OECD Economic Outlook, Volume 2024 Issue 2: Egypt
Table of contents
Growth is expected to be around 3.7% this fiscal year before strengthening to 5.0% and 5.2% in FY2025/26 and FY2026/27, respectively. Domestic demand, initially held back by restrictive policies, will accelerate as inflationary pressures recede and some major investment projects are rolled out. Despite a still unfavourable geopolitical environment, export growth will be supported by the recovery in gas and oil production and the competitiveness gains from exchange rate depreciation.
It is important to consolidate economic stability and pursue pro-growth structural reforms. This requires maintaining a restrictive monetary policy until inflation approaches the target and reducing public debt. Rationalising public investment and subsidies, accelerating privatisations, removing regulatory and tax barriers to private firms, and eliminating obstacles to women's participation in the labour market would support the foundations for solid and sustainable growth.
Growth fell to 2.4% in FY2023/24 amid high, albeit falling, inflation. Lower gas and oil exports and the drop in Suez Canal revenues caused by the Middle East conflict weighed heavily on activity. Consumer price inflation stood at 26.3% year-on-year in October, continuing to exert a drag on domestic demand. Despite the deceleration of food prices, disinflation has stalled since the beginning of the summer due to the increase in regulated prices of energy and public transport linked to cuts in budget subsidies to these sectors. Further increases in regulated energy prices are expected before the end of 2024.
1. Inflation of regulated items refers to urban inflation computed by Central Bank. Other inflation measures are nationwide.
Source: CEIC; and OECD, National Accounts database.
The implementation of far-reaching reforms in agreement with the IMF and the large foreign currency inflows since March 2024 have made it possible to broadly stabilise the exchange rate and gradually phase out import restrictions. Production difficulties in the gas and oil sectors are being resolved with the gradual settlement of payment arrears to foreign companies exploiting the deposits. In addition to IMF lending, financial support agreements have been signed with the European Union, the World Bank and the European Development Bank. Furthermore, employment is picking up in the non-oil private sector in a context of rising external demand, consistent with firms’ confidence regarding the development of their activities in the coming months on the back of improved cost competitiveness.
The central bank has kept its key policy interest rate unchanged at 27.75% since the unification of the exchange rate regime in March 2024. Meanwhile, the exchange rate vis-à-vis the US dollar has stabilised between 48 and 50 Egyptian pounds, corresponding to a loss in value of around 37%. Pursuing disinflation in line with the central bank's objectives requires a restrictive monetary policy stance. The exceptional revenues of nearly 4% of GDP provided by the sale of development rights for the Ras el-Hekma tourist site helped bring the fiscal deficit down to 3.6% in FY2023/24. For FY2024/25, this deficit is expected to increase to 7.6% of GDP, slightly above the 7.3% target of the government, which foresees a primary surplus of 3.5% of GDP on the basis of a growth projection of 4.2%. This objective is based on strengthening revenues by modernising and simplifying the tax system, particularly for SMEs, and improving incentives for the integration of informal sector firms into the formal economy. These measures, which promote private sector growth, are accompanied by planned privatisations amounting to 0.6% of GDP.
Growth is set to pick up over the next two years while disinflation will be helped from the beginning of 2025 by base effects. Domestic demand will then strengthen thanks to the gradual easing of interest rates and more vigorous investments fostered by the construction of the Ras el-Hekma tourist site. Exports will benefit from increased gas and oil production and the positive effect of the weakening pound on exports. This improvement in the economic situation should be accompanied by a further decrease in unemployment. An aggravation of geopolitical tensions would undermine this recovery. Conversely, an easing of tensions in the region would boost exports due to increased traffic in the Suez Canal. Growth would also benefit from stronger foreign direct investment if reforms conducive to private sector development are implemented vigorously.
Ongoing economic stabilisation must be accompanied by further efforts to promote the development of the private sector. This involves stepping up privatisations and continuing to eliminate tax distortions that favour state-owned enterprises. To be effective and sustainable, the rationalisation of public investments must not only be based on capping expenditure, but also on a rigorous selection process for infrastructure projects. Efforts are also needed to replace broad-based subsidies by social assistance targeted at the most vulnerable. It is also important to encourage female labour market participation to strengthen growth by accelerating the creation of nurseries and promoting flexible work arrangements to enable women to combine work and family responsibilities.