Egypt’s economy is firmly on a positive trajectory following two years of structural adjustment, yet non-
oil sector growth, low domestic consumption, and high youth unemployment remain key challenges that
can offset the progress.

A little over a year ago it appeared as if Egypt was at the precipice of another ‘spring’, as aggrieved
citizens swept across the streets of Cairo and other major cities in protest against a rigorous austerity
programme that had seen a sharp rise in the price of basic goods (See
Egypt: austerity reforms).

Fast forward to today and the grievances have markedly dissipated. This, on the back of a recovery and
increasingly optimistic macro-economic outlook for North Africa’s largest economy.

Plaudits aplenty

The scope of the recovery was affirmed by a 17 October poll of 15 economists by the Reuters news
agency, which highlighted that most were in agreement that growth in the 2018/19 financial year would
either match or breach the 5.3 percent mark that was achieved in 2017/18. This is no trivial feat. As
noted by Egypt’s Minister of Planning, Hala al-Saeed, the rate of 5.3 percent was the country’s fastest in
a decade.

And in the most flattering – and confidence imbuing remarks – International Monetary Fund (IMF)
Director Christine Lagarde noted amid a September meeting with President Abdel Fattah al-Sisi that
Egypt’s economy had become one of the most robust in the Middle East region.

However, Lagarde aptly cautioned that there is some way to go to ensure that the recovery is not only
sustainable but also inclusive. This is particularly the case given the fact that the expansion was
predominantly fuelled by three drivers: government infrastructural spending, a recovery in tourism, and
hydrocarbons sector investment – far from the diversified growth envisaged by Egyptian authorities.
Nonetheless, the IMF is not the only key institution to laud Egypt for its turnaround. Indeed, in May, the
‘commendation’ came in a more concrete and consequential change in the economic assessment by
ratings agency, Standard and Poor’s, which lifted Egypt’s sovereign credit rating from B- to B. This was
followed by Fitch, which affirmed its B assessment and positive outlook on Egypt in August. Most
recently, Moody’s affirmed its B3 rating but lifted its outlook from stable to positive.

Collectively, the assessments reflect a gradual, positive change in external institution and market
perception on a previously fragile Egyptian economy and its highly unstable polity. They also denote
increased confidence regarding Egypt’s future economic prospects under Sisi and the continued
minimisation of political disruption.

The cost of recovery

As noted, the recovery has not been without its costs. Indeed, it was facilitated by a painful austerity
and structural adjustment programme on which the disbursement of a USD 12 billion Extended Fund
Facility by the IMF was conditioned. In goods markets, this comprised of an introduction of a 14 percent
VAT and a repeal in energy subsidies in 2016.

Collectively, the measures had a compound effect on the price of goods and services, while the
subsequent corrosion of consumer welfare was central to the demonstrations in early-2017.
The adverse welfare effect was exacerbated by changes in the foreign exchange sector – specifically the
reduction of the Egyptian pound’s peg on the USD by more than 50 percent – which resulted in an
increase in the price of foreign denominated imports. Furthermore, politically, it would be remiss to
overlook the fact that the enforcement of the measures at hand and the mitigation of the unrest did
come at the restriction of civil liberties.

Nonetheless, this was not in vain. The austerity measures were crucial to the reduction in the country’s
debt stock, which between 2016 and 2017 fell from 103 percent to 86 percent of GDP. In 2017, Egypt’s
budget deficit also fell beneath the 10 percent threshold – 9.8 percent to be precise – for the first time
since the deposed Hosni Mubarak regime.

Finally, according to Standard and Poor’s, the currency liberalisation has led to myriad other benefits
including the reduction in external imbalances, an uptick in remittances, increased foreign reserves and
a boost to portfolio inflows, particularly in Egypt’s mainstay hydrocarbons sector.

The lull in unrest – and success in counter-terrorism initiatives – has also facilitated a steady recovery in
the country’s key tourism sector, which had been stymied by the political and security risks (See

Admittedly, the observed changes are encouraging but are by no means sufficient. A debt to GDP ratio
of over 86 percent and deficit of 9.8 percent is excessive, risky and unsustainable – more so given the
fact that debt servicing costs amounted to approximately 77.36 percent of revenue in 2017.

However, it is crucial to bear in mind that very often a signal of intent carries just as much importance as
the intended change itself, especially in the economy. And, as signified by the improved sovereign
ratings assessments, the changes at hand do signal sufficient intent to re-establish macro-economic
fundamentals. They also serve to re-enforce that the country is correctly aligning itself for future growth
and development.

The stumbling blocks

Despite the apparent success of its realignment efforts, there are a few stumbling blocks that are
hindering the country from reaching its economic potential and which – if left unaddressed in the long
term – could potentially derail Egypt from its promising path.

Stagnant non-oil sector

First among these is the lagging investment in the country’s non-oil economy. Growth in this sector is
vital not only as a complement to the oil-sector but also to provide employment opportunities for
Egypt’s bourgeoning youth population.

Accordingly, several endogenous and exogenous factors have been cited as reasons for the diminished
appetite among investors. For one, global trends in investment have seen a general movement away
from riskier emerging markets in preference for so-called safe havens. Egypt, as a result, has suffered
from this change in preference and the subsequent migration in financial capital. Indeed, according to
Bloomberg, as much as USD 6 billion flowed out of local treasury bonds between April and August. The
subsequent loss of funds meant fewer finances could be directed towards the growth of the non-oil

Secondly, the country may be beset by an effectiveness lag. As noted by some commentators, it can
take time for FDI to accelerate after an IMF agreement and associated structural changes are enacted,
as markets wait to analyse the scope of the adjustments. Egypt may thus be undergoing such a lag and
in due time, FDI should gain some pace.

Nonetheless, while both reasons are veritable, Egypt has hardly helped itself with the excessive red-tape
that remains in pieces of legislation such as the Company Incorporation Law. Indeed, high borrowing
costs and arbitrary administrative requirements – such as those obliging foreign owned private
companies to have at least one local general manager – continue to serve as a deterrence to potential
entrants. The less than favourable business and investment environment was encapsulated in the World
Bank’s Doing Business Report 2018, where the country fell by six positions from 122 to 128 relative to
the 2017 assessment.

As such, whittling away administrative requirements is one way to stimulate FDI, non-oil, and private
sector growth. And, most importantly, it is well within the government’s control.

Low domestic consumption

A second stumbling block to Egypt’s recovery is the country’s suppressed domestic consumption
expenditure by households and non-state related economic agents. In fact, the absence of a strong
consumer base could, in some part, explain the lack of urgency in deploying FDI which would ordinarily
capitalise on the consumption.

Many commentators agree that the low propensity to consume could be attributable to ongoing
unemployment and inflation due to the VAT and subsidy repeal. In the knowledge that the VAT is
unlikely to be retracted and subsidies re-instated, the diminished consumption re-enforces the need to
facilitate non-oil sector growth as a driver of further employment, income and the subsequent
broadening of the consumer base.

High youth unemployment

The third and final stumbling block relates to the country’s high unemployment among the youth. While
the general unemployment rate has improved by roughly 1 percent between 2017 and 2018 – and is
scheduled to peak at a modest 10.9 percent in 2018 – the IMF has noted that approximately 77.9
percent of those without jobs are between the ages 15 and 29. Central to this issue, once again, is the
stagnant non-oil sector, and the shortage in labour intensive job posts which would otherwise absorb
the excess labour.

Considering Egypt’s recent history of youth-led socioeconomic unrest and juxtaposed with the country’s
accelerating population growth – which according to President Sisi is the foremost national security
threat – it is not difficult to see why youth unemployment is of critical concern.

If left unchecked, Egypt’s so-called ticking time bomb could reignite the broad instability of the early
2010’s which brought the country to the IMF’s casualty room in the first place.

Risk implications:

Egypt’s recovery and improved assessments by ratings agencies is a testament to the payoffs of
economic prudence, which are rooted in its adherence to adjustments advocated by the IMF.
While its trajectory since 2016 is laudable, there are notable shortcomings which – if left unaddressed –
threaten to derail the country’s economic progress. These include a stagnant non-oil sector, low
domestic consumption expenditure, and high youth unemployment. The establishment of a stable
financial position is also incomplete, with Egypt’s debt, deficit and associated interest payments
measuring at risky and unsustainable rates.

The Egyptian government is somewhat limited in the resolution of non-oil sector growth, especially
when it comes to interest rates. This is based on an apparent trade-off pitting portfolio and debt
investors who demand high interest rates so as to render state financial assets more attractive versus
those operating subsidiaries in Egypt who are advocating for reduced rates so as to limit borrowing

In a bid to entice foreign capital, the country is reportedly planning to approach JP Morgan Chase & Co.
for inclusion in its emerging-market bond index. Given questions over the eligibility of its debt – and the
prioritisation of this concern – the approach is unlikely to occur in the near future. When it does occur,
inclusion into the index will undoubtedly bode well for investment, especially given the fact that
Egyptian debt would be in the radar of key institutional investors.

Rather prudently, the government has also committed to other non-interest related incentives to
promoting private, non-oil sector growth. Mostly contained in the Investment Law of 2017, these
include a reduction of equity quotas for local and foreign ownership, the minimisation of legal
intervention in financial distress or bankruptcy scenarios and the expedition of documenting and
licensing processes.

It remains to be seen as to whether or not the envisaged measures will be sufficient to entice investors
and stimulate non-oil sector growth; however, in the presence of the IMF’s anchorage and the lapse of
the effectiveness lag, it is possible. Should it be the case, any such sectoral growth is likely to be
marginal at first. But it should go some way in facilitating a gradual uptick in employment and domestic
consumption expenditure.

Egypt has also mulled over further infrastructural expenditure as a means to stimulate demand-side
growth and employment, although deficit and debt requirements advise against such an expansion
unless it is funded by fiscal reallocations.

Finally, from a political perspective, the gradual decline in economic drivers of unrest should diminish
the necessity for a coercive stance by the administration of President Sisi. Yet, this is unlikely to facilitate
any significant opening of the political space. Meanwhile, a lingering threat of terrorism suggest that the
country’s increased securitisation is likely to persist for the foreseeable future.