Egypt: a new reform agenda for the recovery – Egypt – Al-Ahram Weekly
A national structural reform program building on existing economic reforms will soon be announced by the government.
The new program aims to create a stronger and more resilient economy capable of withstanding internal and external shocks, Fakhri Al-Fiqi, head of the House of Representatives’ budget and planning committee, told Al-Ahram Weekly. .
The new measures will consolidate the gains of the reform program that Egypt successfully implemented in 2019, since international credit rating agencies maintained their rating of Egypt at B + and maintained a stable economic outlook. .
As the latest annual meetings of the International Monetary Fund (IMF) / World Bank made clear, the post-Covid recovery for developed economies will be faster than for those that are less developed because they are structurally healthier. This is why, argues Al-Fiqi, Egypt must implement further reforms to be able to cope with future shocks.
The new three-year reform program will create a more resilient, flexible and vibrant, equitable, digitized and greener economy, says Al-Fiqi. More importantly, improving living standards will be at the heart of the changes.
The government’s proposals, as described by Al-Fiqi, appear to be in line with IMF recommendations: “Once the health crisis is over, policy efforts can focus more on building resilient, inclusive and greener economies. , both to support the recovery and to increase the potential exit. Priorities should include investing in green infrastructure to help mitigate climate change, strengthening social assistance and social insurance to stop growing inequalities, introducing initiatives to boost productive capacity and adapting to a more digital economy, and the resolution of over-indebtedness, ”advised on April 2021. Outlook for the world economy.
Observers noted that reforms undertaken under its IMF-backed program have made Egypt more resilient to the fallout from the Covid-19 pandemic. Unlike many developing economies which have seen their economies contract, Egypt was one of the few countries that did not experience negative GDP growth last year. And according to the IMF’s World Economic Outlook, Egypt’s economy is expected to grow 5.7 percent in fiscal year 2021-22.
“Most countries are expected to show strong growth as they recover from the pandemic shock and restrictive measures / lockdowns imposed last year, and Egypt is no exception,” says Ahmed Shams, head of research at EFG Hermes, Egypt’s largest investment bank. “Vaccinations, both nationally and globally, should also have started to boost the tourism sector, a key driver of potential economic recovery.”
James Swanston, Middle East and North Africa specialist at London-based Capital Economics, adds that with the loosening of domestic Covid-19 restrictions, there will be an increase in domestic demand which will support the recovery. In addition, easing lockdowns in the rest of the world will translate into stronger external demand which will boost exports and also trade through the Suez Canal. The resumption of production from Egypt’s two main gas liquefaction facilities will also boost overall GDP this year.
The need to continue reforms has been one of the main demands of economists and international institutions.
“It is very important that the structural reform program is accelerated,” said Taline Koranchelian, deputy director of the IMF’s Middle East and Central Asia Department, during a press briefing last week on the economic outlook for the Middle East. East and Central Asia. “It is very important to improve governance and the business environment, to remove trade barriers and continue to strengthen the transparency of public enterprises, but also to gradually reduce the footprint of the state and offer equal opportunity for all agents. “
Koranchelian highlighted the importance of the private sector for job creation and growth in Egypt.
While financing will be essential to the achievement of the ambitious program, a new agreement with the IMF is not currently on the table. The second review of the 12-month standby agreement (SBA) approved in June 2020 giving access to $ 5.2 billion is expected in May-June according to Koranchelian. This mission will be an opportunity to take stock of the situation and discuss the upcoming reform program, she said.
El-Fiqi believes that funding could come from local savings, including government spending, foreign direct investment, support from international financial institutions as well as borrowing in international markets. He does not worry about the increase in debt as long as the GDP increases, which means that in the long run the debt-to-GDP ratio will decrease. Improving the business environment will attract foreign investors, as will the planned privatization of state-owned enterprises.
“For those with limited fiscal space, better revenue administration, greater progressivity in taxation, and a shift in spending toward critical health, social and infrastructure spending will be essential,” suggests the Perspectives. ‘Mondial economy.
The IMF expects Egypt’s budget deficit to fall to 7.3 percent of GDP by the end of June, from its earlier projections of 8.1 percent. “A key factor is better revenue collection through increased tax levies, including from the public sector. In addition, the government has shown strong restrictions in its spending, contributing to a better budget result. We expect the deficit to narrow further in fiscal years 21-22 thanks to lower interest payments and improved incomes as economic activity continues to recover, ”Shams said.
Government spending has declined, Swanston says, in large part due to subsidy reform and public sector payroll cuts.
Total government spending fell from 30% of GDP in fiscal year 2014-15 to less than 25% in fiscal year 2019-20. The government expects the budget deficit to narrow even further to 6.3 percent of GDP by the end of the current fiscal year. If that happens, it will be the smallest shortfall since the early 2000s.
Egypt’s public debt is now expected to reach nearly 93% of GDP by the end of the current fiscal year, up from 90.2% last year. Shams points out that to finance the deficit, Egypt had to borrow from abroad, including $ 8 billion from the IMF and $ 2 billion from regional banks. During the current fiscal year, the government issued $ 4.5 billion in Eurobond debt, as part of its attempts to lengthen the average maturity of its debt in order to reduce short-term refinancing risks. During the same period, about $ 90 billion was issued in treasury bills, almost all denominated in local currency, and $ 38 billion in national bonds.
Debt will start to drop once economic activity recovers, thanks to the fiscal discipline the government has shown so far, says Shams, “but it’s clear that debt levels remain high, offering little. room for maneuver for decision-makers to react to shocks. ”
Meanwhile, international reserves are returning to their pre-Covid levels, thanks to Egypt’s ability to guarantee access to foreign funding on favorable terms despite persistent headwinds linked to the pandemic, pressures on expatriate remittance flows and declining forecasts for tourism income and FDI inflows. .
* A version of this article appears in the April 22, 2021 edition of Al-Ahram Weekly