EGYPT

The Egyptian economy, which is the third largest of the African continent, is well diversified. Over the past decade, GDP registered strong growth (+4% on average), driven by the dynamism of the mining, manufacturing, agriculture and tourism (albeit to a lesser extent since 2020) sectors. The Covid-19 outbreak affected the Egyptian economy though the dramatic contraction of international trade (i.e. Suez Canal revenues), the significant loss of tourism activity (8% of GDP) and the drying up of remittance inflows (9% of GDP). Despite all this adversity, Egypt’s economy outperformed most emerging market peers and grew by +3.6% in 2020.  Growth momentum also remained stable in 2021 at around +3.5%, despite continued sanitary restrictions and disruptions to global value chains. Growth is set to speed up as of 2022 (+5.2%) and hover around +5.5% in the medium term. Thanks to sound macroeconomic fundamentals and credible central bank policy, inflation in Egypt remains under control as of end-2021 (within the central bank target) at around 5.5%.

Despite its proven resilience to the Covid-19 crisis, Egypt continues to face persistent longstanding challenges. The country entered into a stronger growth regime since 2016, along with the implementation of key reforms after a severe balance of payments (BoP) crisis. Overall, these reform policies have been successful in gradually easing economic rigidities (with a fixed exchange rate, high subsidies and capital controls) to establish a more market-based business environment. Yet, achieving the transition towards a more private sector-driven economy remains a challenge ahead. At 41.9% and 39% (of working-age population) respectively, Egypt’s labor force participation and employment rates remain below potential (World Bank). Like in other emerging markets, the Covid-19 crisis exacerbated labor market vulnerabilities in Egypt. Greater job creation in the formal sector while scaling up human capital developments are the key policy challenges to maintain robust long-term economic growth.

The World Bank Doing Business 2020 survey ranks Egypt 114 out of 190 countries (+14 during the last two years). Concerns related to the business environment include the difficulty to pay taxes and enforce contracts as well as barriers to trade across borders (including the impact of past capital controls on current transactions). These bottlenecks hide quite good perceptions on other aspects, like the ease of dealing with construction permits and the relatively good access to electricity and credit. However, the cost of resolving bankruptcies is higher than the regional average.

Under the macroeconomic reform program, significant progress has been made in terms of opening up the economy and improving the business climate. However, credit to the private sector has been on a declining trend since 2004 and stands at very low levels (24% of GDP) compared to Morocco and Tunisia (both at 64% of GDP). Besides pursuing the ongoing efforts to remove tariff and non-tariff barriers to trade, easing credit to SMEs will be key for boosting manufacturing activity. The Egyptian economy could significantly benefit from greater trade openness. Export gains stemming from the African Continental Free Trade Area are sizeable, estimated to +USD10bn of additional exports over the next decade.

Going forward, rising social discontent related to high youth unemployment and low purchasing power after the sanitary crisis pose some implementation risks to the ambitious reform agenda. Egypt is also facing security and geopolitical risks that are mostly related to a potential contagion of instability from neighboring countries—Sudan, Ethiopia and Libya.