita, current US$ 2475 a gy supply is also starting to have positive the cash transfer programs. On the exter- Lo wer middle-inco me po verty rate ($ 3.2) 16.1 a spill-overs on other sectors, especially nal side, the current account deficit nar- Natio nal po verty line 27.8 manufacturing. The tourism sector is re- rowed to 0.7% of GDP in Q1-FY18, down a Gini co efficient 30.0 bounding gradually, helped by the effect from 2% a year before. This was support- b Life expectancy at birth, years 71.3 of local currency depreciation. The nas- ed by an increase in merchandise exports, Source: WDI, M acro Poverty Outlook, and official data. cent economic recovery has been accom- tourism revenues, Suez Canal dues and Notes: panied by a steady decline in unemploy- remittances. Those, in addition to large (a) M ost recent value (2015), 2011 PPPs. (b) M ost recent WDI value (2015) ment, which dropped to its lowest level portfolio inflows, contributed to an overall since mid-FY10 to reach 11.3% in Q2- balance of payments surplus of 2.3% of FY18. Annual headline and core inflation GDP in Q1-FY18, up from a 0.8% in the rates continued to decline for the sixth same quarter of the previous year. Net Macroeconomic conditions are improving, consecutive month in January 2018, reach- international reserves achieved a new as Egypt’s twin deficits are narrowing ing 17.1% and 14.4%, down from peaks of record high of US$42.5 billion in end- and inflation has receded sharply in re- 33% and 35%, respectively in July 2017. February 2018 (covering 9 months of FY18 This decline was supported by tighter merchandise imports), more than double cent months. The Central Bank has cut monetary conditions, easing food infla- its level prior to the exchange rate flota- key policy rates for the first time since the tion, in addition to the favorable base tion in end-October 2016. tightening cycle that accompanied the effect, as the impact of the exchange rate FDI remains weak (0.7% of GDP in Q1- exchange rate flotation in November depreciation in November 2016 and the FY18, down from 0.8% of GDP a year ear- one-off energy price hikes are fading. The lier), reflecting continuing concerns about 2016. Economic activity is picking up, CBE has thus started to ease policy rates business climate and the growing role of and unemployment rate has fallen below by 100 basis points in mid-February 2018. the State in economic activity. To enhance 12% for the first time since 2011. Socio- While nominal interest rates are still 600 the business environment, the govern- economic conditions remain challenging basis points above their pre-exchange rate ment has introduced a series of key legis- with the erosion of real incomes over the flotation levels, declining inflation has lative reforms, including a new industrial helped turn real interest rates positive in licensing law, investment law, bankruptcy past year. The impact of key business en- end-February 2018. law, and amendments to the companies vironment reforms will depend on effec- Macroeconomic imbalances are narrow- law. tive implementation. FIGURE 1 Arab Republic of Egypt / Real GDP growth, de- FIGURE 2 Arab Republic of Egypt / Inflation rates, Janu- mand-side, FY2014Q1-FY2018Q1 ary 2014 – January 2018 Total Revenues, Expenditures, & Overall Budget Deficit (% of GDP) Annual Percent Growth 35% 13.5% 12.90% 40% 30% 12.5% 13.0% 12.5% 25% 12.0% 30% 12.0% 20% 11.4% 11.5% 15% 10.9% 11.0% 20% 10% 5.0% 10.5% 4.2% 5% 10.0% 10% 0% 9.5% FY13 FY14 FY15 FY16 FY17 Jul/Dec- Jul/Dec- FY17 FY18 0% Revenues (LHS) Expenditures (LHS) Jan'14 Jul'14 Jan'15 Jul'15 Jan'16 Jul'16 Jan'17 Jul'17 Jan'18 Overall Deficit (RHS) Jul/Dec Deficit (RHS) Core Headline Urban Food Source: Authors’ calculations based on Ministry of Planning data. Source: Central Bank of Egypt. MPO 1 Apr 18 Extreme poverty in Egypt is practically The budget deficit is expected to narrow eradicated. Using the national poverty threshold, about a third (27.8%) of the to 9.8% of GDP in FY18. This is slightly higher than initially-budgeted, due to Risks and challenges population was below the poverty line in larger interest payments, higher interna- 2015. Moreover, the high inflation accu- tional oil prices, and larger-than-budgeted mulated over the course of FY15-FY17 has exchange rate. The fiscal consolidation The absence of a level-playing field, espe- lowered the purchasing power of house- program is expected to rely on revenue cially in sectors where there are State-led holds across the distribution, reducing the mobilization, in particular the increase in activities, might stifle the private sector positive spillovers of economic growth; VAT receipts, in addition to energy subsi- and job-creation. Additionally, regional taking a toll on social and economic condi- dy reforms. The current account deficit is and domestic security risks threaten the tions. Regional disparities continue to be expected to narrow to 4.9% of GDP in recovery of foreign investments and tour- part of the country’s landscape, with Up- FY18, from 6.6% of GDP in FY17. ism. per Rural Egypt showing poverty rates Consistent with the macro picture of resil- Fiscal reforms slippage or unfavorable three times as high as Metropolitan Egypt. ient growth in private consumption, pov- external conditions, for example in the Recent increases in allowances of the main erty rate based on the $3.2/day (2011 PPP) form of sustained increases in global oil social programs have helped weather the is projected to decline modestly to 15.21% prices, pose risks that may negatively im- effects of inflation, but imperfect coverage in 2019 from an estimated 15.63% in 2017. pact the consolidation trajectory. With a and targeting leave some groups unpro- However, the ongoing reforms, although government debt ratio of 108.8 % of GDP tected. beneficial in the long term, could reduce in end-FY17, a combined macro-fiscal households’ welfare in the short-term due shock can threaten Egypt’s debt sustaina- to energy price increases and overall high bility. Outlook inflation. The government’s strategy to shift expenditures away from universal Social conditions remain difficult with double-digit unemployment rate and the subsidies to targeted transfers and food absence of a notable acceleration in em- As reform momentum is sustained, eco- smart cards is key in mitigating the effects ployment. A better understanding of the nomic activity is expected to improve and and will help support private consump- impact on the population and their coping imbalances are projected to narrow fur- tion. Social protection measures must be mechanisms will come from the results of ther. Real GDP is forecast to grow by 5% complemented with efforts to improve the ongoing Household Consumption in FY18, and to increase gradually to 5.8% service delivery. Negative impacts on the Survey 2017 which was launched in Octo- by FY20. Growth is expected to be driven vulnerable and the middle class may only ber. by resilient private consumption and in- be mitigated by ability of the private sec- vestment, in addition to a gradual pickup tor to create jobs, especially for the youth in exports (notably from tourism and gas). and women. TABLE 2 Arab Republic of Egypt / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2015 2016 2017 e 2018 f 2019 f 2020 f Real GDP growth, at constant market prices 4.4 4.3 4.2 5.0 5.5 5.8 Private Consumption 3.1 4.7 4.2 3.9 4.1 4.2 Government Consumption 7.0 3.9 2.3 2.0 2.9 1.9 Gross Fixed Capital Investment 13.8 12.0 12.4 8.0 8.2 12.1 Exports, Goods and Services 0.0 -15.0 86.0 4.0 9.0 8.0 Imports, Goods and Services 1.0 -2.2 52.5 2.0 4.5 5.0 Real GDP growth, at constant factor prices 3.4 2.3 3.6 5.0 5.5 5.8 Agriculture 3.1 3.1 3.2 3.8 3.5 3.8 Industry 1.1 0.2 3.1 3.8 4.1 3.7 Services 5.0 3.6 4.0 6.1 6.8 7.5 Inflation (Consumer Price Index) 11.1 10.2 23.3 22.1 14.0 12.0 Current Account Balance (% of GDP) -3.6 -6.0 -6.6 -4.9 -4.4 -4.1 Financial and Capital Account (% of GDP) 4.3 7.2 6.5 4.9 4.4 4.1 Net Foreign Direct Investment (% of GDP) 1.9 2.0 3.3 3.3 3.5 3.7 Fiscal Balance (% of GDP) -11.4 -12.5 -10.9 -9.8 -8.4 -7.3 Debt (% of GDP) 93.3 103.0 108.8 99.8 96.4 91.3 Primary Balance (% of GDP) -3.5 -3.5 -1.8 -0.6 0.8 1.2 Lower middle-income poverty rate ($3.2 in 2011 PPP) a,b 16.1 15.9 15.6 15.4 15.2 15.0 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. (a) Calculatio ns based o n 2004-HIECS and 201 5-HIECS. A ctual data: 2015. No wcast: 2016 - 2017. Fo recast are fro m 2018 to 2020. (b) P ro jectio n using po int-to -po int elasticity (2004-2015) with pass-thro ugh = 0.5 based o n private co nsumptio n per capita in co nstant LCU. MPO 2 Apr 18